TOPIC 7

Other taxes
PREPARED BY WES OBST AND RAMI HANEGB I FOR THE UNIT TEAM

Contents

Introduction 1

Learning resources 1
Textbooks 1

Part 1: Fringe Benefits Tax (FBT) 2

Introduction 2

General scheme of the Fringe Benefits Tax Assessment Act 2

Step 1: Determine whether a benefit has been provided to an
employee or associate 2
Step 2: Determine the type of fringe benefit 3
Step 3: Calculate the taxable value of the benefits and calculate the
FBT liability 4

General operation of FBT 5

Benefits excluded from fringe benefits tax 5

Part 2: Goods and Services Tax (GST) 7

Introduction 7

Underlying principles 10
Taxable supplies and taxable importation 11
Non-taxable supplies 11
Taxable importations 12
Input tax credits 12

Calculating GST and net amount 12

Accounting for GST 13

Tax invoice 13

© Deakin University
 Taxation

Introduction
The final topic in this unit introduces two other important areas of taxation which
together with income tax make up by far the major proportion of revenue collected
by the Federal Government. The areas of Fringe Benefits Tax and the GST also
have important implications for the income tax system. The fringe benefits tax
system was introduced because of the failure of the income tax system to
effectively collect tax on non-cash payments to employees and the GST was
introduced to replace an inefficient sales tax system.

This final topic aims to give you an overview of both the fringe benefits tax system
and the GST. When studying these two taxation systems you should give careful
consideration to how they interact with the income tax system.

Learning resources

Textbooks
Sadiq et al. Principles of taxation law 2020, Thomson Reuters, Pyrmont NSW.
Pinto et al. Fundamental tax legislation 2020, Thomson Reuters, Pyrmont, NSW,

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Part 1: Fringe Benefits Tax (FBT)

Introduction
A fringe benefit is a benefit, other than a salary or wage, derived from employment.
There are a wide range of possible benefits that an employer can provide to an
employee, but the more common are the provision of a car, low interest personal or
housing loans, payment of an employee’s expenses such as telephone, electricity,
school fees, and subsidised rental and family holidays.

Fringe benefit tax (FBT) applies to non-cash remuneration benefits paid or given by an
employer and received by or benefiting an employee or associate of an employee.

TEXTBOOK
Please read Sadiq et al. 2020, 7.00 - 7.10.

General scheme of the Fringe Benefits Tax Assessment Act

Note: Unless stated otherwise, all section references from this point to the end of
this section refer to the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

An employer is liable for tax on the total of the grossed-up taxable value of fringe
benefits provided to employees or associates of employees. The fringe benefit is
not assessable to the employee (s. 23L of ITAA 36).

There are essentially three steps in determining FBT:

1 determine whether a benefit has been provided to an employee or associate

2 if yes to 1, determine the type of fringe benefit
3 calculate the taxable value of the benefit/s and the FBT liability. (Students
will NOT be required to do calculations of taxable values and FBT liabilities
for the CAF010 course.)

Step 1: Determine whether a benefit has been provided to an

employee or associate
The first of the requirements for determining liability for FBT is to be found in the
definition of fringe benefit (s. 136(1)).

To be a fringe benefit:

• there must be a benefit provided during the year

• the benefit must be provided to an employee or an associate of the employee
• the benefit must be provided to the employee or associate by the employer,
an associate of an employer, or by arrangement with another entity
• the benefit must be provided in respect of the employment of the employee.

TEXTBOOK
Please read Sadiq et al. 2020, 7.20 – 7.85.

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Step 2: Determine the type of fringe benefit

Once it has been ascertained that there is a fringe benefit, the next step is to
determine what type of fringe benefit there is.

Cars (ss. 7-13)

As a general rule a taxable fringe benefit will arise if an employer’s car—one
either leased or owned by the employer—is made available for the private use of
an employee.

Debt waiver (ss. 14-15)

If an employer forgives or otherwise waives a debt owing by an employee there will
be a benefit and the taxable value of that benefit will be the amount of the debt
which was released, including any unpaid interest forming part of that amount.

