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ACC301 Fringe Benefit Taxation on Provided Facts Assessment Answer


ACC 301



Michael operates his own business selling pool equipment and materials as well as servicing swimming pools. During the year ended 30 June 2019 Michael received $915,000 in cash for sales of equipment and materials and for pool services. Wages of $275,000 were paid to his staff. This included an amount of $50,000 paid to his brother. The work of the brother could have been done by an unrelated person for $10,000. On 1 June 2019, Michael paid $4,530 to his lawyer to complete the winding up of a business he had operated at a loss in earlier years. One of Michael's customers bought some pool materials for $600 on credit on 21 June 2018 but could not pay the account which was issued on the same day because he went bankrupt in November 2018. Michael wrote off the debt on 1 July 2019. During the year ended 30 June 2019 Michael paid rates and taxes of $5,270 on a vacant block of land. Michael was thinking of putting a holiday house on the block of land. 

Michael made an interest free loan of $500,000 on 1 January 2019 to one of his employees. The employee used the loan for two purposes: 30% for the purchase of an investment property and 70% to pay off his home mortgage. On 1 March 2019 Michael paid the life Insurance premium for one of his employees in the amount of $25,000.

Michael bought a rental property on 4 July 2018 for $1,000,000. He borrowed $750,000 of this money on the same day from the bank to buy the property. The term of the loan was 4 years. The property was leased on 4 July 2018. He received rent in cash from his tenants during the year ended 30 June 2019 in the amount of $95,000. On 1 July 2018 Michael paid the bank a loan application fee of $1,570. During the year ended 30 June 2019 Michael sold the following assets which were purchased on 1 December 1999 and sold on 30 June 2019. 

Asset Purchase Price Sale Price
Antique $2,000$7,500
First Day Cover $500$22,000

In addition to the above assets, Michael sold another investment property in NSW on 1 July 2018 for $986,500. The investment property was purchased on 30 September 2010 at a cost of $345,000. He paid stamp duty on the purchase of $2,750 in October 2010. Michael incurred the following expenses in relation to this investment property: 

• Interest of $18,800 on the loan to buy the investment property, 

• Fine of $5,450 imposed by the local council for breaching council's building regulations, 

• Commission of $9,750 paid on 1 July 2018 to the real estate agent who sold the investment property. Michael had an overall loss for the year ended 30 June 2018 

from all his activities of $66,000 (not including capital losses). Included in this loss of $66,000 was a donation to a charity of $3,000. During the year ended 30 June 2018 Michael earned exempt income of $16,000. Michael also had a carried forward Collectable Capital Loss of $3,500 for the year ended 30 June 2018. 

The taxpayer wants to minimise his taxable income for this year. Assume all depreciating assets, if any, have an effective life of 6 years. He does not wish to use the SBE election. 


Part 1 (2 marks) 

What is Michael's assessable income for the year ended 30 June 2019? 

Part 2 (8 marks)

What fringe benefits tax (FBT) must Michael pay for the year ended 31 March 2019? Assume that Michael cannot claim GST input tax credits for the provision of fringe benefits, if any. Part 3 (10 marks) 

What is Michael' net capital gain or net capital loss for the year ended 30 June 2019? 

Part 4 (10 marks) 

What income tax deductions can Michael claim for the year ended 30 June 2019? You must give reasons for your answer. Your discussion must include an analysis of the pertinent sections of the relevant legislation, rulings, and the relevant case law. If relevant, you must show your calculation. You must apply the law to the facts and provide YOUR OWN analysis of the issues and write a comprehensive answer to the question. 


Fringe Benefit taxation 

Fringe benefits

Fringe benefits may be referred to the extra benefits offered by the employer to employee in course of employment apart from the wages and salaries. Medical Insurance, personal healthcare, meals, allowance to use company’s car, interest free loans are some of the examples of such benefits (Turner, 2017).

Fringe Benefit Tax

Employers have responsibility to pay Fringe Benefit Taxes on the fringe benefits provided to employees. This tax is completely different from the income tax and is computed on the fringe benefit’s taxable value. Employers are allowed to claim the deduction in income tax for the cost that has been incurred in providing such benefits, and the amount of fringe benefit tax paid. Employers commonly claim Goods and Services Tax credits for the items that have been provided as part of fringe benefits (Kaplan, & Price, 2014).

Computation of Assessable Income for the year ended 30th June 2019

Income from Business or ProfessionAmount($)
Sales/Revenue                    9,15,000 
Less: Wages to staff                    2,25,000 
Less: Wages to brother                        50,000 
Less: Bad Debts                              600 
Less: Legal expenses                          4,530 
Less: Depreciation on Rental Property                    1,66,667 
Less: Rates & Taxes                          5,270 
Less: Life Insurance Premium of employees                        25,000 
Net Income from Business or Profession (A)                    4,37,933 
Income from House Property 
Rent Income                         95,000 
Less: Interest on Loan                        18,800 
Less: Loan Application fees                          1,570 
Less: Fines                          5,450 
Net Income from House Property (B)                        69,180 
Income from Capital Assets 
Profit on Sale of Antique                          5,500 
Profit on Sale of First day cover                        21,500 
Commission Paid                          9,750 
Profit on Sale of Investment                    6,41,500 

Loss on Sale of Lounge                                50 
Brought Forward Business Loss                        66,000 
Brought Forward Capital Loss                          3,500 
Net Income from Capital Assets ( C )                    5,89,200 
Total Assessable Income (A)+(B)+( C )                  10,96,313 

Assessable income is that income of the assessee which has been received by selling the products or rendering the services, renting the house property and utilisation of capital assets. Assesses are allowed to claim deduction for the costs that have been incurred to generate aforesaid incomes. The above calculation has been done by deducting the costs that have been incurred in generation of income for Michael (Kaplan, & Price, 2014).

