Question 1 (10 marks)
Paul is a Sales Manager of Chatswood Pty Ltd with a weekly salary of $1,000.
He is mainly responsible for selling camera equipment in NSW. On 1 April
2011, Paul was provided with a fully maintained company car which was
newly bought for $22,500 on the day. From 1 April 2011 to 31 March 2012,
Paul travelled 20,000 km for private purposes and paid nothing at all during
the year. He was also provided with an entertainment allowance of $2,000 per
year. In addition, part of his executive package provided him with a loan of
$8,000 for a year at a concessional rate of 3% per annum commencing 1 April
2011.
REQUIRED:
Advise Chatswood Pty Ltd as to its fringe benefits tax liability for the
year ended 31 March 2012. (Maximum 1,000 words)
Question 2 (10 marks)
On 1 January 2012, Peter borrowed $520,000 from a bank at a
commercial interest rate of 8% per annum to purchase a “negatively
geared” residential investment property in Australia. He is required to
pay a weekly interest of $800. Immediately after acquiring the property,
Peter engaged a real estate agent to advertise the property asking for a
weekly rent of $400. Unfortunately, the real estate agent is unable to
secure a tenant and the property is still vacant.
REQUIRED:
Discuss whether Peter would be entitled to any deductions in
respect of the interest expenditure incurred from 1 January 2012 to
30 June 2012 for the 2011/2012 income year.
(Maximum 1,000 words
Answer :1
Fringe benefits are a kind of benefit that is given to the employees by the employer during the terms of the employment. However, such benefits are liable to be taxed on the employer and not on the employees who are actually receiving the benefits. Certain non cash items comes under the purview of Fringe benefits as per the Australian Tax system. The usual rate that is payable by the employer is 46.5% and another 1.5% as Medicare levy. This rate is calculated on the taxable income value and any kind of contribution received from the employee is reduced from the figure.
Before the introduction of the fringe benefits tax, such benefits were tax free income for all the employees. The major reason for bringing this tax is to bring under the tax bracket all the items included under the salary package of an employee.
Fully maintained Company car:
For calculating the Fringe benefits for the car that is provided to Mr. Paul , the cost of purchase is $22500 on 1.4.11 and the total kms that has been travelled in that car is 20000kms. It’s immaterial whether the car was used for private purpose or business purpose under the statutory method of calculation.(Issac and cole, n.d)
The value of FBT is calculated either by applying the statutory formula or the operating costs. It’s advisable to make use of the statutory formula method which is much easier. So as per the table of kms and percentage provided by the tax system in Australia it’s necessary to multiply the base value of the car with the percentage.
As per the Australian tax law:
- Less than 15,000/26%
- 15,000 to 24,999/20%
- 25,000 to 40,000/11%
- More than 40,000/7%
So for the current 20000 kms run, the percentage is 20% so we get FBT as 22500*20%=$4500
However, operating cost method does give a cushion as the taxation department does help the firms to segregate between the private and official purpose of travel. So, in the case of Chats wood Pty Ltd, the car has been used by Mr. Paul completely for private purpose only and so the operating cost can help in claiming reduction in the FBT. But for this, the Chats wood Pty Ltd has to maintain a complete log of the following details:
- Date of journey
- Reading of the odometer at the start and end of journey
- Total number of kms travelled
- Purpose of journey: Private or business
If the company is able to maintain such details in precision, then the total operating cost like fuel, service etc can be calculated for the total kms run and then the private travel can be reduced from the balance figure. This way the company can save a lot on the FBT.
Entertainment allowance:
Before considering the Entertainment allowance for fringe benefits its necessary to understand the terms Entertainment under the Fringe benefit tax laws of Australia.(CPA, n.d)
As per the FBT laws in Australia entertainment is explained as:
(i)Entertainment that is given through the food, drinks, amusement, sports and any such leisure activities
(ii)Travel facilities related to such other entertainment as mentioned in (i) above
This definition of entertainment that is followed under the FBTAA is as described under the sections of ITAA 97. So, only such items can be treated as entertainment and just allowances that forms part of the salary packages cannot be included in the list of fringe benefits. This definition of entertainment is to be understood in order to analyse the given case.
In the given case of Chatswood Pty Ltd, Mr.Paul is being given only an allowance of $2000 annually and there is no specific mention of entertainment provided to him with this regard. So such benefits are not treated as the fringe benefit and are not subjected to FBT too.
Loan at concessional rate:
As per the Fringe benefits tax laws of Australia, any loan that is given to the employees at a rate that is below the current prevailing market rates is taken as fringe benefits and they are charged at applicable tax rates.
Since the loan extended to Mr. Paul by Chatswood Pty Ltd is at a concessional rate that is the rate is lower than the generally applicable interest rates, it’s deemed to be a fringe benefit and attracts FBT. To calculate the taxable value under the concessional loan fringe benefits, it’s necessary to understand the statutory interest rate. The tax is not charged on the loan amount directly.