Loans (ss. 16-19)

A loan from an employer to an employee will be a taxable fringe benefit if the loan
is at a rate of interest lower than the specified benchmark rate. The taxable value
will be the difference between the interest rate charged and the statutory interest
rate for the year.

Expense payments (ss. 20-24)

An expense payment benefit will arise where an employer pays or reimburses
expenses incurred by an employee (s. 20). The taxable value of the benefit will be
the amount paid or reimbursed, reduced to exclude any otherwise deductible
proportion of the payment.

Entertainment expenses (ss. 37AA-37CF)

Generally, where an employer pays for the entertainment of an employee, or
associate, at a restaurant the expense is tax deductible to the employer, but
subject to FBT if the employer elects to have FBT apply. Where a client is also
entertained there is no tax deduction for the client’s meal (Div 32) and therefore
no FBT.

Car parking benefit (ss. 39A-39GH)

Generally, a taxable fringe benefit will arise where:

• a vehicle, used by an employee to commute from home to work, is parked

for more than four hours between 7 am and 7 pm on business premises
that are owned, controlled or leased by the employer
and
• there is a permanent commercial parking station available to the public
within one kilometre of the employer provided facility
and
• the lowest fee for all day parking on the first day of the FBT year exceeds
the car parking threshold (s. 39A).

Property (ss. 40-44)

A taxable fringe benefit arises where an employer provides an employee with
property, either free or at a discount. ‘Property’ means intangible property and
tangible property (s. 136(1)). The term intangible property is also defined in

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s. 136(1). Property therefore includes all goods, including gas and electricity, real
property, shares and other choices in action, e.g. debentures, securities etc.

Different valuation rules apply depending upon whether the items are
manufactured by the employer (in-house goods) or not manufactured by the
employer (external goods).

Residual benefits (ss. 45-52)

This category of benefits is intended to pick up all benefits not included in a specific
category above.

Residual benefits include such benefits as the use of property, the provision of
services and the provision of insurance cover, including health cover. The
benefit and tax liability will arise when the services are provided or the property
is used. Certain residual benefits, such as child care facilities and living-away-
from-home accommodation, are exempt from FBT (s. 47).

Step 3: Calculate the taxable value of the benefits and

calculate the FBT liability
The next step is to calculate the taxable value of each the fringe benefit/s given.
Once this is ascertained, the amount of FBT Payable can be calculated.

As stated earlier, students are NOT required to perform numerical calculations of

taxable values and FBT liabilities for the CAF010 unit. However, students should
realise that each type of fringe benefit has its own set of calculations for
ascertaining the taxable values of that benefit, e.g. the way of calculating the
taxable value of a car fringe benefit is different from calculating the taxable value of
a loan fringe benefit.

Students should also realise that the taxable value of a benefit can be reduced by:

• the recipient’s contributions

• the otherwise deductible rule
• concessional ‘reduction amounts’.

The concept of the ‘otherwise deductible rule’ is very important, but it can be quite
difficult to understand. The otherwise deductible rule was introduced to avoid the
possibility of double taxation, and therefore it allows the taxable value of a fringe
benefit to be reduced. This reduction is allowed if the fringe benefit provided to the
employee would have been an allowable deduction if the employee had incurred
the expense.

For example, an employee of a large drug company incurs considerable travel

expenditure in relation to her job. If the employee incurs this expense she will be
entitled to a general deduction under s. 8-1. However, if the employer reimburses
these travel expenses to the employee, the employee will lose her deduction and
the employer can reduce the taxable value of the fringe benefit by the amount of
the deduction lost.

Once the taxable values of the benefit/s granted are ascertained, they are then
‘grossed up’.

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To determine the ‘grossed-up taxable value’ of the fringe benefits provided, the
taxable value of each fringe benefit must be multiplied by the ‘gross-up rate’ which
differs depending on whether the employer can claim the GST input tax credit:

• 1.8868 if no GST input tax credit.

The ‘grossed up value’ of the benefits are then taxed at the FBT rate of 47%. If
the goods or services provided as a fringe benefit entitle the employer to a GST
credit the gross-up factor is increased by to 2.0802.

TEXTBOOK
Please read Sadiq et al. 2020, 7.360 – 7.390.