Note 1: Depreciation has been calculated by using straight line method.

Note 2: The donation of $3,000 in the brought forward losses has been deducted from the income. In computation of taxable income, this deduction will not be allowed.

Note 3: The deduction for fines will not be allowed in computation of taxable income.

Note 4: Commission paid to real estate agent for selling of investment property shall not be allowed as deduction in computation of taxable income.

Note 5: The amount paid in excess to the brother will be disallowed as deduction in computation of taxable income.

Note 6: Indexation has been ignored in calculation of Capital gain or loss.

Fringe Benefits Tax for year ended 31st March 2019

Fringe Benefit tax is computed on the taxable value of the extra benefits paid by the employer.

Fringe Benefits PaidAmount
Interest free Loan $                 5,00,000 
Life Insurance Premiums $                    25,000 

Loan fringe benefit’s taxable value is calculated by deducting the actual interest paid by the employee from the interest amount that would accrue at statutory rate of interest. For FBT year 2018-19, the statutory interest rate is 5.20%.

Hence, the taxable value of Interest Free Loan = ($5,00,000*5.20%)-0

Taxable Value of Interest free Loan = $26,000

Taxable Value  Amount
Taxable Value of Interest Value Loan $                    26,000
Taxable Value of Life Insurance Premium $                    25,000 
Total Taxable Value of Fringe Benefits $                    51,000 

  • The loan was used 30% for investment and 70% for paying off home mortgage. However, the tax will be calculated on full value (Turner, 2017).

As Michael is not entitled to claim the GST input credits for provision of fringe benefits, following FBT rate and type 2 gross up rate will be applicable for FBT year ended on 31st March 2019.

`FBT RateGross up rate
Fringe Benefit Tax Ending 31st March 201947%1.8868

The grossed up taxable value of fringe benefits = $51,000*1.8868

Grossed up taxable value of fringe benefits = $96,230

Fringe Benefit Tax = Grossed up taxable value of fringe benefits*FBT Rate

Fringe Benefit Tax = $96,230*47% (Katz, & Mankiw, 2015).

Fringe Benefit Tax = $45,228

Net Capital Gain or Loss for the year ended 30th June 2019

  1. Capital gain on sale of Investment Property
Sell price of Investment $                 9,86,500 
Cost Price of Investment $                 3,45,000 
Stamp Duty paid $                       2,750 
Indexed Cost Price of Investment $                 4,08,742 
Indexed cost of Stamp Duty $                       3,258 
Total Index Cost of Investment $                 4,12,000 
Long Term Capital Gain on Sale of Investment (1) $                 5,74,500 

Note 1: Customer Price Index have been taken as index factor

Index Factor 201095.8
Index Factor 2018113.5

 Note 2: Indexed Cost Price of Investment = ($345,000*113.5)/95.8 = $408,742

Note 3: Indexed cost of stamp duty = ($2,750*113.5)/95.8 = $3,258

Capital Gain on sale of Antique  Amount 
 Sale Price of Antique  $                       7,500 
 Cost Price of Antique  $                       2,000 
 Indexed Cost Price of Antique  $                       3,323 
 Long Term Capital Gain  (2) $                       4,177 

Index Factor 199969.1
Index Factor 2019114.8

  • The collectable like first day cover up to the purchase value $500 are exempted for Capital Gain Tax liability. Hence, the Capital gain on sale of first day cover is (Zero Pope, Fayle, & Chen, 2013).
Capital Gain on sale of Lounge  Amount 
 Sale Price  $                    14,950 
 Cost Price  $                    15,000 
 Indexed Cost Price  $                    24,920 
 Capital Gain on sale of Lounge (3) $                     -9,970 

Index Factor 199969.1
Index Factor 2019114.8

Total capital Gain (1)+(2)+(3) = $568,707 – Brought Forward Capital Loss

Total Capital Gain for year ended 30th June 2019 = $565,207

Income Tax Deduction for year ended 30th June 2019

Income Tax DeductionAmount
Wages To staff $                 2,25,000 
Wages to brother $                    10,000 
Legal Expenses $                       4,530 
Bad Debts $                          600 
Rate & Taxes $                       5,270 
Interest on Loan $                    18,800 
Brought Forward Business Loss ($66,000-$3,000) $                    63,000 
Brought Forward Capital Loss $                       3,500 
Cost of Fringe Benefits $                    51,000 
Fringe Benefits Tax $                    45,228 
Depreciation $                 1,66,667 
Loss on Sale of Lounge $                       9,970 
Total $                 6,03,565 

Note 1: The deduction of donation is not allowed for assesses.

Note 2: The amount for wages shall be allowed at arm’s length.

Note 3: Commission paid for sale of property is not allowed as deduction in income tax (Pope, 2013).

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