ACC301 Fringe Benefit Taxation on Provided Facts Assessment Answer
Fringe Benefit taxation
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 Profession||Amount($)|
|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|
|Less: Interest on Loan||18,800|
|Less: Loan Application fees||1,570|
|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|
|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 $3,000 in the brought forward losses has been deducted from the income. In computation of taxable income, this deduction will not be allowed.
Note 3: The deduction for fines will not be allowed in computation of taxable income.
Note 4: Commission paid to real estate agent for selling of investment property shall not be allowed as deduction in computation of taxable income.
Note 5: The amount paid in excess to the brother will be disallowed as deduction in computation of taxable income.
Note 6: Indexation has been ignored in calculation of Capital gain or loss.
Fringe Benefits Tax for year ended 31st March 2019
Fringe Benefit tax is computed on the taxable value of the extra benefits paid by the employer.
|Fringe Benefits Paid||Amount|
|Interest free Loan||$ 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 = $26,000
|Taxable Value of Interest Value Loan||$ 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 Rate||Gross up rate|
|Fringe Benefit Tax Ending 31st March 2019||47%||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 = $45,228
Net Capital Gain or Loss for the year ended 30th June 2019
|Sell price of Investment||$ 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 2010||95.8|
|Index Factor 2018||113.5|
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 1999||69.1|
|Index Factor 2019||114.8|
- 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 1999||69.1|
|Index Factor 2019||114.8|
Total capital Gain (1)+(2)+(3) = $568,707 – Brought Forward Capital Loss
Total Capital Gain for year ended 30th June 2019 = $565,207
Income Tax Deduction for year ended 30th June 2019
|Income Tax Deduction||Amount|
|Wages To staff||$ 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|
|Loss on Sale of Lounge||$ 9,970|
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).