QUESTION 7.1
What is the ‘otherwise deductible rule’ and what is its relevance in determining
liability for FBT?

General operation of FBT

In order not to overload the usual tax year-end, the FBT year is from 1 April to
31 March.

FBT is generally payable quarterly. The tax rate is 47% on the fringe
benefits taxable amount (s. 6 Fringe Benefits Tax Act 1986).

The quarterly payments are based upon the tax payable for the previous year, with
the taxpayer having a right to vary the quarterly payments when the benefits
change. Where the employer’s FBT liability in the previous year was less than
$3000, the employer only pays FBT on an annual basis. The balance of FBT is
payable on lodgement of the annual return by 28 April.

Employers self-assess their liability for FBT by calculating the taxable value of
each benefit provided to employees each year in accordance with valuation
rules in the FBT Act. Fringe benefit taxpayers have the normal objection, review
and appeal rights.

Further, as mentioned earlier, from 1 April 1999 where an employee’s ‘reportable

fringe benefits amount’ exceeds the statutory amount the employer is required to
include the benefit on the group certificate issued to the employee.

The remainder of the FBT legislation outlines the rules and formulas for calculating
the taxable value of each benefit. These rules, the concessions and the
exemptions are outlined in the remainder of the chapter.

Benefits excluded from fringe benefits tax

The definition of ‘fringe benefit’ in s. 136(1) specifically excludes from FBT:

• a benefit provided in the form of salary or wages, including cash allowances

• provision of shares or rights pursuant to an employee share acquisition
scheme
• superannuation benefits
• payments made in consequence of termination of employment

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• capital consideration for injury or a legally enforceable contract in restraint

of trade
• a payment deemed to be a dividend under income tax law
• a payment to an associated person that is not an allowable deduction by
the operation of s. 26-35 of the ITAA
• a benefit which is exempt.

QUESTION 7.2
A company conducting a profitable publishing business owns a 100-hectare
farming property. The farm runs 12 head of cattle and the company claims all the
farm costs as a tax deduction. Employee/shareholders of the company stay at
the farmhouse, an unpretentious little cottage of some 30 rooms with a pool,
tennis courts, etc. for about 100 days a year. Little, if any, farm work is performed
by the employees. What are the FBT implications?

QUESTION 7.3
Harry Hick is the son of a wealthy farmer and he is employed by the family
company to work on the farm which is run by his father. During the year Hick
made regular use of the company utility to make private trips to see his girlfriend
some 200 km away. These trips were made once per week. Hick used petrol paid
for by the company for which the company claims a tax deduction. Explain how
these ‘transactions’ are affected by FBT.

QUESTION 7.4
On the death of an overworked tax accountant his former employer provided
flowers to the value of $300 to the widow; the other employees also raised the
sum of $1000 to give to the widow and the former employer’s company added
another $1000 to this fund. Are there any FBT implications from these events?

QUESTION 7.5
As part of her salary package Susan Adams is provided with a fully maintained
Ford Falcon car. The purchase price of the car was $45 000. The total running
and lease costs are $12 000 per annum. Adams travels 22 000 kilometres a year
of which 12 000 are on business. She is also provided with a car phone at a cost
of $700. Fifty percent of the calls are business related.

What are the FBT consequences?

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 Taxation

Part 2: Goods and Services Tax (GST)

Introduction
The Goods and Services Tax is an indirect tax that was introduced on 1 July 2000
to apply a 10% tax on the consumption of goods and services. It is an indirect tax
because the burden of tax falls on the final consumer but is paid by the supplier.
GST is levied on each supply of goods and services throughout the production or
distribution chain, with a credit given to registered businesses for their GST paid.
To maintain equities between locally produced and imported goods, importations
are also taxed. A credit is also given for GST paid at each stage of the supply
chain, so that the full cost of the tax will fall on the final consumer. However, the
chain may be broken if one of the businesses in the chain is not registered for GST
so it is more correct to say that GST is ultimately paid by any business or
consumer who is not registered for GST.

For both political and social reasons some items are designated as GST-free (e.g.
health costs, education and some food), and others are taxed in the hands of the
supplier. Those taxed in the hands of the supplier are known as input taxed
because no GST is charged directly to the consumer, although prices will probably
be increased to compensate for the supplier’s GST.

