Scope of Business of RPL and Taxation Law

This content discusses the scope of business of RPL and its tax implications under Taxation Law. It also analyzes various cases related to the taxation of income from renovation services and sale of business.

Western Sydney University
Taxation Law 200187
Autumn 2019
Answer 1
Issue
The question pertains to determination of scope of business of RPL. The scope of the business is
restricted to renovation services business or the wider purchase activity purchase, renovate and sale
of business. Thus, the case study harps on two points
Analysis
If Borader approach is applied, as applied in case of Memorex v FCT and GP International
Pipecoaters v FC wherein it has been held that the said income proceeds shall be a part of
normal business proceeds and accordingly shall be taxable as ordinary income in terms of
Section 6-5 of Income Tax Assessment Act, 1997. However, the sale of business will be
characterised as capital as it is infrequent in nature and not ordinary incident of business as
held in case FCT v Merv Brown.
Also, it can be Strongly arguable that the houses were not bought for sale, rather they were
purchased for renovation and rent as in case of FCT v Hyteco Hiring Pty Ltd
Even if the profit is not treated as normal proceeds of business, the same may be bought into
purview of tax by treating it as one off isolated transaction or possibly as an extraordinary receipt.
Three casew where the income has been treated as ordinary receipt under section 6-5:
(a) Transactions entered into forms a business as seen in case of Whitford Beach (Transformation
of business); or
(b) Profit falls under the first strand of Myer Premium;
(c) Profit falls under second Myer Strand
In short profit unlikely to be ordinary income based on the following rationale:
(a) RPL is not a typical property dealer and has not in mind to sell the houses while thinking of new
sources of income as held in case of California copper. Thus, RPL is distinguished from Whitfords
beach;
(b) The profit shall not be caught under first strand of Myers as though there was a commercial
transaction with an intention to earn profit but the profit was not of the kind which was earlier
thought when transaction was entered into;
(c) The profit shall not be caught under second strand of Myers as in our case sale proceeds is not a
substitute for rent.
Accordingly, the income shall be treated as capital and business ordinary income.

Answer 2
Introduction
In the present case, Ms. Lucy is the director of Clothes r Us Pty Ltd (CRU), a private company which
is an importer and wholesale supplier of children’s clothes to independent retailers in the Sydney
region. Lucy owns most of the shares in CRU.
The company has given Lucy a car worth $70,000 and the fuel consumption of car did not exceed 7
litres per 100 kilometre. The car is generally parked at home of Ms. Lucy on account of lack of safety
parking facility near office. The cost incurred with respect to car during the year has been detailed
here-in-below:
Sl No Particulars Amount
1 Stamp duty $320
2 Registration & Insurance $900
3 Petrol and oil $1,900
4 Repairs & Maintenance $500
5 Total kilometres travelled (as per log book) 38,000 kms
6 Business kilometres travelled 16,000 kms
7 Lucy’s contribution for petrol and oil $849
Lucy is also reimbursed for the parking fee paid by him i.e. $ 20
Also, Lucy has been offered a loan of $ 20,000 at interest of 2% to help him pay fees for education of
her elder daughter. In addition, the articles of association prohibit such loan.
Analysis- Car
In terms of Section 136 of Fringe Benefit Tax Assessment Act, a fringe benefit is defined a benefit
provided by the employer or an associate of the employer to his employee or an associate of the
employee in respect of employment of income.
In the present case, since Ms.Lucy is director of the company and is on payroll of the company, she
shall be considered as employee and there exists an employer employee relationship between Ms.
Lucy and Clothes r Us Pty Ltd. Accordingly, the benefit provide shall qualify for fringe benefit under
the Fringe Benefit Tax Assessment Act1
Further, there is no selection made regarding the choice of method of computation of Fringe Benefit
Tax, section 9 of Fringe Benefit Tax Assessment Act shall apply automatically. However, in the given
case study since documentation has been maintained, Section 10 i.e operating cost method has also
been analysed to compute Fringe Benefit Tax of Ms. Lucy.
Section 9: Statutory Method
1https://www.ato.gov.au/law/view/print?DocID=AID
%2FAID201097%2F00001&PiT=99991231235958&Life=10010101000001-99991231235959

Under the statutory method, the formula used for computation of Fringe Benefit Tax is presented as
under:
Base value of the car* Statutory Percentage* Days Available For Private Use/ Days in the year – Less
Employee Contribution
Computation under Statutory Method
Sl No Particular Amount
1 Base Value of the Car 70000
2 No of Days car available for Private use 336
3 Statutory % 0.2
4 Employee Contribution 849
5 Fringe Benefit 12038.7
Statutory rate has been taken based on the below basis:
Total kms travelled during FBT year
Statutory rate
Pre
Existing
Contracts
From 10
May 2011
From 1
April
2012
From 1
April
2013
From 1
April
2014
Less than 15,000 0.26 0.2 0.2 0.2 0.2
15,000 to 25,000 0.2 0.2 0.2 0.2 0.2
25,000 to 40,000 0.11 0.14 0.17 0.2 0.2
Over 40,000 0.07 0.1 0.13 0.17 0.2
Further, the reportable benefit has been computed as under:
Computation of Reportable Value
Sl No Particulars Amount
1 Value of Fringe Benefit 12038.7
2 Tax 47%
3 Grossed up 22714.5
Section 10: Operating Cost Method
Under the Operating Cost method, the formula used for computation of Fringe Benefit Tax is
presented as under:
Cost Incurred* (100%- Business Purpose%) – Less Employee Contribution
Business purpose %= 1- Private Use Km/ Total Km

Computation under Operating Cost Method
Sl No Particular Amount
1 Cost 3620
2 Depreciation 15630.1
3 Interest 3450.89
4 Total Cost 22701.0
5 Personal Use 16000
6 Total Travelled 38000
7 Business use % 58%
8 Employee Contribution 849
9 Fringe Benefit 8709.3
2
Computation of Reportable Value
Sl No Particular Amount
1 Value of Fringe Benefit 8709.3
2 Tax 47%
3 Grossed up 16432.7
Accordingly, Clothes r Us Pty Ltd (CRU) shall choose Section 10- operating cost method as the
reportable value is lower in the same.
FBT Liability= $7723.4
Since, no method has been specified Section 9 shall automatically apply and FBT liability shall be
$10675.8.
In addition with respect to loan provided, Section 19 of Fringe Benefit Tax Assessment Act shall
apply. Accordingly, by applying otherwise deductive rule shall apply and no FBT liability shall arise.3
This amount is deductible as ordinary business expenses under s 8-1 ITAA97 read with TR 95/24.
2 https://www.ato.gov.au/rates/fbt/
3 http://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s19.html

Bibliography
https://www.ato.gov.au/law/view/print?DocID=AID
%2FAID201097%2F00001&PiT=99991231235958&Life=10010101000001-99991231235959
https://www.ato.gov.au/rates/fbt/
http://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s19.html