Taxation Law Case Study Analysis

This case study analysis delves into the taxation implications of fringe benefits, income tax consequences, and barter schemes. It covers calculations, rules, and advice for individuals and participants in various scenarios.

HI6028 Taxation Law
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Contents
Question 1..................................................................................................................................3
Question 2..................................................................................................................................6
a. Advise Allan of any income tax consequences..................................................................6
b. Explain how a hobby is to be distinguished from a business.............................................8
c. Advise Allan and Betty of any income tax implications....................................................9
d. Advise the participants in the barter scheme of any income tax implications.................10
References:...............................................................................................................................11
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Question 1:
Meaning of fringe benefit:
In accordance with Fringe benefits tax act, 1986, fringe benefits tax is imposed on employers
for providing fringe benefits to employees. There are different types of fringe benefits such
as car expenses, and other expenses, apart from the usual remuneration and superannuation
funds. Fringe benefits are provided to employees in addition to the usual salary remuneration
for attracting employees and motivating them to work for the company. These fringe benefits
are subject to taxation, after providing certain deductions/ claims. These are paid by
companies.
There are varied types of fringe benefits which are provided to employers. In accordance
with the provision of section 8.1 of ITAA, 1997, the fringe benefit is allowed as a deduction
and the cost incurred for fringe benefits are also allowed for deduction (Lignier, & Evans,
2012). There are a different type of fringe such as type1, type 2 and type 3. The difference in
the types is due to tax benefits available as for type 1, there are GST benefits and in type 2,
there are certainly other benefits.
In accordance with the ITAA act, 1997, a person has to maintain the records for 5 years and
there are four methods for calculation for car expenses are cents per kilometer, logbook
method, 12% original method and 1/3 rd. of total expenses. A taxpayer is free to choose any
of the car expense methods for claiming the deduction and for ascertaining taxation amount.
There are different methods for calculation of fringe benefit. One of the other fringe benefits
is for staying away from the home. This includes the amounts which are paid for living away
from and contains all the expenses incurred for providing employment services (Lignier, &
Evans, 2012).
Analysis of the case study:
In the given case study, Charlie is working as an employee for Shine homes. Shine homes
have provided a four-wheeler car “Sedan” to Charlie which costs around $ 70,000 as on 1st
Sep 2016. The benefits which were provided to Charlie includes car fringe benefit, parking
benefit and home benefit (as he stays away from his home) (Lignier, & Evans, 2012). These
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fringe benefits are subject to taxation and thus, there is need to assess the taxation amount
after considering all the deductions and the tax amount is to be paid by the company.
Ascertainment of fringe benefit:
Car fringe benefit: The Sedan car was provided to Charlie as on 1st September and the total
distance traveled by it is 80,000 km. The distance traveled by it includes 70% for business
purpose and 30% for personal purpose. The information which was recorded by Charlie for
12 weeks includes that the car travelled for 50,000 km and petrol cost for 1 month was $
2,000 per month, cost for repair and maintenance includes $ 3,500 per month, registration
cost includes $240 per annum and insurance cost includes $ 960 per annum (Evans, et. al.,
2013). This can be calculated by two formulas namely, statutory formula basis and cost basis:
Statutory formula Cost basis formula
Taxable fringe benefit can be calculated
as
(0.2* Base value of car* number of days
provided fringe benefit/ number of
days in the financial year) – amount
paid
Putting values in the formula is as
follows: (0.2* 70,000*196/212)-0
= 14,000*0.924
=12,936
The formula for calculation of taxable fringe
benefit
[C*(100%-BP)]-R
After putting values in the above formulae
are as follows:
39,700* (100%-70%)-0
=$11,910
Among both the methods, the method with lower amount taxable would be considered for
tax calculation. As per cost method, the amount of $ 11,910 will be taken as the taxable
amount for taxation purpose.
