Benefit Tax Liability of ABC Pty. Ltd.

Question: Discuss about the Benefit Tax Liability of ABC Pty. Ltd. Answer: The Fringe Tax Benefit Tax Liability of ABC Pty. Ltd. for its employee Alan, is calculated in the following table (Ato.gov.au. 2016):- In the Books of ABC Ltd. Calculation of Fringe Benefit Tax Liability as on 31.03.2015 GST Inclusive GST Free Particulars Amount Amount $ $ Payment of Phone Bill 2640 Payment of School fees of Employee's Children 20000 Dinner at Restaurant 330 Providing Mobile Phone 2000 Total of GST Inclusive/Free Benefits 4970 20000 A B Gross-up Rate 2.1463 1.9608 C D Gross-up Value 10667.11 39216 E = A x C F=B X D Total Taxable Fringe Benefit 49883.11 G = E + F Less : Exemption for Mobile Phone at gross-up value 4292.60 ($2000 x 2.1463) H Net Taxable Fringe Benefit 45590.51 I = G - H Fringe Benefit Tax Rate 49% J Fringe Benefit Tax Liability 22339.35 K = I x J The important factors, considered for the calculation of FBT liability of ABC Ltd., are mentioned below:- Salary of Alan is not considered in the calculation, as it is not subject to FBT (Delany 2012). Payment of the mobile phone bill of employee is an expense payment fringe benefit, which is paid by employer to the third party on behalf of the employee. The monthly amount is less than $300, but annually it amounts to $2640 and therefore, considered for FBT (Soled and Thomas 2015). Payment of the school fees of employees children is also an expense payment fringe benefit and included in the taxable value for FBT (Martocchio 2013). The mobile phone provided to the employee is a work-related item, which should be exempt from FBT. However, the cost of the phone is included for deriving the total value of GST inclusive items. Later, the amount of the phone at gross-up value is exempted from the total taxable value of FBT (Kaplan and Price 2014). Expenses incurred for the dinner, arranged for all the employees, is a type of Entertainment Benefits. It must be noted that the employer may apply for reduction under the otherwise deductible rule but only for the amount, attributable to the employees, not for their family members or associates. In this case, as the exact cost for the employee cannot be ascertained, no reduction is made for such benefit (Shields and North-Samardzic 2015). After summarizing all the GST inclusive and GST free benefits, provided to the employee, the individual values for each type of benefits are multiplied by the gross-up rate, applicable for GST inclusive benefit and GST-free benefit (Woellner et al. 2012). The total amount is to be considered as Total Taxable Value of FBT. It is further deducted by the amount of exemptions to ascertain the net taxable value of FBT (Bender et al. 2013). The net taxable value of FBT is then charged with the applicable FBT Rate, which is presently 49%, to determine the Total Fringe Benefit Tax Liability of the employer for the individual employee (Jones 2015). As per the above mentioned process and assumptions, the FBT liability of ABC Ltrd. For the employee, Alan has resulted to $22339.35 for the year ending on 31st March,2015. If the dinner party included 5 employees and the total cost of dinner remained same, then the dinner cost per employee would be $1320. In that case, the FBT Liability would increase proportionately and resulted to $23380.52. The calculation for the alternative FBT liability is shown below (Ato.gov.au. 2016):- In the Books of ABC Ltd. Calculation of Alternative Fringe Benefit Tax Liability as on 31.03.2015 GST Inclusive GST Free Particulars Amount Amount $ $ Payment of Phone Bill 2640 Payment of School fees of Employee's Children 20000 Dinner at Restaurant 1320 Providing Mobile Phone 2000 Total of GST Inclusive/Free Benefits 5960 20000 A B Gross-up Rate 2.1463 1.9608 C D Gross-up Value 12791.95 39216 E = A x C F=B X D Total Taxable Fringe Benefit 52007.95 G = E + F Less : Exemption for Mobile Phone at gross-up value 4292.60 ($2000 x 2.1463) H Net Taxable Fringe Benefit 47715.35 I = G - H Fringe Benefit Tax Rate 49% J Alternative Fringe Benefit Tax Liability 23380.52 K = I x J However, if the per head dinner cost, attributable to each employee would remain unchanged, which is $330, and the total cost of dinner would decrease accordingly, the alternative FBT liability will be same as the actual FBT Liability. If the clients would also included in the dinner, the cost for employees would be considered only for FBT liability. The company would not enjoy any tax benefits for the entertainment cost of the clients (James et al. 2013). According to the Taxation Law, any assets can be depreciated under the two depreciation methods Straight Line Method and Declining Method (Rimmer et al. 2014). In this case, as there is no such specific method is mentioned, both the mehods are apllied to describe the tax consequences of the case event. Moreover, in absence of any certain GST rate, 1/11 part of the