Statutory interest rate refers to the rate that is specified by the reserve bank of Australia periodically. It’s a variable rate that is fixed on the housing loans and is a major reference item for calculating the fringe benefits under the concessional loans to employees. This is applied for loans including the interest free loans given to employees by the employers as a part of the fringe benefits. (NSW,2012)
The statutory interest rate set by the Tax system in Australia is applied on the loan amount and the interest amount is found. Then the actual interest that is accrued on the loan as per the concessional rate of interest is calculated. The difference between these two figures is taken as the taxable fringe benefit value. The current Statutory interest for the year ended 31.03.12 is 7.8%. So the taxable value can be found as:
Statutory interest rate on Loan i.e., 7.8% on $8000 = $624
Concessional interest rate on loan i.e.,3% on $8000 =$240
———-
Taxable value of the fringe benefit =$384
======
It’s necessary to pay the FBT either annually or quarterly depending upon the total value of the FBT. If the payment is to be done annually its essential to file the FBT returns in the month of May every year. Besides the employers also have the obligation to bring such fringe benefits under the “Reportable Fringe Benefits” column of the PAYG payment summaries form.
Answer :2
Investing in the negatively geared property is a great investment strategy as it comes with it a great bundle of tax benefits.
Negatively geared investment property:
When the cost of owning a property is much more than the actual revenue that is generated from it is termed as the negatively geared property.(ANZ,2012) In this context, the cost includes loan interest, bank charges, repairs and maintenance, and so on. Generally the income tax law of Australia allows the owners of such negatively geared property to claim deductions from the rental income. The deductions that can be claimed include the following:
Revenue reductions – interest charges, maintenance expenses, fees for agents, advertising fees, bank charges, corporate fees, gas and water, garden maintenance, insurance and even cleaning expenses.
Capital expenses- Capital expenses in the form of depreciation on the capital goods can also be claimed subject to the rates specified by the Taxation commission of Australia. This has to be claimed over a specified period of years depending upon the terms of the usage of the capital item.
Building allowance- Even depreciation on the capital works can be claimed at the current rate of 2.5% for a period of 40 years.
The main reason for investing in such properties is to get benefitted by the capital gains that the investor may get on resale of the properly after holding it for a period of time until which the value of the property exceeds the current purchase value. So, people who have a good and strong financial base will opt for such high risk investment opportunities which can be fruitful if you can provide sufficient income for covering the interest payments. The reason is that if the property ceases to generate any income then you may still have to pay the interest every year. Also, it’s very important to select the property carefully. The reason for investing in such property is to benefit from the capital gains that are expected to be generated over a period of years assuming that the value of the property will increase in future.
In case, the property value depletes in the future then the investor will have to face a major loss. The capital gains that the investor expects from the sale of the property are also not receivable.
So, in the given case of Mr.Peter, the loan amount is $520000 and it carries an interest of 8% p.a. Mr.Peter has invested in a negatively geared property and he has to pay an interest amounting to $800 every week. Though he has advertised the properly for let out, he has still not been successful in getting any tenant. This means that the property is vacant during the period of January 2012 to June 2012. As per the income tax laws, the interest expense is a claimable deductions under the head of property income from the rental income. This type of deduction is given for the benefit of the investor. The interest deduction can be claimed only if there is rental income received from the property. If the rental income is less than the interest then the loss is then set off against the other income of the investor. So, it’s evident that the income tax laws of Australia have clearly set the guidelines for claiming interest deductions for negative geared property.
The first aspect is that Mr.Peter’s property is vacant and so there is no income generated from the property. When there is no income there is no question of deduction to be claimed from it. Only if the property is let out the tax deductions can be claimed. That’s the major risk associated with negative geared investment property. If the property fails to generate any kind of income or if it remains vacant then the interest still has to be paid and cannot be claimed. So the investor has to have sufficient financial balance to meet such contingencies.
The basic essence of providing tax deductions for negatively geared property is to offset their low income generating capacity of the property. A property is treated as negatively geared when the income is less than the cost of owning it. So, the deciding factor is the income that is received from the property. If over a period of time, the rent received increases the cost of owning it then it’s treated as the positively geared property and so it’s subject to tax just like any other property. No tax deduction can be claimed on it any further. This clearly brings out the point that only if the property is let out the investor can claim the interest deduction.
References:
1.Isaccs and Cole, n.d Fringe Benefits and Tax, viewed on 24th may 2012, http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&ved=0CG8QFjAH&url=http%3A%2F%2Fwww.isaacscole.com.au%2F_literature_93199%2FFact_Sheet-_Fringe_Benefits_Tax&ei=bwW-T6HzCcjjrAfVqY3GDQ&usg=AFQjCNElkJYTXy_ZwLtRCMWYVzxtQWbUUw&sig2=0hTuuAHL24ns7ZuAphhVxA
2.CPA, Fringe Benefits and Tax- Tricks and traps, viewed on 24th may 2012, http://www.mjaccountants.com.au/node/561
3.NSW Govt 2012, Fringe Benefits Tax manual, viewed on 24th may 2012,http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0020/21881/TPP12-02_Fringe_benefits_tax_manual_dnd.pdf
ANZ 2012, About Negative Gearing, viewed on 24th may 2012,http://www.anz.com/personal/home-loans/investing-property/negative-gearing/
Mortgage choice Limited 2012, Negative Gearing in property invest ment, viewed on 24th may 2012, http://www.mortgagechoice.com.au/investing-in-property/property-investment-tips/negative-gearing-in-property-investment.aspx
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