Taxation Law Assignment 2012 sample essay

Emma’s annual salary of $150,000 per annum is assessed based on s6-5(1) ITAA97, which states her AI includes income according to ordinary income (OI) concept. In Scott v Commissioner of Taxation (1935), the court’s definition of income is reflective of what majority of public would consider income, such as salaries. Emma’s annual salary does constitute for OI and is thereby AI.

However, since Emma has arranged for 10% of her salary to be directed to her sister, we consider whether there is an implication on the full amount of her salary being AI. According to the constructive receipt rule, s6-5(4) ITAA97, even though Emma is not the recipient of that 10% of her salary, she is deemed to have also derived it as soon as it is dealt with in accordance to her directions. Thus, the 10% is still part of her AI.

To conclude, Emma’s full salary of $150,000 is AI under OI.

ALLOWANCE VS REIMBURSEMENT

The issue of whether Emma’s provided clothing and make-up allowance limit is an allowance or reimbursement is looked into. Using TR 92/15 as guidance, ‘allowance’ is understood to be a specific predetermined amount paid to recipient to cover an expense regardless of whether the expected expense is incurred. In contrast, ‘reimburse’ describes how a “recipient is to be compensated exactly for an expense already incurred”. Based on the definitions provided, since Emma is required to provide her employer with receipts of all her expenses before she is paid the full amount as per her receipts, her situation is likely to be a reimbursement.

In assessing the tax consequences of the reimbursement, we look into whether it qualifies as a fringe benefit. According to s136(1) FBTAA, Emma receiving the $5,000 reimbursement benefit from Ryma Pty Ltd constitutes for a fringe benefit for the annual financial year as clothing and grooming expenses is deemed to be a necessity for her employment as ‘the face’ of Ryma.

As reimbursements are not excluded from the definition of a fringe benefit under s136(1) FBTAA, we can conclude that a fringe benefit exists. Moreover, as taxes for fringe benefits are imposed on the employer and not employee, Emma is exempted from tax on the $5,000 and is hence not part of her AI.

Given the reimbursement covers clothing and grooming expenses, we can categorise it under division 5 – expense payment fringe benefit. With reference to s20(b) FBTAA, where Ryma Pty Ltd reimburses Emma in whole of her $5,000 expenditure, the making of the reimbursement shall be taken to constitute the provision of a benefit by the provider to the recipient. As there are no exemptions under division 5 that apply to this case, the benefit is then subject to a fringe benefit tax.

The taxable value of the reimbursement is provided in Part B.

BONUS

The issue of bonuses being a gift or income is taken into consideration.

First, the bonus is assessed to see if it qualifies as a fringe benefit. Under s136(1) FBTAA, bonuses qualify as a fringe benefit as it is a benefit provided by the Ryma Pty Ltd to Emma given she meets a certain annual profit target as part of her employment service. However, since the definition of fringe benefit specifically excludes salary, which also comprises of bonus payments, it is not a fringe benefit and will be further assessed under OI.

Under OI, s6-5(1) ITAA97, there is a note that tells of some provisions (s10-5) to the AI that may not be OI. With reference to s10-5 ITAA97, under employment, allowances and benefits in relation to employment is deemed to be statutory income (SI) and not OI. As such, we look at s15-2 ITAA97 where Emma’s AI includes the value of all bonuses provided to her in respect of her employment.

In Emma’s case, her bonus is related to company productivity as is provided only under the condition that she meets a certain annual profit target. This is similar to Smith v FCT (1987), where the Westpac’s study scheme for its employees exists for the purpose of boosting employee productivity by providing monetary incentives for completing relevent degree subjects. As Emma’s sole motivation for gaining the benefit is through achieving an employee productivity target, it is clear that there is a sufficient nexus linked between Emma and her employment. This shows that the bonus is not a gift.

Conclusion, the $10,000 bonus is SI and is thereby included in Emma’s AI.

EMPLOYEE PURCHASE DISCOUNTS

Emma’s ability to purchase goods from Ryma at a 10% discount has given rise to an issue of fringe benefit.

According to s136(1) FBTAA86, the discount is a fringe benefit because it is a benefit provided during the year of tax by Ryma to Emma in respect of her employment, and it is not excluded from the definition of fringe benefit. Next, we identify that because the benefit does not fall into any of the other categories of fringe benefits in the FBTAA86, it should be a division 12 – residual benefit as stated in s45 FBTAA86. Since the discount on the purchase does not meet any requirement of exemption (s47 FBTAA86) for residual fringe benefit, a fringe benefit tax liability has then arisen.

Next, we look at the nature of the residual benefit. According to s136 FBTAA86, the definition of in-house residual fringe benefit requires the employer, at the comparison time, to carry on a business that included the provision of identical benefits principally to outsiders. As one of the considerations on the remuneration package implies that televisions are one of the goods that Ryma is retailing, the discounted purchase on the good from Ryma is therefore subject to in-house residual fringe benefit tax under s48 and s49 of FBTAA86.

The fringe benefit tax liability of Ryma arising from this discount will be further elaborated in Part B. Ryma Rhymes (RR)

BUSINESS VS HOBBY
To assist in classifying RR’s activities as a business or a hobby, we look into five common characteristics of a business.

PROFIT MAKING INTENTIONS
Initially when RR first started out, they had no profit making intentions as they did not charge for their performances.

With the increase in demand for their act, they started charging their clients $100 per performance hour to cover their travel, costumes and equipment costs. However, to warrant a profit, RR should be charging more than just to cover the necessary costs incurred as band performers and should seek to be remunerated for their entertainment service. As they did not seek for service remuneration, this indicates a lack of a profit motive, thus it is less likely to be a business.