purchase and sales prices are considered as the amount of GST, included in the price. The rate and amount of depreciation is calculated in the following table:- Calculation for Depreciation Rate and Amount Particulars Amount Purchase Price of Machine 1100000 Less : Amount of GST included in the price 100000 Net cost excluding GST 1000000 Estimated Life (Years) 10 Depreciation Rate (%) 10 Depreciation Amount ($) 100000 Consequences under Straight Line Method:- Under Straight Line Depreciation Method, the assets are depreciated by fixed depreciation per annum. For this case, the amount of such fixed annual depreciation is amounted to $100000. The depreciated values in the end of each year are shown below (Ato.gov.au, 2016):- Calculation of Closing Value under Straight Line Method:- Year Opening Balance excl. GST Depreciation Amount p.a. Period Depreciation charged Closing Balance (months) 31-12-2010 1000000 100000 12 100000 900000 31-12-2011 900000 100000 12 100000 800000 31-12-2012 800000 100000 12 100000 700000 31-12-2013 700000 100000 12 100000 600000 Estimation of Capital Gain/Loss on Sale Particulars Amount Sale of Old Machinery 330000 Less: GST included 30000 Net Sale Price exclg. GST 300000 Less : Depreciated Value of the Machine as on 1/01/14 600000 Capital Loss on Sale -300000 As per the table, the net value of the machine on 1st January,2014 is $600000. On the basis of the net value, the capital gain or loss, generated by the sale of the machine is shown in the following table:- Hence, if the machine would be depreciated under straight-line method, the amount of taxable capital loss on sale would be $300000. Consequences under Declining Depreciation Method:- When any asset is depreciated under Declining Depreciation Method, the depreciation amount is calculated by charging a fixed rate of depreciation on the opening balance of the asset for that period. The rate od depreciation in this case is 10% p.a. The detailed calculation of the depreciation for the machine, purchased by the company is as follows (Ato.gov.au, 2016):- Calculation of Closing Value under Declining Method:- Year Opening Balance excl. GST Depreciation Rate p.a. Period Depreciation charged Closing Balance (months) 31-12-2010 1000000 10% 12 100000 900000 31-12-2011 900000 10% 12 90000 810000 31-12-2012 810000 10% 12 81000 729000 31-12-2013 729000 10% 12 72900 656100 As per the declining method, the value of the machine on 1st January,2016 would be $656100. Therefore, the capital gain/loss for the sale of the machine would be:- Estimation of Capital Loss on Sale Particulars Amount Sale of Old Machinery 330000 Less: GST included 30000 Net Sale Price exclg. GST 300000 Less : Depreciated Value of the Machine as on 1/01/14 656100 Capital Loss on Sale -356100 Under declining depreciation method, the company would also generate loss on sale, but the amount of loss would be higher than that under straight-line method. Net GST Credits:- The net GST credit of the company, generated by the purchase of old machinery and sale of new one will be same irrespective of the methods (Ramli et al. 2015). The amount of net GST credit, which the company can claim in the current financial year, is shown below:- Estimation of Net GST Credit Particulars Amount Amount Purchase of Machinery 2200000 Output GST 200000 Sale of Old Machinery 330000 Input GST 30000 Net GST Credits 170000 If the company had not claimed the GST credit for the purchase of old machinery earlier, it can claim it now also, as the taxation rules provide the opportunity to claim such GST within the four years of purchase of the assets. Then, the amount of Net GST credits would be increased by $100000 (Ato.gov.au, 2016). Reference List:- Ato.gov.au. (2016).Claiming GST credits | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/business/gst/claiming-gst-credits/ [Accessed 27 May 2016]. Ato.gov.au. (2016).Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ [Accessed 27 May 2016]. Ato.gov.au. (2016).Prime cost (straight line) and diminishing value methods | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/General-depreciation-rules---capital-allowances/Prime-cost-(straight-line)-and-diminishing-value-methods/ [Accessed 27 May 2016]. Bender, M., Contacos-Sawyer, J. and Thomas, B., 2013, July. Benefits Strategies for Attracting and Retaining Employees. InCompetition Forum(Vol. 11, No. 2, p. 165). American Society for Competitiveness Delany, T.P., 2012. Fringe benefits tax James, S., Wallschutzky, I. and Alley, C., 2013. The Henry Report and the taxation of work related expenses: Principles versus practice Jones, S., 2015. 'Cost-to-company'explained: tax planning.Tax Breaks Newsletter, (349), pp.6-7 Kaplan, R.L. and Price, D.J., 2014. Change and Continuity in Fringe Benefit Taxation: Seeking Sense and Sensibility.NYL Sch. L. Rev.,59, p.281 Martocchio, J., 2013.Employee benefits. 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