Home benefit: In the given case study, Charlie was away during his honeymoon trip and the
couple also cannot make use of the car as the car met with an accident and further the
company has thought of hiring a car for accommodating the couple during their honeymoon
period. The cost incurred for this period was $1,000 and it also bore an amount of $ 3000 for
their accommodation. Thus, the total amount of allowance provided is $4,000 (vans, et. al.,
2013).
Exemption amount estimation:
These exemptions are provided as below:
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First, 40 weeks = $350 per week
Second, next week’s = $ 199 per week
The total exemption allowed will be $ 700 for accommodation and $ 398 for food
component. Thus, taxable amount would be
=$ 4,000- $ 1,098
=$ 2,902.
Car parking benefits: As per the rule of ATO, an employee has to maintain the details for 2
weeks. Charlie has effectively recorded all the details and thus, the calculation can be done as
follows:
The total fringe benefit can be ascertained as follows:
Total fringe from all the formulas are as follows:
Car fringe benefit = $ 11,910
Home benefit= $ 2,902
Car parking= $ 5,600
Total benefit= $ 20,412
Grossed fringe benefit= $ 20,412* 2.14
= $ 43,810.28
Adding, employer net exempt amount= $43,810+0= $ 43,810
Taxable amount = $ 43,810
The above table presents that there is a total of all the taxable amount of fringe benefits
which includes car fringe benefit, home benefit tax, car parking benefits. The grossed benefit
is calculated by multiplying the amount to 2.14.
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Taxable fringe benefit can be ascertained as
=no. of weeks * weekly charge
=28* $200
= $ 5,600

Question 2:
a. Advise Allan of any income tax consequences.
Issue:
The issue is related to the tax implications to be considered for the assessment Alan and Betty
by referring to the information given in the scenario.
Rule:
The income tax is chargeable in Australia when it comes under the purview of ordinary
business income of the assessee or the statutory income chargeable to tax. The ordinary
income of the assessee represents the profits earned obtained in the normal course of
activities whereas statutory income represents that portion of the income of assets which are
specifically included in the total income of the assessee due to legislation formed by the
Australian Taxation Office. For analyzing the chargeability of the income of the assessee the
nature of the income of the assessee in the hands of the recipient will be evaluated and the
nature of expenditure in the hands of the payee should be ignored in that situation. The same
issue was addressed in the case of McNeil (Australian Taxation Office, 2018).
The other factors which should be considered while making the assessment of income in the
hands of the assessee include:
 Regularity, periodicity and occurrence of the income in the hands of the
recipient.
 The expectation of the continuation of income in future in the hands of the
assessee.
 The objective behind earning the income whether profit objective exists.
Section 21 and 21A of the Income Tax Assessment Act, 1936 specifies that the amount
obtained as a non-cash receipt would also be chargeable to tax on the hands of the assessee
and the money value of the transaction will be considered as the value derived from that
transaction (Australian Taxation Office, 2018).
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Analysis:
In the concerned case, the part-time business is being carried out and the intention of the
assessee is to earn profits through the business activities. The future expectation is not clearly
mentioned in the information. The wine bottle that is received by Alan is worth $360 and the
exemption limit is $300 and therefore the same will be includable in the hands of the assessee
(Barkoczy, 2016).
Conclusion:
Therefore it can be concluded that the income will be included in the hands of Alan in the
concerned case.
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b. Explain how a hobby is to be distinguished from a business.
Issue:
The issue here involves interpretation of the law regarding the differentiation between the
hobby and the business activity. The interpretation will be used for analyzing the tax
implications of the assessment.
Rule:
The tax implication would be different when the business activity and a hobby are included
in the transaction. The transaction which involves fulfillment of any hobby will not be taxed
in the hands of the assessee whereas the transaction with the intention of the business activity
will be taxed appropriately (Australian Taxation Office, 2018).
