Fringe Benefit Derived From Car

Questions: (a). Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2016. You may assume that Periwinkle would be entitled to input tax credits in relation to any GSTinclusive acquisitions. (b). How would your answer to (a) differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband? Answers: a. It is apparent on the basis of the case presented that Emma is an employee of Periwinkle and has obtained some fringe benefits from the employer. Hence, the central aim is to determine the fringe benefit related tax implications of these benefits with especial reference to Fringe Benefit Tax Assessment Act 1986 (FBTAA86). The various fringe benefits that arise based on the employers conduct are discussed as follows. This benefit is derived by the employee only when the employer gives away the car owned by itself to the employee for usage in personal needs. This has been advocated by Section 8, FBTAA and the fringe benefit tax would typically depend on the usage of the car. Besides, Section 23L ITAA 1936 rules that tax implications for any fringe benefit that may be given away to employee has to be borne by the employer (Sadiq et. al., 2014). As per the case details, Emma has been given car fringe benefit since the employer owned car was given by the employer for personal usage. The payment of GST is a key issue with regards to the computation of fringe benefit associated with car as the factor involved in calculation of the grossed taxable value is driven by the GST (McCouat, 2012). As is apparent from the data given in the case, the car attracts GST and thus the gross up factor to be applied is 2.1463 (ATO, 2015). The FBT liability imposed on the employer as a result of the given arrangement can be computed as mentioned below (Wilmot, 2012). Step 1: Ascertain the taxable value The taxable value of the benefit associated with the given arrangement is determined using the approach below. The calculation of the key constituents for the determination of the underlying taxation liability is shown below. 20% is the statutory percentage that would be applied in accordance with the ATO rule as per which the personal usage of any car to the extent less than 15,000 km during the assessment period. In the given case, the personal usage is 10,000 km. (ATO, 2015). Period for which Emma has the office owned car under her possession = 365-30-5 = 330 A deduction of thirty days has been introduced as Emma was given the car not at the starting of the financial year but after one month. Also, there has been an adjustment to the tune of five days as the car had gone out for repairs and hence Emma did not have it. However, no provisioning would be done for those ten days when the car despite being in possession was parked at the airport and therefore not in use. Benefits value that is subject to FBT = 32450 0.2 (330/365) = $ 5,867.7 Step 2: FBT related liability FBT on car fringe benefit to be paid by employer = 5,867.7 2.1463 0.49 = $ 6,170.95 Fringe benefit derived from loan The above benefit is derived by the employee if the employer does give loan to the employee at an interest rate lower than the RBA prescribed rate and thereby tends to benefit the employer in the form of lower interest cost. Similar to the nature of the fringe benefit derived from car, the employer only has to bear the tax liability arising on account of this benefit. The RBA rate that is currently applicable if given by tax ruling TD 2015/8 and stands at 5.65% pa (Barkoczy, 2015). But the interest rate being charged to Emma is significantly lower at 4.45% pa which essentially gives rise to the benefit being realised by the employee. The loan fringe benefits value is equivalent to the employees saving on the interest cost by comparing if lending was done at the RBA rate (Gilders et. al., 2015). Interest cost @RBA rate i.e. 5.65% = 500,000 0.0565 = $ 28.250 Actual interest cost @ Periwinkle rate i.e. 4.45% pa = 500000*0.0445 = $ 22,250 Net Interest Savings due to employer lower interest = $ 28,250 - $ 22,250 = $6,000 Thus, FBT would be applicable on the value of loan fringe benefit as ascertained above at $ 6,000. Emma uses 90% of the loan amount i.e. # 450,000 for the purchase of a holiday home with the intention of making personal gains, thus the interest component on this portion of the loan would be available for deduction at the end of the employer and thereby help in lowering the liability on account of FBT (Sadiq et. al., 2015). Fringe benefit derived from bathtub In case of bathtub, Emma realises fringe benefit as the employer has extended a favour or a benefit by giving the bathtub at significantly lower value as compared to the actual retail value and hence the underlying tax liability on account of this would be computed as 49% of the total benefit extended (Deutsch et. al., 2015). b. There has been a change in the deployment of funds since 10% of the loan is now used by husband of Emma for making investments in shares. Since, the remaining $ 450,000 still continues to be used by Emma with regards to making investment in holiday home, hence the deductions available to the employer on this interest would continue to take place. Additionally, the decline in the related liability to FBT is determined below (Sadiq, et. al.,2015). Interest cost @RBA rate i.e. 5.65% for 10% loan amount = 28,250 0.1 = $ 2,825 Actual interest cost @ Periwinkle rate i.e. 4.45% pa for 10% loan amount = 22,250 0.1= $ 2,225 Hence, the taxable fringe benefit would now become less by 2825-2225 which is $ 600. Savings on FBT = 600*0.49 = $ 294 References Barkoczy,S 2015.Foundation of Taxation Law 2015,7th edn, CCH Publications, North Ryde Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, Snape, T 2015. Australian tax handbook, 8th edn, Thomson Reuters, Pymont Gilders, F, Taylor, J, Walpole, M, Burton, M. Ciro, T 2015. Understanding taxation law 2015, 8th edn, LexisNexis/Butterworths. McCouat, P 2012, Australian GST legislation. 17th edn, CCH Australia Limited, North Ryde Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015,Principles of Taxation Law 2015,8th edn, Thomson Reuters, Pymont Wilmot, C 2012, FBT Compliance guide, 6th edn, CCH Australia Limited, North Ryde.