Question 1:

The Division 40 of ITAA 1997 is about capital allowance provisions. It allows deductions for various types of capital expenditures. The section 40.1 of ITAA 1997 explains that an amount equal to the decline in value of a depreciating asset can be deducted (Commonwealth Consolidated Acts, 2015).

Division 40-B of ITAA 1997 provides that the taxpayer (who is the holder of a depreciating asset) may be entitled to the deduction for its decline in value. The depreciable asset is defined in the Division 30 of ITAA 1997 as an asset which has a limited life and is reasonably expected to decline in its value over the time it is used (Income Tax Assessment Act, 2015). However some assets like land, trading stock and some prescribed intangible assets are defined as non-depreciable assets under sub sections of 40-30(1) and 40-30(2) of ITAA 1997 (Commonwealth Consolidated Acts, 2015).

The conditions are clearly listed in the section 40-40 of ITAA 1997 which are needed to be satisfied by the taxpayer who holds a depreciable asset. The general rule is that the owner (either legal or equitable) of the asset must hold the depreciating asset (Kenny, 2008). The first step to make the tax provisions is to calculate the declining value of depreciating asset on its effective life by using either prime cost or diminishing value method (Income Tax Assessment Act, 2015). Broadly the effective life of an asset is defined as the period during which depreciable asset can be used to produce income and the decline in value is based on the cost and effective life of a depreciating asset (not its actual change).

The cost of the depreciating asset is determined in line with the detailed rules in Section 40-175 to 40-230 of ITAA 97. It is make up of two elements. The first element is calculated at the time when an entity begins to hold the asset and the second element is calculated after the entity begins to hold the asset. In the case of the initial machine cost for depreciating purpose is the first element of $1m (the purchase price of $1.1m inclusive of GST tax) (Commonwealth Consolidated Acts, 2015).

  

Disposal of Initial Machine:

Entities can make provisions to use either “diminishing value method” or a “prime cost method” in order to calculate the decline in value of a depreciating asset (ATO, 2012).

In order to use diminishing value method, Rubber Co. would use the formula in following way:

Diminishing Value Method = Base value ×  ×

Year Ended	Decline in Value	Depreciation Claim	Adjustable Value
2010	$          99,178	$          99,178	$          900,822
2011	$        180,164	$        180,164	$          720,658
2012	$        144,132	$        144,132	$          576,526
2013	$        115,305	$        115,305	$          461,221
2014	$          46,501	$          46,501	$          414,720

 

In order to use Prime cost method, Rubber Co. will use the formula in following way:

Prime Cost Method = Asset’s Cost ×  ×

Year Ended	Decline in Value	Depreciation Claim	Adjustable Value
2010	$          49,589	$          49,589	$          950,411
2011	$        100,000	$        100,000	$          850,411
2012	$        100,000	$        100,000	$          750,411
2013	$        100,000	$        100,000	$          650,411
2014	$          50,411	$          50,411	$          600,000

 

It is assumed that the machine was sold on 1^st January 2014 at the termination value of $330,000 (inclusive of GST). After reducing GST of $30,000 the termination value is $300,000 on disposal. The calculation of the balancing adjustment amount is made according to the Section 40-285 ITAA 97 i.e. termination value greater than adjustable value = assessable income [Section 40-285(1) ITAA 97] or termination value less adjustable value = loss on disposal [Section 40-285(2) ITAA 97]. For the machine sold by Rubber Co. the calculations are as follows.

Diminishing Value Method: Net Receipt on disposal $300,000 less $414,720 = $114,720 – allowable deduction.

Prime Cost Method: Net Receipt on disposal $300,000 less $600,000 = $300,000 – allowable deduction.

