Taxation Law: Deductions and Fringe Benefits Tax Implications

This report discusses deductions for businesses, calculation of taxable income for individuals, and fringe benefits tax implications in different cases. It covers topics such as allowable deductions for repairs, calculation of taxable income for an individual, and the implications of fringe benefits tax for employers. The report provides insights into the Australian taxation law and its application in various scenarios.

Taxation Law

INTRODUCTION...........................................................................................................................2
QUESTION 1..................................................................................................................................2
QUESTION 2..................................................................................................................................4
Calculation of Anushka's taxable income and net tax payable....................................................4
QUESTION 3..................................................................................................................................5
Discussion of Fringe Benefits Tax implication of different cases...............................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
1

INTRODUCTION
Taxation could be defined as the liability of every business and individual to pay accurate
tax to the legal authorities of the country in which income is generated by them. These are levied
in every country around the world and it is one of the main source of income of governmental
bodies. In other words, it could be described as the system which is imposed by government on
all the citizens and entities to finance all their expenses such as infrastructure development,
education and health care (Maurer and Walker, 2017). Present report is based upon assessment of
tax in different situations and analysis of deductions for individuals and businesses. This report
covers various topics such as allowable deduction for a new chimney, calculation of taxable
income for an individual’s etc. Apart from this, assessment of fringe benefit for employers in
different situations under Australian taxation law is also covered in this assignment.
QUESTION 1
In case of building new chimney, there is no amount allowable as a deduction under
Australian Income Tax but, if Furnaces Pty going to repair the chimney then it would be
deductible. Repair of any machinery or equipment will always be the replacement of a part of the
capital equipment or of the system, the component being repaired being no more than a
subservient part of all of it (Deduction under Australian taxation. 2017). For example, buildings
are considered to be a whole rather than a subservient portion, but the elements that make up the
construction are subordinate parts.
In case of Furnaces Pty, repair amount of the chimney would be allowed for deduction. A
deduction shall be made for the cost of repairing business property, part of premises or a drop in
the value asset (as defined in s40-30) retained for the purpose of generating an appraisal income.
If the assets is held or only used in part for that reason, a deduction may be made in so far as is
appropriate in the circumstances (s25-10). The taxation authority cannot force the owner to own
the asset or the depreciating asset (Arnold, Ault and Cooper, 2019). It may also be held by another
organisation; however, if the expense is for maintenance and the owner retains or uses the
property or the depreciating asset from the year of income for the purpose of creating
an appreciable income, the deduction is permissible given that the payment is produced. There
are three cases such as incurred by the taxpayer who sought the deduction, incurred in the same
year that the deduction is assumed and imposed in regard of property or a devaluing asset.
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The redesign, demolition or restoration of the whole premises or plant, etc. would not have
been a repair. The same may occur when a significant portion of the asset is restored, replaced or
rebuilt. Whereas the repair clearly improves the state of the item that existed before the repair
had taken place, the repair basically means returning the item to the state that it had previously
had without altering its character (Murphy, 2019). In determining whether or not work must be
carried out is a repair, it is more crucial to analyse if there's been a reconstruction of quality or
functionality instead of an identical reproduction of shape or material. In Furnaces Pty Ltd,
Chimney is commercially, functionally and physically inseparable part of an organization.
Repair work of Chimney is deductible but constructing new chimney is not because it is a
totally new expanse for the organization and they deducted this amount from their net profit.
There seems to be a popular misconception that a deduction for corrections cannot be permitted
if the material used to do the "repair" is not anything like the initial. It is not always the situation
which similar with previous one (Vaughan, 2019). There were several situations in which the
Board of Inspection, AAT or the Courts have approved claims even if the materials seemed to
carry out the repairing was completely different. The criteria to assess deductibility are whether
the functionality of an object has been restored (without altering its character) instead of the
exact reproduction of form or substance.
