Student’s Name
 
Course
Professor’s Name
University
City (State)
Date
Australia Taxation
Part A
Question One
Gilbert, Holtzmann, Tolan and Yates (GHTY) partnership.

  1. Advise GHTY if any of Lani’s additional packages are fringe benefits.
  2. $1,000 paid on the last day of every month for “communication costs”.

There is no fringe benefits tax for the $1000. Act No. 39 of 1986, Section 20A[1] provides tax exemptions for reimbursement of expenditures that are incurred by an employee to pay for the employers cost. In the case 7-046  Rowe, a taxpayer was given an amount equal to the sum used in the court proceeding. The judges ruled that there was no benefit since all the monies were used to reimburse his expenses.

  1. $3,000 paid quarterly to Happy Kidz – a childcare provider

Lani will pay fringe benefits tax for the $3000. The fringe benefits will be capped to the higher gross up rate. Act No. 124 of 2013, section 38[2], and Subsection 38D, 138-155 established for GST free, there resulting in calculation of fringe benefits using the higher gross rate.

  1. A pair of $250 steel capped boots, a $150 lead lined apron and a pair of $350 prescription safety goggles. Purchased from Safety and Uniforms R Us.

The employee will not pay fringe benefits for this safety equipment since they are work related benefits. Act No. 39 of 1986, Section 58[3], and subsection 58M says that an employee’s benefits on work related preventative health care is tax exempt.

  1. On the 1 September 2015, Lani borrowed $19,000 at 3.5% from GHTY. Lani used the money to purchase a car that she used to drive to and from work and on the weekends for private purposes.

The employee will pay a fringe benefit tax since the interest rate of 3.5% is below the 5.95%, which was the benchmark rate as of March 2016. Act No. 39 of 1986[4], Section 16 provides that the difference between the amount the interest charged by the employer and the statutory rate should be considered for fringe benefit tax.
Question Two
Calculate for GHTY their total FBT liability, consistent with your advice and include relevant legislation.

  1. $1000 for communication (No fringe benefit tax, Act No. 39 of 1986[5], Section 20A)
  2. $3,000 paid quarterly to Happy Kidz – a childcare provider. (Fringe benefit tax is paid, Act No. 124 of 2013, section 38)

Notably, when calculating the items to be considered for tax deduction, the goods and services (GST) must be actually supplied to the recipient. In the case of Lani, the $3000 is considered since it has actually been paid to Happy Kidz. The courts enforced this law with case no. S47/2012 Commissioner of Taxation v. Qantas Airways Limited[6] when they ruled that failure of an airline to arrive to pick customers does not constitute to a benefit for the plane even when most of the passengers were late for the airport.
Calculation
Assumption: Since the paper does not say when Lani was employed, for this paper I assume it was on 1st April 2016.
Amount *GST (Type 1)
3000*2.1463= 6,438.9
$ 6,438.9
An year has 4, quarters, therefore, 4*$6,438.9= 25,755.6
FBT= 0.49* 25,755.6= 12,620.24
FBT=$12,620.24

  1. A pair of $250 steel capped boots, a $150 lead lined apron and a pair of $350 prescription safety goggles. (No fringe benefit tax, Act No. 39 of 1986, Section 58[7], and subsection 58M)
  2. On September, Lani borrowed $19,000 at 3.5% from GHTY. (A fringe benefit tax will be paid as provided by Act No. 39 of 1986, Section 16[8])

