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 1

FBT- Fringe Benefit tax needs to be paid by the Employer for fringe benefits provided or deemed to be provided to an employee in a fiscal year.

a) The benefits in this case provided to Employee includes :

Car- Car Fringe Benefits

Loan at concessional rate of interest- Loan Fringe Benefits

Electric heaters at discounted price- Residual Fringe benefits

A car fringe benefit most commonly arises where the employer makes a car available for use to an employee for private use or the car is being treated to be available for private use.

FBT Calculations:

For employer provided car

Statutory Formula:

FBT= A*B*C-E/D

A = the base value of the car = $33,000

B = the “statutory fraction” = 20%

C = the number of days during the FBT year the car was available for private use = 335 days

D = the number of days in the year of tax =365 days

E = the amount of any recipient’s payment (also commonly known as employee contribution) =$550

Taxable Value= (($33000* 20%* 365/335)- $550 = $6641

Thus, Rapid heat is liable to pay FBT at $6641 for year end 31st March, 2018 for the car provided to Jasmine.

Loan Fringe benefit tax:

The taxable value of a loan fringe benefit is the difference between:

• the interest that would have accrued during the FBT year if the statutory interest rate had applied to the outstanding daily balance of the loan, and
• any interest that actually accrued.

GST does not affect the taxable value of loan fringe benefits

FBT for Loan Fringe benefit = Notional Interest rate- Actual interest rate

Notional Interest rate = $500,000*5.65%*212/365 = $16,408

Actual Interest rate = $500,000*4.25%*212/365= $12,343

Taxable value of loan Fringe benefit = $16,408-$12,343 = $4,065

Residual Fringe benefit tax:

A residual fringe benefit is valued as an in-house residual fringe benefit if employer provide the benefit and it is identical or similar to rights, services or facilities provided to the public in the ordinary course of business.

Taxable value of in-house residual fringe benefits - not accessed under a salary packaging arrangement

The taxable value of an in-house residual fringe benefit is 75% of the lowest arm's length price charged to the public at the time for identical benefits, less any amount paid by the employee.

Taxable value of benefit = 75%* $2600- $1300= $650.

Total FBT taxable value for year ended 31st March, 2018 = $6641+ $4065+$650= $11,356

Rapid-heat would be eligible for GST credit of $ 3,000 for car purchase

b) If Jasmine has purchased the shares herself instead of giving loan to his husband, her Loan Fringe benefit taxes would had been lower i.e  it would had reduced to the extent to which interest payable on the loan is, or would be, allowable as an income tax deduction to the employee.

Thus if loan was used herself by Jasmine then the loan Fringe Benefit would be

Taxable value of Fringe benefit to be reduced = $16,408*10% - $ 12,343*10% = $407

Thus Taxable Fringe benefit = $4,065- $407 = $3,658