The following example shows how, at each stage of supply, GST is charged to the
next level in the production chain and a GST credit is claimed for the cost of GST
paid by the next business in the chain. At each stage of supply the business remits
to the tax office the net of, GST collected over GST paid, and claims a refund if
GST paid is greater than GST collected.

In Figure 7.1 the steel merchant first sells $300 worth of steel to the bed
manufacturer but the steel merchant now has to charge $330 being the original
$300 plus 10% GST. The $30 GST collected is paid to the ATO. Consequently,
the steel merchant receives the amount of $300 as he did prior to GST and
therefore has no additional costs.

The bed manufacturer pays $330 (including $30 GST) for the steel which is used to
manufacture a bed which previously sold for $400. Adding the 10% GST requires
the bed manufacturer to sell the bed for $440 which includes $40 GST. A net GST
of $10 ($40 GST collected – $30 GST paid) is then returned to the tax office which
leaves the bed manufacturer in the same economic position as before GST, i.e. a
profit of $100 ($440 – $330 – $10). The economic position of the retailer is also
unaltered by the GST system.

The final consumer now pays 10% more for the goods and is not entitled to any tax
credit. The figure also shows that the total tax of $60 is collected by the Australian
Tax Office at each stage of supply and they do not have to wait until the goods
finally pass to the consumer. This approach to collecting the tax aims to bring
forward the cash flow returned to government.

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Figure 7.1 Normal GST supply

ATO
Steel Merchant GST liability $30
Sells steel for $300 plus GST credit nil $30
$30 GST = $330 Pay ATO $30

Bed Manufacturer GST liability $40

Sells bed for $400 plus GST credit $30 $10
$40 GST = $440 Pay ATO $10

Retailer GST liability $60

Sells bed for $600 plus GST credit $40 $20
$60 GST = $660 Pay ATO $20

$60 Total

Consumer
Buys bed for $660
including $60 GST

As mentioned previously, some goods and services are not fully taxed but are
either GST-free or input taxed. In both cases the supplier is not liable for GST on
the supply, but the treatment of credit for GST paid on purchases is different. With
GST-free items, the supplier may claim credit for the cost of GST paid, but with
input taxed goods or services no credit for GST paid is allowed. Figures 7.2 and
7.3 illustrate this difference.

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 Taxation

Figure 7.2 GST-free supply

ATO
Steel Merchant GST liability $30
Sells steel for $300 plus GST credit nil $30
$30 GST = $330 Pay ATO $30

Bed Manufacturer GST liability $40

Sells bed for $400 plus GST credit $30 $10
$40 GST = $440 Pay ATO $10

Private Hospital GST liability nil

Buys bed for $440 GST credit $40 -$40
including $40 GST ATO refund $40

Nil Total

Consumer
Buys medical service -
GST free

As the bed is used for the provision of health services (which are GST-free), the
hospital can claim an input tax credit and is not liable for GST on the supply of
the health services. Consequently, all of the GST collected at previous stages of
the production process is refunded to the hospital.

In contrast, the provision of residential rental accommodation is input taxed, in which

case no credit is available for GST paid on inputs. Figure 7.3 shows that the final cost
of the bed to the property owner is therefore $440. Input taxed supplies therefore
could lead to the supplier increasing charges and passing the added cost onto the
customer, but no GST is charged on the actual supply of the residential rent itself.

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Figure 7.3 Input taxed supply

ATO
Steel Merchant GST liability $30
Sells steel for $300 plus GST credit n i l $30
$30 GST = $330 Pay ATO $30

Bed Manufacturer GST liability $40

Sells bed for $400 plus GST credit $ 3 0 $10
$40 GST = $440 Pay ATO $10

Residential Rental GST liability nil

Buys bed for $440 GST credit nil
including $40 GST Pay ATO nil

$40 Total

Consumer
Pays input taxed
Rent

TEXTBOOK
Please read Sadiq et al. 2020, 25.00 – 25.40.

Underlying principles
GST is governed by a number of Acts the main one being A New Tax System
(Goods and Services Tax) Act 1999 (later referred to as the GST Act); and is
imposed by three acts which relate to general GST, customs and excise.