Calculation
Assumption: Since the paper does not say when Lani was employed, for this paper I assume it was on 1st April 2016.
Interest paid at 3.5% for an year
3.5%*$19,000= $665
Interest paid at 5.95%, the benchmark rate
5.95%*$19,000= $1,130.5
Amount for FBT= 1,130.5-665= 465.5
FBT= 0.49*465.5= 228.05
Period that she has held the loan = 7 month
Four months FBT 7/12*227.05= 132.45
FBT= $75.68
Total fringe benefit tax= 12,620.24+ 132.45=12,752.69
Total FBT= 12,752.69
Question Three
Calculate for Lani her total tax payable assuming she has a salary of $65,000 per annum. Your answer must include any relevant items from a-d.
Taxation List
$0-18, 2000             Nil Tax
$18,201-37,000       19 Cents per $1
$37,001-$80,000      $32.5 Cents per $1
Medicare   2%
Temporary Budget repair 2% tax over $180,000
Lani’s Tax
Income= $65,000
$0-18, 2000             Zero    Remaining income $46,800
$18,201-$37,000     (18,800*0.19= 3,572) Remaining income $28,000
$37,001-$80,000      (28,000*32.5= 9,100) Remaining income Zero
Medicare 2% (0.02*65,000= 1,300)
Temporary Budget repair 2% for income over $180,000 (Not Qualifying)
Fringe Benefit Tax= 12,752.60
Total Tax= 3,537+ 9,100+ 1300+12,752.69= 26,689.69
Total Tax= $26,689.69
Part B
Question One
Explain to Michel whether he has been carrying on business as a winemaker.
Michel has been carrying work as a wine maker. Since he has not established the farm as an independent entity from him, he operates it as a sole proprietor.
The identification of whether Michel is carrying a business or a hobby is determined by whether work generates income or financial gain for the party. According to a case ruling number 9-060 Ferguson, the court demonstrated that a business is any commercial activity that an individual undertakes. Basically, a hobby occurs where an individual does not aim at making a profit from his/her activities. The individual can also conduct the activity on his/her own
Year 2008: Purchase of farm at $3,000,000. Land is a capital input necessary for farming
Land does not qualify for capital deductions. Generally, capital deductions occur to properties that undergo depreciation throughout their use. These are items such a machinery, fences, and electronic equipment. In addition, items that become obsolete or need upgrading are also considered for capital deductions.
Year 2011: Sale of wine for $23,000. Taxable income
Taxation of 2011 income to be included in Michel personal employment income since he is a sole proprietor. The applicable net income will be calculated by subtracting all the net expenditures from the sales of $23,000. He will also add the value of wine he consumed for his family by valuing it at the market rate.
Year 2012: Sale of wine for $56,000. Taxable income
Taxation of 2012 income to be included in Michel personal employment income since he is a sole proprietor. The applicable net income will be calculated by subtracting all the net expenditures from the sales of $56,000. He will also add the value of wine he consumed for his family by valuing it at the market rate.
Year 2013: Sale of wine $122,759. Taxable income
Taxation of 2013 income to be included in Michel personal employment income since he is a sole proprietor. The applicable net income will be calculated by subtracting all the net expenditures from the sales of $122,759. He will also add the value of wine he consumed for his family by valuing it at the market rate.
Year 2014: Salary to Giorgi $52,000
Taxation of 2014 income to be included in Michel personal employment income since he is a sole proprietor. The applicable net income will be calculated by subtracting all the net expenditures such as Giorgi salary ($52,000) from the sales of $234,200. He will also add the value of wine he consumed for his family by valuing it at the market rate.
Salary to Chari $15 per hour (School Holiday-niece). This is a related party transaction
Chari is Michel’s niece. Therefore, the expense on Chari are ignored when calculating the farms total expenses (AASB 124 Related Party Disclosures[9]). Basically, Chari, the farm, and Michel are treated as one and the same thing.
Cost of Equipment $325,000. Capital deduction. According to the case 140-30 (223) Lindsay, the court held that a new machinery, which s acquired for business purposes is considered as a new capital asset. Therefore, the new wine making machine will qualify for capital deductions.