 

Purchase of New Machine:

The new machine is also entitled to depreciation as it is depreciating asset (defined earlier). The deductions on new machine are also available. After reducing the GST amount of $0.2m, the initial cost will be $2m and will be claimed as an input tax credit. It is now assumed that the effective life of new machine will be the same as the old machine i.e. 10 years and that the machine is acquired on 1^st January, 2014 (Commonwealth Consolidated Acts, 2015). The calculations are as follows:

 

Diminishing Value Method:

Diminishing Value Method = Base value ×  ×

Year Ended	Decline in Value	Depreciation Claim	Adjustable Value
2014	$        198,356	$        198,356	$       1,801,644
2015	$        360,329	$        360,329	$       1,441,315

 

Prime Cost Method:

Prime Cost Method = Asset’s Cost ×  ×

Year Ended	Decline in Value	Depreciation Claim	Adjustable Value
2014	$          99,178	$          99,178	$       1,900,822
2015	$        200,000	$        200,000	$       1,700,822

 

Question 2:

Fringe benefits tax is a tax which the employer has to pay on certain benefits they entitled to their employees (including employee’s family or other associates).  It is a form of compensation where a benefit other than customary taxable wage is provided to an employee for the performance of services for an employer. The benefit can be an addition or a part of initial salary or wage package of an employee (Australian Taxation Office, 2015). The benefits a director of a company or a trust receives, are entitled to Fringe Benefits Tax under Australian Corporate Taxation Law. The fringe benefits tax is separated to income tax and is calculated on the taxable value of the fringe benefits provided by the employer to the employee. The fringe benefit year in Australia runs from 1^st April to 31^st March (Australian Taxation Office, 2015). A fringe benefit occurs when a benefit is occurred during a tax year by an employer, an associate of the employer or a third party under an arrangement with the employer or associate of the employer to an employee or associate of the employee in respect of the employment of the employee.

5. The employer provide a loan fringe benefit if he gives his employee a loan that is interest free or lower than the benchmark rate (5.95% for year ending 31^st March, 2015)(Australian Taxation Office, 2015). Periwinkle provided Emma with loan of $500,000 at 4.45% which is lower than the current benchmark rate of 5.95% so it is considered as loan fringe benefit. Interest on a loan to purchase private assets is not deductible so $20,250 of interest on $500,000 is not deductible (Australian Taxation Office, 2015). The FBT tax value would be only reduced to the extent she uses the loan to produce assessable income. The FBT taxable value will be $7,500 as [500,000 * (5.95%-4.45%)/100]. The discount provided to Emma is by her employer with respect to her employment in buying the bathtub at $1300 is therefore a fringe benefit under s 136(1) FBTAA as it is not excluded. There will be a fringe benefits tax liability imposed on Emma’s employer, under s 66(1) FBTAA (Australian Taxation Office, 2015).

 

The car has travelled 10,000 km so the taxable value of the car fringe benefit is $6600.

4. Periwinkle provided Emma with loan of $500,000 at 4.45% which is lower than the current benchmark rate of 5.95% so it is considered as loan fringe benefit. Interest on a loan to purchase private assets is not deductible so $20,025 of interest on $450,000 is not deductible. The FBT tax value would be only reduced to the extent she uses the loan to produce assessable income so Emma uses $50,000 to use the loan to produce assessable income.

 

References

ATO. (2012). Australian Income Tax Legislation. CCH Australia Limited.

Australian Taxation Office. (2015). Australian Government. Retrieved September 1, 2015, from https://www.ato.gov.au/uploadedFiles/Content/SME/downloads/Completing2015FBTreturn.pdf

Australian Taxation Office. (2015). Fringe benefits tax (FBT). Retrieved 30 August, 2015, from https://www.ato.gov.au/Business/Employers/Preparing-to-engage-workers/Fringe-benefits-tax-(FBT)/

Commonwealth Consolidated Acts. (2015). Australia Law. Retrieved September 1, 2015, from http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.25.html

Income Tax Assessment Act. (2015). Retrieved September 1, 2015, from http://www.iknow.cch.com.au/#!/topic/tlp166/document/atagUio695216sl24357304/legislation/depreciation/section-40-30-what-a-depreciating-asset-is

Kenny, P. (2008). Australian Tax 2008. LexisNexis Butterworths.