The two main aspects of the legislation are to:

• define a taxable supply and a taxable importation

• define the right to input tax credits.

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 Taxation

Taxable supplies and taxable importation

Chapter 2 of the GST Act sets out the basic rules relating to when a GST liability
arises and when there is an entitlement to input tax credits.

Part 2-1 contains the central provisions and begins with s. 7-1 which is the main
taxing provisions. Section 7-1 states that:

1 GST is payable on taxable supplies and taxable importations.

2 Entitlements to input tax credits arise on creditable acquisitions and
creditable importations.

Taxable supplies
For a taxable supply to exist, s. 9-5 requires all of five elements:

(a) you make a supply

(b) the supply is for consideration
(c) the supply is made in the course or furtherance of an enterprise that you
carry on
(d) the supply is connected with Australia
(e) you are registered or required to be registered for GST.

Each of these elements are defined by the Act.

TEXTBOOK
Please read Sadiq et al. 2020, 25.50 – 25.130.

Non-taxable supplies
Having described a taxable supply, s. 9-5 goes on to exclude from this
definition any supply that is either GST-free or input taxed.

GST-free supplies
Supplies that are GST-free are not liable to GST but credit can be claimed for tax
paid on the inputs used to produce the GST-free supply. This effectively results in
no GST being collected on the supply of GST-free goods and services (see the
example in Figure 7.1). A supply is GST-free if it is deemed to be GST-free by Div.
38 of the GST Act or under the provisions of another Act (s. 9-30(1)). The main
GST-free items are:

• food
• health
• education
• religious services
• non-commercial activities of charitable institutions
• water and sewerage
• farming land.

Input taxed supplies

GST is not payable on input taxed supplies because they are excluded from the
definition of a taxable supply under s. 9-5. However, input taxed supplies differ
from GST-free supplies because no input tax credit can be claimed for anything

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acquired or imported to produce such supplies (see the example in Figure 7.3).
In practice, this means that enterprises making input taxed supplies are not able
to reclaim the GST cost on inputs used in producing the supply. Consequently,
the added cost of GST paid is likely to be passed on in the pricing of the supply.

Section 9-30(2) defines input taxed supplies as those deemed to be input taxed
supplies under Div. 40 of the GST Act or a provision of another Act. Essentially
there are three main categories of input taxed supplies; financial supplies, supplies
of residential rent, and supplies of residential premises.

TEXTBOOK
Please read Sadiq et al. 2020, 25.140 – 25.170, 25-180.

Taxable importations
As well as taxable supplies, GST is also payable on taxable importations (s. 7-1).
However, in this case the GST liability falls to the importer (s. 13-15).

Input tax credits

GST is borne by the final consumer but it is charged at each stage of the supply
chain. To prevent the tax from accumulating, a credit is given to registered entities
for the GST paid on acquisitions (see figures 7.1, 7.2 and 7.3). GST is therefore
only levied on the value added to the product at each stage of production.

Section 7-1(2) states that an input tax credit can be claimed for the GST component
of creditable acquisitions and creditable importations. The credit allowed is one
eleventh of the price of the acquisition (s. 7-5) and this credit reduces the GST
liability of the entity by reducing its net amount (see earlier discussion). The right to
an input tax credit is available to entities that make taxable or GST-free supplies but
it is not available on input taxed supplies. Some special input credit rules apply for
second-hand goods, company establishment costs and reimbursements.

Creditable acquisition
For an entity to be entitled to an input tax credit it must have made a creditable
acquisition, which arises under s. 11-5 if:

• the entity acquires anything solely or partly for a creditable purpose

• the thing supplied is a taxable supply
• the entity provides, or is liable to provide, consideration for the supply
• the entity is registered or required to be registered.

TEXTBOOK
Please read Sadiq et al. 2020, 25.190 – 25.214, 25.225 – 25.230, 25.250 – 25.260,
25.320 – 25.330.

Calculating GST and net amount

As mentioned previously, GST is charged at each stage of the supply chain and
where applicable input tax credits can be off-set against GST liabilities for the same
period. This approach of netting off GST and input credits gives rise to the concept

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of a net amount (s. 7-5) which is the amount remitted to the Tax Office or if it is
negative, the amount refunded to the tax payer.