The farm equipment of $325,000 is capital input used by the farm. However, since it does not have a finite project life it does not qualify for capital deductions, or simply put, it has a capital deduction of zero. (ITAA Section 40-880[10]).
Year 2015: Sale of 2011 cellared wine $25,000
Taxation of 2015 income to be included in Michel personal employment income since he is a sole proprietor. The applicable net income will be calculated by subtracting all the net expenditures such as Giorgi salary ($52,000) from the sales of $25, 00 of cellared and other incomes he might earn from the vineyard. He will also add the value of wine he consumed for his family by valuing it at the market rate
2015: Purchase proposal $4,200,000
The proposal to sell the farm for $4.2 million will result in a capital gain of $1.2 million. This capital gain will be subject to income tax.
The gain tax is allowable for 50% discount (ITAA 1997 section 104-5[11])
Calculation
Land price 3,000,000
Wine Equipment 325,000
Total Original cost 3,325,000
Capital Gain= 4,200,000-3,325,000= 875,000
Deductible Allowance 0.5*875,000= 437,500
Taxable capital gain= $ 437,500
Question Two
Discuss whether the $4.2m from the large Australian winemaker could be ordinary income for Michel. His wife wants him to take the offer so that they can purchase a house in France for their retirement.
Solution
The income of $4.2 million is not an ordinary income for Michel since it is not earned from his ordinary source of wealth, which are salary and sale of wine. (Income Tax Assessment Act 1997- Sect 995.1). This amount will be realized by disposing of existing assets, Michel will have to pay a capital gain tax on this property (ITAA 1997 section 104-5[12]). In a case number 7-050  McArdle, the court held that the income that this man earned form the sale of stock was not his ordinary income. Normally, McArdle did not participate in the trade of stocks.
Question Three
Assuming that the $4.2m is not ordinary income. Calculate for Michel the capital gains consequences of accepting the $4.2m.
Solution
The proposal to sell the farm for $4.2 million will result in a capital gain of $1.2 million on the land. This capital gain will be subject to income tax.
The tax is allowable for 50% discount (ITAA 1997 section 104-5[13])
Calculation
Land price 3,000,000
Wine Equipment 325,000
Notably, the wine equipment will be sold along with land, therefore, its price is part of the $4.2 million quotation.
Total Original cost 3,325,000 [3.2 million +325,000].
Capital Gain= 4,200,000-3,325,000= 875,000
Deductible Allowance 0.5*875,000= 437,500
Taxable capital gain= $ 437,500
[1] Fringe Benefits Tax Assessment Act 1986. (10 September 2016)
< https://www.legislation.gov.au/Details/C2014C00048>
[2]Tax Laws Amendment (2013 Measures No. 2) Act 2013. (10 September 2016)  < https://www.legislation.gov.au/Details/C2013A00124>
[3] Fringe Benefits Tax Assessment Act 1986 (10 September 2016) < https://www.legislation.gov.au/Details/C2014C00048>
[4] Fringe Benefits Tax Assessment Act 1986 (10 September 2016) < https://www.legislation.gov.au/Details/C2014C00048>
[5] Fringe Benefits Tax Assessment Act 1986 (10 September 2016) < https://www.legislation.gov.au/Details/C2014C00048>
[6] Commissioner of Taxation v. Qantas Airways Limited. (10 September 2016) <http://www.hcourt.gov.au/cases/case-s47/2012
[7] Fringe Benefits Tax Assessment Act 1986 (10 September 2016) http://www.hcourt.gov.au/cases/case-s47/2012 < https://www.legislation.gov.au/Details/C2014C00048>
[8] Fringe Benefits Tax Assessment Act 1986 (10 September 2016) < https://www.legislation.gov.au/Details/C2014C00048>
[9] AASB Standard 124, 2015, Related Party Disclosures. (10 September 2016)< http://www.aasb.gov.au/admin/file/content105/c9/AASB124_07-15.pdf>
[10] Income Tax Rule 1997. (10 September 2016)< https://www.ato.gov.au/law/view/document?DocID=PAC/19970038/40-880>
[11] Income Tax Assessment Act 1997-Sect 104.5. (10 September 2016) < http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html>
[12] Income Tax Assessment Act 1997-Sect 104.5. (10 September 2016) < http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html>
[13] Income Tax Assessment Act 1997-Sect 104.5. (10 September 2016) < http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html>