Taxation Law 2: Fringe Benefits Tax and Income Tax Analysis

This assignment solution addresses various aspects of Australian taxation law, specifically focusing on Fringe Benefits Tax (FBT) and Income Tax. The solution begins by defining fringe benefits and their tax implications, particularly concerning car fringe benefits, detailing the statutory formula method and the operating cost method for calculating taxable values. The case facts involve an employer providing a car to an employee and the associated tax liabilities. The assignment then examines income tax implications for individuals, including the tax treatment of non-monetary benefits such as homemade food and wine. It further explores the criteria distinguishing business activities from hobbies, referencing relevant court cases and taxation rulings. The solution concludes by analyzing the tax implications of a barter system, emphasizing its treatment under the Income Tax Assessment Act 1997 and the Goods and Services Tax (GST) legislation, ensuring such transactions are treated equally to cash and credit transactions. The assignment demonstrates an understanding of relevant legislation and provides practical application of tax principles.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer 1..........................................................................................................................................2
Case facts.........................................................................................................................................3
Answer 2..........................................................................................................................................6
Part (b).............................................................................................................................................7
Part C...............................................................................................................................................8
Part D...............................................................................................................................................8
Reference List................................................................................................................................10

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Answer 1
The additional benefit that the employer provides to the employee other than the wages
and the salary is considered as Fringe Benefits under the Fringe Benefit Tax Assessment Act
1986. For the applicability of this provision, the existence of an employment relationship is
mandatory between the provider of benefits and the beneficiaries in order to determine the tax
liabilities of the employer as well as the employee with respect to such benefits (Hodgson and
Pearce 2015).
According to section 7 of the Fringe Benefit Tax Assessment Act 1986 stipulates the
benefits that can be derived from cars. The provision states that if an employer provides the
employee with a car that the employer personally owns or has obtained it through lease and the
car is allowed to be used for personal purpose, such benefits related to the car gives rise to fringe
benefits tax (Gale and Samwick 2014). In the event, the employees or his associates use the car
for private purpose or if it is not used for personal use, the benefits derived from the car shall be
subjected to fringe benefits tax.
There are two essential methods to determine taxable value of fringe car benefits,
namely, the operating cost method and statutory formula method. According to section 9 of the
Fringe Benefit Tax Assessment Act 1986, the taxable value of car fringe benefits can be
calculated as per the statutory method. This method includes the cost of the car in order to
determine the fringe benefits associated with the car. The operating cost method is another
significant method that is used to determine the fringe benefits of the car as stipulated under
section 10A and 10B of the FBTAA 1986. The operating cost method involves the operating
cost of the car to measure the taxable value of fringe benefits. It must be comprehended that only

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the method that produces the lowest result should be applied to calculate the fringe benefits of
the car. Moreover, the relevant documents are necessary while calculating the fringe benefits
using the operating cost method (Kim, Longest and Lippmann 2015).
Case facts
In this case, the employer of Shiny Homes Pty Ltd provided its employee, Charlie with a
four-wheel sedan. The car provided to Charlie is defined as a car under the fringe benefits tax
legislation. As per the given facts, the car was permitted to be used for personal purposes of the
employees and Charlie not only used car for personal purposes but also for additional work
purposes. Hence, the car provided to the employee, Charlie, shall be liable for determining fringe
benefits associated with the car.
The statutory formula method and the operating cost method are essential methods used
to determine the taxable value of the fringe benefits for calculating the FBT (Nijland and Dijst
2015). The calculation of the car fringe benefits through the statutory formula method can be
determined by considering the statutory rate at 20 percent. The base value of the car is multiplied
with the statutory rate of 20% for calculating the taxable value of fringe benefits according to the
statutory formula method. At the time of calculating the fringe benefits associated with the car as
per the statutory formula method, it is not required to include the extent to which a car provided
by the employer is used for personal purpose. On the other hand, the total operating cost of the
car is equally divided between the work purpose and the personal purpose for determining the
taxable value of fringe benefits.

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The deemed depreciation is calculated using the statutory rate of 25% by using the formula
provided under section 11(1).

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The deemed interest is calculated using the formula provided under section 11(2). The
statutory interest rate is calculated at 5.65% for the year 2016/17.
Since the calculation of the taxable value of fringe benefits for the car, using the statutory
formula method has produced lowest outcomes, it shall be regarded that the taxable value of
fringe benefits associated with the car provided to Charlie has been calculated as per the
statutory formula method. Moreover, Shine Ltd has been hiring cars for weeding which implies
that the hiring charge shall be included while calculating the taxable value of fringe benefit
associated with the car. In addition, the honeymoon accommodation that the employer, Shine
Limited has financially supported shall also be taken into account while determining the taxable
value of fringe benefits associated with the car.