SCALE OF ACTIVITIES
The scale of RR’s performing activities is comparatively smaller than professionals in the party entertainment industry. However, it was noted in FCT v JR Walker (1985), despite running a small operation, and size being a relevant factor in acknowledging the existence of a business, the taxpayer was declared to have been running a business. This was summed up as an instance where there was enough business-like characteristics to evidently declare an operation a business.

In this scenario, RR is unlikely to constituting a business.

SUSTAINED AND FREQUENT ACTIVITY
RR primarily work on an ad hoc basis. Seeing as all members of RR still maintain their day jobs in Ryma Pty Ltd, they only perform for an interested party when they are all available. As a small performing group with minimal advertisement, the chances of them acquiring interested clients for their kids’ birthday parties on a regular basis is expected to be slim.

Moreover, they do not have an organised booking system, which usually is a necessity amongst professionals who perform frequently. This weakens the likelihood of RR being a business.

COMMERCIAL APPROACH
RR did not seek professional advice or invest time to survey their industry prior and during the running of their operation. Besides that, they did not sign formal contracts with their clients, did not hire a manager to manage the band and accepted cash payments only instead of opening a bank account for their band. Clearly a non-commercial approach was taken, thus portraying RR as more of a hobby.

SYSTEM AND ORGANISATION EMPLOYED
To begin with and previously stated above, RR did not hire a manager and all band members were given equal responsibility in managing their practices and performances. Also, unlike businesses, no records of expenses or income for RR were kept.

Overall, we conclude that RR is not a business as it failed to exhibit business-like characteristics as mentioned above and hence, is not part of Emma’s AI.

NON-TRANSFERABLE GIFT VOUCHERS
The issue of fringe benefit tax will not be considered for the prize of non-transferable vouchers, as the employer of Emma did not provide the prize.

The prize is assessed under the OI concept. As RR is not a business, the voucher benefit would be non-cash-convertible, since it is not transferable. However, this would not be the case if it was a business, in which the voucher would otherwise be treated as cash-convertible, according to s21A(1) ITAA36. Since the prize do not satisfy the OI concept to be cash or cash-convertible, it should be treated as a gift and is not assessable.

Under SI s15-2 ITAA97, since it requires the benefit to be provided to Emma in relation to her employment or any services rendered by her and there is an absence of nexus between the prize won in a talent competition and her employment in a retail company, it is understood that the prize is not a SI.

Moreover, as suggested in Kelly v FCT (1985), prizes that are not associated with employment or professional activities should only be considered as an AI if it is related to high professionalism. As we have concluded that Emma’s band does not carry a business but a mere casual activity, the personal exertion level is significantly low, causing the prize to be non-assessable.

Conclusion, the voucher provided by the third party is not an AI to Emma as it is only a prize.

TICKETS FROM RYMA PTY. LTD
From the $500 worth of tickets offered to RR by Ryma, we examine if there is a FBT.

According to s136(1) FBTAA, a fringe benefit is a benefit provided in the year of tax by an employer to an employee in respect of the employment. Although the tickets were provided by Ryma, with the nature of the talent competition being completely unrelated to the course of Ryma Pty Ltd’s business, it is therefore not a FB.

Then, the benefit is re-assessed under the general concept of income. Recall from Brown v FCT (2002), benefits being periodic and related to employment is two general characteristics of OI. Here, the zero recurrence implies that the show tickets are unlikely to be an OI. Also, without a nexus with the employment, the benefit is therefore non-assessable under both s6-5 ITAA97 and s15-2 ITAA97. Instead, the non-recurring benefit that arose from Emma’s personal skill is more likely to be a gift.

In Scott v FCT (1966) the High Court concluded that the motives of the donor and the expectation of the recipient are also determining factors when considering if the benefit is a gift. It is stated that the Ryma rewarded them simply because he was impressed, not for other reasons arising from their relationship as employer and employees. Also, the tickets appear to be rewarded to Emma out of non-expectation. Evidently, these factors have further indicated that the tickets are a gift to Emma.

In brief, the $500 worth of tickets did not arise in relation to Emma’s employment. So, it is neither a fringe benefit nor an AI. In fact, several facts of receipt show that it is a gift instead, which is not tax-assessable.

Part B
In this section, we will advise Ryma as to its fringe benefits tax liability. As discussed in Part A, the issues of fringe benefits arose in the context of the provision reimbursement and the discount on the purchase offered by Ryma to Emma.

Reimbursement
Taxable value: Reimbursing Emma for her expenditure on grooming is an external expense payment fringe benefit, of which the taxable value is advised in s23A FBTAA. Therefore, it is $5,000. Reduction: Zero (Not in-house benefit and no contribution has been made)

Fringe Benefit Taxable Amount (Type 1)

Discount↓Is this a repeat of the above?
Taxable value: Before we move on to the calculation of its taxable value, we need to determine the nature of the residual benefit. According to s 136 FBTAA86, the definition of in-house residual fringe benefit requires the employer, at the comparison time, to carry on a business that included the provision of identical benefits principally to outsiders. As one of the considerations on the remuneration package implies that televisions are one of the goods that Ryma is retailing, the discounted purchase on the good from Ryma is therefore subject to in-house residual fringe benefit tax under s48 and s49 of FBTAA86. Therefore, it is [pic]

Reduction: First, we deduct Emma’s contribution, $2,970, which is the amount she paid. This would bring our taxable value to zero. In the case that it is not zero, we have to consider the reduction for in-house fringe benefit that would otherwise be applicable under s 62 FBTAA86.