Fringe Benefits Tax Assignment For Rapid Heat Pty Ltd
Question
Rapid-Heat Pty Ltd (Rapid-Heat) is an Electric Heaters manufacturer which sells Electric Heaters directly to the public. On 1 May 2017, Rapid-Heat provided one of its employees; Jasmine, with a car as Jasmine does a lot of travelling for work purposes. However, Jasmine's usage of the car is not restricted to work only. Rapid-Heat purchased the car on that date for $33,000 (including GST).
For the period 1 May 2017 to 31 March 2018, Jasmine travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Rapid-Heat. The car was not used for 10 days when Jasmine was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.
On 1 September 2017, Rapid-Heat provided Jasmine with a loan of $500,000 at an interest rate of 4.25%. Jasmine used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible.
During the year, Jasmine purchased an Electric Heaters manufactured by Rapid-Heat for $1,300. The Electric Heaters only cost Rapid-Heat $700 to manufacture and is sold to the general public for $2,600.
Required:
(a) Advise Rapid-Heat of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2018. You may assume that Rapid-Heat would be entitled to input tax credits in relation to any GSTinclusive acquisitions.
(b) How would your answer to (a) differ if Jasmine used the $50,000 to purchase the shares herself, instead of lending it to her husband?
Answer
Fringe benefits tax of FBT can be termed as the tax that is paid by the employer on the value of benefits that is given to the employees. It can even be described as the non-wage payment or advantage that the employer bestows on the employees. Rapid Heat Pty Ltd is a manufacturer of bathtub who provides some fringe benefits to one of the employees. During the year 2017-18, Jasmine was given a car, loan along with other good that is being manufactured by the company. Hence, in this scenario, Rapid-Heat will be required to pay the FBT. The computation of FBT is shown below:
FBT on the usage of Car
The employer will be subjected to FBT when the car is provided to the employee for usage. In this scenario, the employer needs to pay the FBT. However, if the car does not meet the definition of the car then residual fringe benefits will come into action. Further, there are many other instances when the utilization of car is exempted from fringe benefit. The computation of the FBT on tax can be done in either of the two ways that are the statutory method or the operating cost method (Pratt & Kulsrud, 2013). The statutory method of computation of the FBT is utilized because the operating cost method needs the presence of log books with the complete details of the travelling done in terms of kilometres and personal purpose.
In the present scenario, Rapid-Heat Pty Ltd has provided Jasmine with a car on 1st May 2017 that was purchased on the same date for an amount of $33,000. The expenses that are incurred by Jasmine constitute to $550 on the car that was reimbursed by the company and the car travelled for around 10,000 km. Further, it needs to be noted that Rapid Heat Pty Ltd was unable to utilize the car for a period of 15 days during the year. Hence, in the absence of information, the computation of the FBT will be done as per the statutory method.
As per statutory method-
Value of benefit = A*B*C/D -E
Where,
A = Car cost
B = Statutory Percentage
C = vehicle was used for private purpose
D =Days in the Year
E = Contribution of the Employee
The following data were gathered from the case
A = 33000, B = 0.20, C = 320, D = 335 and E = 0
Hence, the computation can be done in the following manner
Value of Benefits = 33000*0.20*320/335- 0 = 6,304
Value grossed up = 6304 * 2.1463 = 13,531
Fringe benefit tax on loan:
A fringe benefits tax on the loan is chargeable when the employer does not charge the interest or a very low level of interest in charged on loan. When the interest rate is lower as compared to the benchmark rate then the interest rate is considered as a low-interest rate. If the employee owes a debt to the employer and the employee fails to make the payment on time and furthermore, the employer does not ask for the same then it will be treated as a fringe benefit and will be exempt from the ambit of FBT (Nethercott et. al, 2013). In the provided case, it is noted that Rapid Heat Pty Ltd has provided jasmine with a loan amounting to $,500,000 at the rate of interest at 4.45%. Out of that, a sum of $450,000 was utilized to purchase a holiday home and the remaining amount was provided to the husband to purchase a share in Telstra without any part of interest. As per the current standard, the threshold rate is 5.95%
Hence, fringe Benefit value on loan = (Bench mark rate - rate charged by employer) * Loan Amount
From the case study we have
Fringe Benefit value on loan = (5.95% - 4.45%)* 500000 * 7/12 = 4,375
Grossed up Value = 4,375 * 1.9608 = 8,579
When the loan is given by the employer to the employee and if the amount is used for the purchase of assets that generates income, such amount is deductible for the FBT computation. However, in the current scenario, the shares are purchased by the husband of Jasmine and hence deduction cannot be claimed by the employer (Nethercott et. al, 2013)
a) Fringe benefits tax on goods:
An FBT on the goods of the company is chargeable when the company sells the goods to the employee at a price that is lower than the current market price. In such a scenario, the employer will be subjected to pay FBT on the difference that exists in the price at which the goods are sold to the employee (Sadiq et. al, 2005)
In the present scenario, Rapid-Heat Pty Ltd has sold the goods to the employee (Jasmine) ar an amount of $1300 while the same goods are sold in the market at a price of $2600. Hence, the company will be required to pay FBT on the difference that exists between $1300 and $2600. Hence,
Value of fringe benefit tax on goods = 2600 - 1300 = 1300
Grossed up Value = 1300 * 2.1463 = 4,078
The overall value of fringe benefit tax that i chargeable is as follows:
Grossed up value of Car = 13,531
Grossed up value of Loan = 8,579
Grossed up value of Goods = 4,078
TOTAL = 26,188
FBT charged at the rate of 49% will amount to $ 12,832
(b) Further if Jasmine used the amount of $50,000, the loan that was received by the employer to purchase the share of Telstra then the employer will be entitle for a deduction of interest on the amount $50,000. The new amount of FBT would be as follows:
Value of fringe benefit on loan = (5.95% - 4.45%) * 450000 * 7/12 = 3,938
Grossed up value = 3938 * 1.9608 = 7,721
Now, the total fringe benefit tax that would have been chargeable would be,
Grossed up value of Car = 13,531
Grossed up value of Loan = 7,721
Grossed up value of Goods = 4,078
TOTAL = 25,330
FBT charged at the rate of 49.25% will amount to $ 12,475.
References
Kobestky, M. (2005) Income Tax: Text, Materials and Essential Cases. Sydney: The Federation Press
Nethercott, L., Richardson, G.,& Devos,K.. (2013) Australian Taxation Study Manual. Oxford university Press
Pratt, J. W. and Kulsrud, W. N. (2013) Federal Taxation. Penguin Publishers
Raymond H. P. (2002) Accounting for Fixed Assets. John Wiley and Sons, Inc
Renton N.E. (2005) Income Tax and Investment, 2nd Ed. Oxford University press
Sadiq,K., Coleman, C., Hanegbi, R., Jogarajan,S., Krever, R.,Obst, W., & Ting, A. (2014) Principles of Taxation Law. Sydney.