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Further, there is a legal provision relating to the fact that fringe benefits associated with
car parking shall be taken into account, if the car is parked at premises that has been obtained by
the employer either by ownership or on lease (Tucker 2014). Therefore, as per the given facts,
the car has been parked in separate unit which exempts the car from being subjected to car fringe
benefits.
Answer 2
Betty and Allan have decided to shift from their home in Melbourne for which they have
sold the house. Their acquisition of large country house in Central Victoria and the sale of their
house in shall not be subjected to any tax related consequences. Betty works as a part time
accountant whereas Allan works as a part time locum doctor; hence, their income is liable for
income tax as is stated under the Income Tax Assessment Act 1997.
On the facts here, in addition to the fees that Allan receives from his patients, he also
receives homemade food and cakes, especially from his aged clients as a gesture of appreciation,

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thus, resembling his popularity amongst his aged patients. Nevertheless, the homemade foods
and cakes shall be exempted from any form of additional tax as that food does not amount to
commercial products and has certain commercial value (Wilkins 2015). Moreover, Allan has
received wine from one of his clients but wine has commercial value that is, it is worth $36 in the
market, approximately. As per the Income Tax Assessment Act 1997, the wine that Allan
received shall not be exempted from income tax that is, the price shall be included in the income
earned by Allan while determining his taxable income. This inclusion of the amount of the wine
shall be used to determine the income tax liability under the ITAA 1997.
Part (b)
According to Taxation Ruling TR 97/11, for determining whether an individual is
engaged in a business, the existence of certain factors is necessary. Therefore, the following
ruling factors assist in distinguishing between hobbies and business. In Cooper Books Pty Ltd vs.
Commissioner of Taxation of Commonwealth of Australia [1956] 11 ATD 147; [1942] 66 CLR
436, the court held that there are specific criterions that distinguishes hobbies from business
activities.
Firstly, the purpose of the activity is imperative to distinguish between hobby and
business. An activity is considered as a business activity if it is found that the activity has a
substantial commercial purpose (Shields and North-Samardzic 2015).
Secondly, it is important to have an employment relationship to identify an activity as a
business activity as opposed to an activity related to hobbies.
Thirdly, the primary objective of a business activity is to earn profit whereas there is no
such requirement in case of a hobby.

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Fourthly, for any activity to be identified as a business activity, it is important to have
premises for such business activity. On the contrary, there is no such requirement in case of any
activities that is related to hobbies (Miller, Kim and Holmes 2015).
Fifthly, there is a requirement of huge capital investment in case of business related
activities and there is no need for such huge capital investment to conduct activities that are
associated with hobbies.
Part C
Under circumstances, where a client transforms his hobby into business for attaining
profit, such income arising from the business shall not be subjected to income tax. As per this
case, Betty and Allan had the hobby of gardening that they transformed into a business activity.
They received $500 to $600 after selling the marmalade. Under the Income Tax Assessment Act
1997 the barter system introduced by Betty and Allan shall become subjected to assessment as
per its provisions.
Part D
Any barter transactions that are performed as business transactions becomes subjected to
the provisions stipulated under the ITAA and GST in the country as these legal provisions
regulates the transactions related to barter system. Therefore, any business transactions that
involve barter system shall be treated equally like the credit and the cash transactions for
calculating taxable value as per the GST and ITAA provisions. Hence, as per the facts of the
given case, the barter system introduced by Betty and Allan within the area shall be subjected to

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equal treatment as credit and cash transactions as per the provisions stipulated under the GST
and Income tax legislations (Gitman, Juchau and Flanagan 2015).

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Reference List
Ahmad, R. and Scott, N., 2015. Fringe benefits and organisational commitment: the case of
Langkawi hotels. Tourism review, 70(1), pp.13-23.
Akins, B.W., Chapman, J.L. and Gordon, J.M., 2014. A whole new world: Income tax
considerations of the Bitcoin economy. Pitt. Tax Rev., 12, p.25.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende,
S., 2015. Understanding the economy-wide efficiency and incidence of major Australian
taxes. Treasury WP, 1.
Cooper Books Pty Ltd vs. Commissioner of Taxation of Commonwealth of Australia [1956] 11
ATD 147; [1942] 66 CLR 436
Fringe Benefit Tax Assessment Act 1986
Gale, W.G. and Samwick, A.A., 2014. Effects of income tax changes on economic growth.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax breaks: is the fringe benefits tax a
barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), p.819.
Income Tax Assessment Act 1997

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Kim, P.H., Longest, K.C. and Lippmann, S., 2015. The tortoise versus the hare: Progress and
business viability differences between conventional and leisure-based founders. Journal of
Business Venturing, 30(2), pp.185-204.
Miller, T., Kim, A.B. and Holmes, K., 2015. 2015 Index of economic Freedom. Washington DC:
The Heritage Foundation.
Nijland, L. and Dijst, M., 2015. Commuting-related fringe benefits in the Netherlands:
Interrelationships and company, employee and location characteristics. Transportation Research
Part A: Policy and Practice, 77, pp.358-371.
Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee
Performance & Reward: Concepts, Practices, Strategies, p.218.
Tucker, J., 2014. Tax files: Professional firm structuring. Bulletin (Law Society of South
Australia), 36(9), p.35.
Wilkins, R., 2015. Measuring income inequality in Australia. Australian Economic
Review, 48(1), pp.93-102.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law
2016. OUP Catalogue.