In the case of Martin vs. FCT, it has been established that the activity carried on with the
profit motive will be considered as a business activity with a profit objective. Also in the case
of Babka vs. FCT, it was ruled that the set of activities will be considered s business activity
when the set of arrangements involved in the activities contains the various features of
business like betting. In case of Brajkovich vs. FCT, it was held that there are very rare
circumstances where gambling and betting will be considered as business.
Analysis:
In the given case of Alan and Betty the amount involved in the transaction is not so large and
there should be analysed the basic sense of carrying on these activities and based on that
activity only the nature of the transaction and activity will be analysed and the tax
implication will be obtained accordingly (Barkoczy, 2016).
Conclusion:
It can be concluded that there is a proper distinction between the hobby and business activity
and the tax would be considered based on that nature of activity only.
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c. Advise Allan and Betty of any income tax implications.
Issue:
The issue here is concerned with the analyzing the tax implications of Alan and Betty by
interpreting the case studies based on the distinction between a hobby and business activity
and evaluating the barter system.
Rule:
As per Australian Taxation Rules, it can be established that even if the amount involved in
the transaction is large there should be a formal set of arrangements which comprise the
business activity for the assessment. By referring to the above information it can observe that
Alan and Betty were not engaged in any kind of business rather the amount involved was
very large. As per the Barter system, the money value of the transaction will be considered as
the value of the transaction for the assessed (Australian Taxation Office, 2018).
Analysis:
In the concerned situation, it can be seen that Alan and Betty were operating the activities in
the nature of business only and the same was operated with a profit motive, therefore, the
same will be considered as business activity. Also as per the barter system, the amount of
transaction will be chargeable to the assess in an appropriate manner.
Conclusion:
It can be concluded that the assets involved in the transaction will be taxed appropriately and
there will be no relaxation under barter system (Barkoczy, 2016).
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d. Advise the participants in the barter scheme of any income tax implications.
Issue:
The issue is concerned with analysis of barter system and obtaining the tax implication in the
concerned case
Rule:
The barter system considers the money value of the non-cash transaction involved in the
business activity of the assessee. The concept of arm length price is adopted in this system
and the turnover obtained by considering this price will be considered for GST tax returns
and other taxable assessments of the assesse (Australian Taxation Office, 2018).
Analysis:
I the concerned case the participants to the transaction cannot contend that the noncash
transaction will not be includible in the total income of the assessee and the arm length price
will be considered for obtaining the value of the transaction.
Conclusion:
Therefore the transaction will be taxable under the barter system and the tax will be
calculated on the amount obtained as revenue as per arm length price.
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References:
 Australian Taxation Office, A. 2018. How to calculate your FBT. [online]
Ato.gov.au. Available at:
https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/how-to-calculate-your-fbt/
[Accessed 16 Jan. 2018].
 Australian Taxation Office, A. 2018. Legal Database. [online] Ato.gov.au.
Available at:
https://www.ato.gov.au/law/view/document?DocID=SAV/FBTGEMP/00017&PiT=9
9991231235958/ [Accessed 16 Jan. 2018].
 Australian Taxation Office, A. 2018. Working out the taxable value of a car
fringe benefit. [online] Ato. Available at: Government, A. 2018. Car fringe benefits.
[online] Ato.gov.au. Available at: https://www.ato.gov.au/general/fringe-benefits-tax-
(fbt)/types-of-fringe-benefits/car-fringe-benefits/ [Accessed 16 Jan. 2018]. [Accessed
16 Jan. 2018].
 Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
 Evans, C., Lignier, P. and Tran-Nam, B., 2013. Tax compliance costs for the
small and medium enterprise business sector: Recent evidence from Australia. Tax
Administration Research Centre University of EXETER Discussion Paper, pp.003-13.
 Lignier, P., & Evans, C. 2012. The rise and rise of tax compliance costs for
the small business sector in Australia.
 Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D., 2016.
Australian Taxation Law 2016. OUP Catalogue.
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