The given question involves the identification of fringe benefits extended to Emma by Periwinkle (employer) along with calculation of the same in accordance with the relevant statute. The tax liability on account of Fringe Benefit Tax needs to be determined for Periwinkle Ltd. (the employer) which provides various fringe benefits of Emma (the employee).
Fringe benefit are defined as any non-cash benefit of personal nature which may be provided to the employee by the employer and the tax levied on this is called the Fringe Benefit Tax and borne by the employer only (Wilmot, 2012). The relevant fringe benefits based on the provided information along with their respective taxation treatment are discussed below.
Car fringe benefit: Section 8 of FBTAA86 advocates that car fringe benefits would occur in the event a car is provided by the employer to the employee for personal use also besides use for professional reasons (Barkoczy, 2015). Periwinkle has purchased the vehicle (car) and provided it to their employee Emma who uses the car for personal purposes as well besides official purposes. As per the provision of Fringe Benefit Tax86, the private use of the car will give rise to a fringe benefit tax on the employer that is Periwinkle Ltd but Emma will not be liable to pay any tax.
After considering the exemptions available to Emma under FBTAA86, tax liability for Periwinkle Ltd will be calculated by grossing up of the taxable value of the fringe benefits.
As per the Goods and Services Act 1999, Periwinkle would be entitled to receive input tax credits on the purchase of the car in the event that the purchase would be classified as a Type 1 good. Now the underlying liability in the form of FBT for Periwinkle can be calculated as per the statutory formula method which is in accordance with Section 39F of FBTAA (Wilmot, 2012).
Capital value of car = Car purchase price – on road costs = (33,000 – 550) = $ 32,450
In accordance with the applicable rules, if the number of kilometres travelled for personal usage is less than 15,000 kilometres then the statutory percentage applicable is 20% for any vehicle purchased after 2011. Since the purchase date of the car falls in 2015 and also the distance travelled in the current year for which FBT needs to be calculated is 10,000 km, hence the statutory percentage applicable in the given case would be 20% for the car fringe benefit (Gilders et. al., 2016).
Availability of car for employee (days) = 335 (starting from 1st May) – 5 days for repairing = 330 days
Rest 10 days in airport parking will not be considered as Emma was not in town to use the car but the car was available for use (Deutsch et. al., 2015).
Estimation of car fringe benefit is done in the following manner.
Grossed up value of CFB (Car Fringe Benefit) = $ 32450 × 20% × 330/365 × 2.1463 = $ 12,593.8
As the applicable FBT rate for FY2016 is 49%, hence, FBT payable = 12,593.8 x 0.49 = $ 6,171
Loan fringe benefit: Fringe benefit may arise on account of loan in the circumstance when a particular amount of loan is extended by the employer at a rate of interest which is lesser than the RBA (Reserve Bank of Australia) prescribed rate. The liability on account of this fringe benefit is solely with the employer. The prescribed rate of RBA that is currently applicable is equivalent to 5.65% pa (Sadiq et. al., 2016). However, the employer Periwinkle has extended Emma the loan at an interest rate of 4.45% which is lower in comparison to the RBA rate and hence is extending some benefit to employee resulting in loan fringe benefit. In the question, it is also given that there was no principal repayment in the current year and therefore the extended loan by Periwinkle i.e. the employer has been utilised for personal purposes and hence constitutes loan fringe benefit whose amount can be calculated in the manner shown below (CCH, 2014).
Total interest payments made when interest computation is carried out at the applicable rate by the RBA = 500,000 × 5.65% = $ 28.250
Total interest payments made when interest computation is carried out at the rate given by employer = 500,000 x 4.45% = $ 22,250
Annual savings in interest cost = $ 28,250 – $ 22,250 = $6,000
However, days in FY2016 for which this loan used = 6000 x 213/366 =3491.80
Grossed up value (Loan Fringe Benefit) = 3,491.8 x 1.9608= $ 6,846.72
FBT payable by Periwinkle = 6846.72 x 0.49 = $ 3,354.9
For the given question, Emma has purchased a holiday home from the loan amount given by Periwinkle and thus Periwinkle can avail tax deduction if this holiday home is used for income generation by Emma. As the holiday home costs only $ 450,000 while the remaining money $50,000 has been provided by Emma to her husband, no tax deduction would be available to Periwinkle on remaining $ 50,000 since it is being used by her husband and not by Emma (Woellner, 2014).
Expense Fringe benefit: Periwinkle has provided Emma with a bathtub at a price that is lower than the retail cost. On the discount amount, fringe benefit tax would be payable at the rate of 49% as the item is not for professional usage. Since, Periwinkle provided a bathtub to his employee Emma at the reduced price of $ 1300 instead of the actual retail price of $ 2,600, hence there would be expense fringe benefit to the tune of the difference between the two prices (Nethercott, Richardson & Devos, 2016).
Grossed up value for expense fringe benefit on bathtub = (2600-1300) x 2.1463 = $ 4,078
FBT payable by Periwinkle = 4078 x 49% = $ 1,998
Fringe Benefit Tax calculation
If Emma now uses this $50,000 for deriving gains by investment in shares instead of lending it to her husband, then the deduction by the employer could be availed also on $ 50,000 like the earlier amount of $ 450,000 which Emma used for purchasing the holiday home. This can be calculated as follows (Barkoczy, 2015).
Incremental deduction allowed = 50000 x 1.2 % (5.65% -4.45%) = $ 600
Thus, Periwinkle liability of FBT would decrease by a net amount of $ 600 from the previous amount.