Question

Lou is an employee at a large real estate agency and is paid a salary and commission on sales. He has negotiated the following benefits with his employer: Provision of a car for work and personal use. Lou was provided with the car for the period 1 April 2019 to 31 March 2020. The leased car value was $22,000 at 1 April 2019, and the car had only been leased for a year at that time. Lou is required to pay for any petrol costs which he has determined to be $1,300 for the period 1 April 2019 to 31 March 2020. Provision of the latest model smart phone on 1 April each year as Lou is usually “on the street” and needs a good phone to do his job. Lou estimates that he uses the phone 70% for work purposes. The phone was purchased new on 1 April 2019 for $1,100 (including GST). In addition he was provided with 10 gift vouchers worth $50 each for use at the local supermarket as a Christmas gift.

a. Advise Lou’s employer as to the FBT consequences (including calculation of any FBT liability) arising out of the above information.

b. Would your advice change if the vouchers were used to purchase gifts for clients and new owners who finalized sales in December?

Answer 1

PLEASE GV A RATING IF U LIKE MY EFFORTS, IT WILL KEEP US MOTIVATED. THANK YOU IN ADVANCE. In case u have a query post in comment column, will revert.

Ans a) : Company provided cars

The provision of the use of a company car to an employee constitutes the provision of a benefit for fringe benefits tax (“FBT”) purposes and will usually give rise to a car fringe benefit.

What is a “car benefit”?

Where an employer provides an employee with the use of a car that is held (owned or leased etc) by the employer, and that car is used for private purposes by the employee or is available for the private use of the employee, this will constitute the provision of a “car benefit” in accordance with the Fringe Benefits Tax Assessment.

Exempt car benefits ( Not applicable for our sum )

The main exemption available in respect of car benefits is where the following conditions are met:

the car is:

· a taxi, panel van or utility truck, designed to carry a load of less than 1 tonne; or

· any other road vehicle designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passengers); and

there was no private use of the car other than:

· travel between home and work by the employee; and

· other private use that was minor, infrequent and irregular.

Taxable value of car benefits

Employers have a choice of two methods in relation to calculating FBT on cars – the statutory formula method and the operating costs method. An election is required in order to use the operating cost method; otherwise the statutory formula method applies.

Valuation of car benefits – statutory formula method

The taxable value of a car benefit is calculated under this method according to the following formula:

A X B X C - E

      D

Where:

A = the base value of the car                                    B = the “statutory fraction”

C = the number of days during the FBT year the car was available for private use

D = the number of days in the year of tax

E = the amount of any recipient’s payment (also commonly known as employee contribution)

Valuation of car benefits – operating cost method

The taxable value of a car benefit under this method is calculated using the following formula:

(C x (100% - BP)) – R

Where:

C = the operating costs of the car

BP = the business use percentage

R = the amount of any recipient’s payment

Since , our question does not provide full details we cannot calculate tax laibilty .

Taxable Value of Phone

The taxable value of a fringe benefit usually relates directly to how much an employer reimburses the recipient employee, or pays a third party. Phone classes as an expense payment fringe benefit and - under the ATO guidelines - working out its taxable value depends on:

· The amount the employer reimburses their employee or pays to a third party, and

· The percentage of use of the phone that is dedicated to work purposes (and that the employee would otherwise have been able to deduct from income tax)

Where phone costs are above $50,

· Both the employer and the employee must keep a detailed record of phone and internet costs.

· The employee must provide their employer with a declaration setting out both the percentage of their phone and internet connections which are dedicated to business use, and detail the purpose of the expense they incurred.

Cell phones or any mobile devices were no longer a listed property for the tax year starting from December 31, 2009. The value of the cell phone was still to be included in the employee’s wages as a taxable fringe benefit.

However, after IRS Notice 2011-72, a company-provided cell phone for business purposes is treated as a working condition fringe benefit. Employers exclude the value of the device from the employee's wages. Any personal use of the cell phone is considered a de minimis fringe benefit, also excluded from the wages. This would not be applicable if the cell phone is provided to boost morale or attract employees.

So , in our sums the cell phone is given out of necessity and not mere entertainment of employee . So , nothing is taxable in FBT for phone.

Gift cards

IRS regulations clearly state that fringe benefits provided to employees through a gift card represent “cash-in-kind” and must be included in wages subject to federal employment tax and withholding. It does not matter that the employee is not allowed to redeem the card for cash. Furthermore, the doctrine of constructive receipt applies, meaning the cash value of the gift cards is subject to federal income tax (FIT), federal income tax withholding (FITW), Social Security/Medicare (FICA) and federal unemployment insurance (FUTA) at the time they are made available to employees.

We can withhold federal income taxes on gift cards in one of two ways:

· Percentage method: Withhold a flat rate of 22% for taxes

· Aggregate method: Add value to regular wages and withhold taxes on the combined amount

Gift to employee in vouchers = 10 * $50 = $500

Withholding Tax = $500 *22% = 110

Withhold 7.65% for Social Security and Medicare taxes = $ 500 * 7.65 % = $ 38.25

When we give gift cards to employees, we must include the value in the employee’s wages on Form W-2. Include the amount in box 1 (Wages, tips, other compensation), box 3 (Social Security wages), and box 5 (Medicare wages and tips).

Ans b) If the vouchers were used to purchase gifts for clients and new owners who finalized sales in December : Even in this case he answer would be same as above , because in law there is no such provision given.