A deduction could also be permitted for repairs if the facility has previously been used by
taxpayer for non-revenue-producing purposes, assuming that the expenses of plant maintenance
are incurred when the property is being used for the production of taxable income (Sadiq and
et.al., 2018). In TR 97/23, the ATO agrees that a deduction is appropriate (provided that the
spending is not of a capital asset), even if most or all of the degradation or harm arising from the
repair might be due to it. Usage of the resource by a taxpayer previous to its use for the aim of
developing an appraisable income
Furnaces Pty Ltd discovered that even though the new chimney was approximately the very
same length and style as the old one. It was cheaper to build new chimney instead of
repairing old chimney. Also, the new chimney could be better off Ventilate the atmosphere that
was not accessible in the prior one (Chardon, Freudenberg and Brimble, 2016). The old chimney
was removed just after new chimney had been installed. It is recommended that Furnaces Pty Ltd
should build new chimney that is more effective as well as beneficial in term of deduction. In
addition, amount of building new chimney is not allowed for deduction.
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QUESTION 2
Calculation of Anushka's taxable income and net tax payable
Anushka is working as a staff member in Brilliant Kids Pty Ltd on part time basis and she
is also running her own business as a day carer for her own customers. She invested some of her
savings in Australian Stock Exchange and a Private Company in Australia (Burkhauser, Hahn
and Wilkins, 2016). The calculation of her income for the year ending 30th June 2020 is as
follows:
Particulars Details Amount (In $)
Net salary received 81000
Add back: Tax paid 29000
Total salary 110000
Net business profit 30000
Fully Franked Dividend 7000
Add back: Franking credit* 3000 (7000 / 70 * 100) *
(30%)
Total franked dividend 10000
Unfranked Dividend 1200
Assessable income 151200
Deductions:
Deduction on Employment 5000
Taxable income 156200
Tax:
0 to 18200 @ 0% 0
18201 to 37000 @ 19% 3572
37001 to 87000 @ 32.5% 16250
87001 to 156200 @ 37% 25604
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Tax payable 45426
Less: Refundable tax offsets 1080
PAYG Withholdings 44346
Franking credits 3000
Net tax payable 41346
Notes:
 The value of franking credit is calculated as the 30% of whole value of Frank shares
because for individuals 30% credit is deducted from the franking dividend. As the value
of frank dividend is 7000 so it was converted to 100% firstly and then 30% of it is
calculated to add back as the franking credit (Sadiq and Krever, 2020).
 In Australia taxation rates for individuals is different from the businesses so the
calculation of the tax payable is performed according to following tax slab:
Income Tax percentage
0 to 18200 0%
18201 to 37000 19%
37001 to 87000 32.50%
87001 to 180000 37%
180000 and more 45%
All the calculations of tax payable are performed on the basis of above table for Anushka
(Individual income tax rates, 2020).
QUESTION 3
Discussion of Fringe Benefits Tax implication of different cases
Fringe benefits could be defined as the extra supplementing benefits that are offered by
the employer to the employees (Jacobson, 2020). There are certain types of it which are tuition
assistance, health and life insurance, cafeteria subsidies, reimbursement, employee discounts,
below-market loans, employee stock options etc. There are several other benefits that are
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provided by the employer to the staff members so the Fringe benefits tax implications of them in
different cases is as follows:
A. If employer provides a Christmas lunch at a local restaurant: Christmas parties in
Australia considered as the entertainment and it could be considered as the fringe benefit to the
employer. It is an additional tax which is paid by the employer for some benefits like
entertainment of staff members. In most of the cases the employer can also receive a tax
deduction for the cost of the benefit. If an employer provides a Christmas lunch at a local
restaurant for 10 of its key employee at cost of 1000 dollar each then the FBT payable will be
payable in respect to the employees (Rules regarding fringe benefit, 2020). As the cost is more
than 300 dollars so it will be allowed under the tax deduction for the employer, therefore the
employer will be liable for FBT.
B. A Sporting club paying honorarium to the honorary treasurer: The sporting club
is offering an honorarium to the honorary treasurer for 5000 dollars per year providing a car to
him. This car is used by the treasurer 90% for the business of club and the person is also having
job at the local hospital so the value of the honorarium will be deductible under the taxation laws
of Australia by 90% of 5000. All the fees which are received for professional services that are
provided voluntarily are assessable income of the volunteer (Fringe benefit for honorarium,
2020). The treasurer is working as the volunteer in the sport club and as the car is used 90% for
business purpose so the fringe benefit of 90% of the cost will be deductible which will be around
4500 (5000 * 90 / 100).
