Taxation Law Assignment 2012

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In this assignment, it is assumed that Emma and Ryma are both tax residents of Australia.

Part A
Based on Emma’s negotiated remuneration package and her activities with ‘Ryma Rhymes’, we look into identifying which of her income is assessable income (AI).

Remuneration Package
ANNUAL SALARY
Emma’s annual salary of $150,000 per annum is assessed based on s6-5(1) ITAA97, which states her AI includes income according to ordinary income (OI) concept. In Scott v Commissioner of Taxation (1935), the court’s definition of income is reflective of what majority of public would consider income, such as salaries. Emma’s annual salary does constitute for OI and is thereby AI.

However, since Emma has arranged for 10% of her salary to be directed to her sister, we consider whether there is an implication on the full amount of her salary being AI. According to the constructive receipt rule, s6-5(4) ITAA97, even though Emma is not the recipient of that 10% of her salary, she is deemed to have also derived it as soon as it is dealt with in accordance to her directions. Thus, the 10% is still part of her AI.

To conclude, Emma’s full salary of $150,000 is AI under OI.

ALLOWANCE VS REIMBURSEMENT
The issue of whether Emma’s provided clothing and make-up allowance limit is an allowance or reimbursement is looked into. Using TR 92/15 as guidance, ‘allowance’ is understood to be a specific predetermined amount paid to recipient to cover an expense regardless of whether the expected expense is incurred. In contrast, ‘reimburse’ describes how a “recipient is to be compensated exactly for an expense already incurred”.  Based on the definitions provided, since Emma is required to provide her employer with receipts of all her expenses before she is paid the full amount as per her receipts, her situation is likely to be a reimbursement.

In assessing the tax consequences of the reimbursement, we look into whether it qualifies as a fringe benefit. According to s136(1) FBTAA, Emma receiving the $5,000 reimbursement benefit from Ryma Pty Ltd constitutes for a fringe benefit for the annual financial year as clothing and grooming expenses is deemed to be a necessity for her employment as ‘the face’ of Ryma.

As reimbursements are not excluded from the definition of a fringe benefit under s136(1) FBTAA, we can conclude that a fringe benefit exists. Moreover, as taxes for fringe benefits are imposed on the employer and not employee, Emma is exempted from tax on the $5,000 and is hence not part of her AI.

Given the reimbursement covers clothing and grooming expenses, we can categorise it under division 5 – expense payment fringe benefit. With reference to s20(b) FBTAA, where Ryma Pty Ltd reimburses Emma in whole of her $5,000 expenditure, the making of the reimbursement shall be taken to constitute the provision of a benefit by the provider to the recipient. As there are no exemptions under division 5 that apply to this case, the benefit is then subject to a fringe benefit tax.

The taxable value of the reimbursement is provided in Part B.

BONUS
The issue of bonuses being a gift or income is taken into consideration.

First, the bonus is assessed to see if it qualifies as a fringe benefit. Under s136(1) FBTAA, bonuses qualify as a fringe benefit as it is a benefit provided by the Ryma Pty Ltd to Emma given she meets a certain annual profit target as part of her employment service. However, since the definition of fringe benefit specifically excludes salary, which also comprises of bonus payments, it is not a fringe benefit and will be further assessed under OI.

Under OI, s6-5(1) ITAA97, there is a note that tells of some provisions (s10-5) to the AI that may not be OI. With reference to s10-5 ITAA97, under employment, allowances and benefits in relation to employment is deemed to be statutory income (SI) and not OI. As such, we look at s15-2 ITAA97 where Emma’s AI includes the value of all bonuses provided to her in respect...
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