The net amount is defined in s. 17-5 as being:

GST – input tax credits

Section 7-1(1) states that GST is payable on taxable supplies and taxable
importations, and s. 9-70 states that the rate of tax is 10% of the value of the
taxable supply. This can also be expressed as 1/11th of the value. Therefore, if the
price paid for an item of clothing is $110, the value of the taxable supply is $100
($110 10/11) and the GST is $10.

Under s. 7-1(2) an input tax credit can be claimed for the GST component of
creditable acquisitions and creditable importations. This credit is 1/11th of the
price of the supply and is offset against the GST liability in respect of the recipient’s
own supplies (s. 7-5).

Accounting for GST

Determining the timing of GST supplies and acquisitions is important for calculating
the transactions applicable to the relevant tax period. Rules prescribing the timing
of transactions are set out in Div. 29 of the GST Act and these rules depend upon
which of the two permitted accounting methods are used, cash or accruals.

The cash basis method attributes to a given tax period only the portion of GST
referable to the actual cash payments received and made during that period
(ss. 29-5(2) and 29-10(2)).

All entities that are not eligible or permitted to use the cash basis must account for
GST using the accruals basis. The accruals basis attributes the entire GST
payable, or the full input tax credit, to the tax period in which the tax invoice was
issued, or the payment was made, whichever is the earlier (ss. 29-5(1) and 29-
10(1)). Issue of a valid tax invoice is therefore very important to the
administration of the GST system (discussed later in this module).

Tax invoice
The tax invoice plays an important role in the administration of the GST system.
This is because it is generally not possible to claim an input tax credit without a tax
invoice, and it is also important in determining to which tax period a supply or
acquisition is attributable.

A tax invoice is a document, which substantiates a creditable acquisition. The

supplier must issue a tax invoice within 28 days of purchase, if requested, for all
supplies with a GST exclusive price of $75 or more (s. 29-70(2)). The GST Act and
Regulations set out the requirements for a valid tax invoice.

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EXAMPLE 7.1
Operation of GST

During the current tax period a GST-registered computer manufacturer acquired

the following inputs for production. Tax invoices were received for all supplies
except the supply of office stationery.

Price inc. GST GST (1/11th)

Components $11 000 $1 000.00

Soldering equipment 5 000 454.54

Office stationery 550 50.00

Water rates $230 nil

Other material 3 300 300.00

Wages 5 000 nil

Half of the components are used for the manufacture of computers that sold
for $42 000.

The supply of computers is a taxable supply and the amount of GST owed by the
supplier on the sales of $42 000 is $3818.18 (i.e. 1/11th of $42 000). Input tax
credits are available on the components, soldering equipment and other
materials. No credit is due on wages as they are not a taxable supply and water
rates are GST-free. A credit is also not available on the supplies of stationery as a
tax invoice has not been received. Therefore an input tax credit of $1754.54 can
be claimed as a credit against the $3818.18 tax due. The full input tax credit of
$1754.54 is allowed even though some of the supplies remain is stock. This is
because GST does not make adjustments for stock on hand. The net amount due
to be remitted to the Tax Office is therefore $2063.64 ($3818.18 – 1754.54).

QUESTION 7.6
Determine the GST liability, input tax credit and net amounts arising from each of
the following transactions. Assume that all transactions occurred after 1/7/2000, all
parties are registered for GST and that all appropriate documentation is supplied.

1 A timber merchant quotes $200 (excluding GST) for the sale of wood to a
furniture manufacturer. The timber is later purchased at $200.
2 The timber acquired in (1) is used to make a table that is sold to a
furniture retailer for $400 excluding GST (i.e. $440 with GST).
3 The table purchased by the retailer in (2) is sold to an individual
consumer for $590 including GST.
4 How would your answer differ in (3) if the table was purchased by a
secondary school (rather than a retailer) to be used as part of its process
of supplying an educational program?
5 How would your answer differ in (3) if the table was purchased by a bank
and was used in the process of supplying financial services?

QUESTION 7.7
Sadiq et al. 2020, Question 25.1

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