C. Employer giving a leg ham to all the staff members for Christmas: If an employer
will be giving a leg ham to the staff members for Christmas that costs around 60 dollar per
person then there will be no Fringe Benefit Tax payable because it is an exempt benefit. Leg ham
is considered as refreshment and it is not deductible under Australian Taxation Law. All the food
and drinks that are provided for the purpose of refreshments does not generally considered as the
element of entertainment so the cost of 60 for leg ham will not be deductible under the taxation
law and employer will no be liable for any fringe benefit tax (Fringe benefits, 2020).
D. Employer allowing staff to take home their laptop computers: If employer is
allowing the staff members to take their laptop computers home and it is estimated that only half
of the work will be done at home is related to business then only half of it will be deductible. The
cost which is related to the personal use of laptop computer will not be considered as fringe
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benefit and it will not be deductible under the taxation law of Australia. This fringe benefit will
be partially taxable and rest of it will be deductible as the fringe benefit deduction (Fringe
benefit in case of allowing employees to take laptop home, 2020).
E. Company director using the company's two-tonne truck while undertaking
renovations to his home: A director who is not receiving any type of remuneration from the
company cannot use the property of the company for personal use. If it will be used then there
will be no fringe benefit deduction for the director because it will not be allowed under the
taxation law (Caredes, 2020). The value of two-tonne truck will not be exempted under fringe
benefit taxation law because it will be used by a director who is not getting paid from the side of
the company. All the expenses that are made for personal use of directors are not exempted
under the law so the director will not liable for any type of deduction.
CONCLUSION
From the above project report it has been concluded that it is responsibility of all the
individuals to make sure that they are making appropriate payment of taxation to the government
on income which is generated during the year. While planning to replace an old equipment with
a new one it will be very important for all the businesses to make sure that they are able to
analyse the deduction related to it so that exemption of it could be taken. Apart from this, while
calculating taxation for individual it will also be very important to analyse all the deductions and
adjustments so that accurate tax payable could be calculated. Apart from this, if an employer is
providing any type of service to the employees then assessment related to exemption of fringe
benefit is required to be focused.
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REFERENCES
Books & Journals
Arnold, B. J., Ault, H. J. and Cooper, G. eds., 2019. Comparative income taxation: a structural analysis.
Kluwer Law International BV.
Burkhauser, R. V., Hahn, M. H. and Wilkins, R., 2016. Top incomes and inequality in Australia:
reconciling recent estimates from household survey and tax return data.
Caredes, S., 2020. Reform of Australia's tax system. Taxation in Australia. 55(2). p.68.
Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing
your deduction from your offset. Austl. Tax F. 31. p.321.
Jacobson, R., 2020. Tax reform: With 2020 vision. Taxation in Australia. 55(2). p.79.
Maurer, L. and Walker, J., 2017. A Brave New Post-BEPS World: New Double Tax Treaty
Between Germany and Australia Implements BEPS Measures. Intertax. 45(4).
Murphy, K., 2019. Procedural justice and the Australian Taxation Office: A study of scheme investors .
Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The Australian
National University.
Sadiq, K. and et.al., 2018. Principles of Taxation Law 2018. Thomson Reuters.
Sadiq, K. and Krever, R., 2020. Individual tax residence in Australia. Tax Notes International,
pp.10-15.
Vaughan, M., 2019. Scale shift in international tax justice: comparing the UK and Australia from
2008 to 2016. Social Movement Studies. 18(6). pp.735-753.
Online
Deduction under Australian taxation. 2017. [Online]. Available Through:
http://www.taxandsuperaustralia.com.au/Documents/Publications/Ch%2014%20Tax
%20Summary%202017%20sample.pdf
Fringe benefit for honorarium. 2020. [Online]. Available through:
<https://www.ato.gov.au/Non-profit/Your-workers/Your-volunteers/Paying-
volunteers/Honorariums/>
Fringe benefit in case of allowing employees to take laptop home. 2020. [Online]. Available
through:<http://www.jajonescpa.com/articles/Cellphones&Computers.pdf>
Fringe benefits. 2020. [Online]. Available through:
<https://www.ato.gov.au/law/view/document?DocID=SAV%2FFBTGEMP%2F00015>
Individual income tax rates. 2020. [Online]. Available through:
<https://www.ato.gov.au/rates/individual-income-tax-rates/>
Rules regarding fringe benefit. 2020. [Online]. Available through:
<https://www.dexterousgroup.com.au/are-work-christmas-parties-and-gifts-tax-
deductible-for-employees-and-clients/>
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