An issue has been raised in relation to Draft Taxation Determination TD 2010/D1 which recently issued. Although this may be an issue by way of submission, it is felt that this should be discussed at the forum sooner rather than later.
TD 2010/D1 is about non resident employers and pay as you go (PAYG)/FBT obligations and covers some scenarios. Unfortunately, it does not cover at least one scenario that is used by some multinational corporates. The scenario involves the payment, by an Australian entity (AusCo), of international assignees employed by an offshore company (ForeignCo), as described below.
For administrative and management purposes, AusCo pays international assignees out of a single payroll located in Australia. The tax and economic employer of the international assignees is ForeignCo. ForeignCo is back charged by AusCo for the salaries paid to the international assignees.
We understand that in some cases, AusCo may be liable for the PAYGW if subdivision 12-35 of the Taxation Administration Act 1953 (TAA), Schedule 1 (as paying salary and wages to an individual as an employee whether of that or another entity) applies but that should not mean that AusCo is liable for FBT as AusCo is not the 'employer'.
Could the ATO address this scenario and provide guidance on the interaction of the obligations for PAYGW and FBT and once the treatment has been determined, include this scenario as an example in the final TD.
Also, if the contention in the above scenario is correct (that FBT does not follow PAYG in these cases), the statement in paragraph 23 of TD 2010/D1 that FBT follows PAYG is incorrect.
Also, the general statement in paragraph 24 of TD 2010/D1 that the circumstances to withhold will be infrequently encountered could be wrong as, in cases where section 12-35 of the TAA applies, the circumstances giving rise to an obligation to withhold may be more frequently encountered than suggested in the paragraph.
Could the ATO provide some advice in relation to the above?
Meeting discussion
The ICAA noted that TD 2010/D1 potentially raises more issues than it resolves. Of particular concern is that TD 2010/D1 will potentially create inconsistent outcomes for formerly section 23AG exempt employees in almost identical scenarios, thereby creating severe compliance difficulties for both employers and employees.
The ICAA noted that resident employees engaged in fly-in fly-out (FIFO) arrangements at offshore resource project locations are no longer eligible for section 23AG exemption. In some cases, such employees will be employed by Australian resident employers, however in many cases; the employer will be a non-resident company that does not have a sufficient connection to Australia as that term is discussed in TD 2010/D1.
The key problem that TD 2010/D1 potentially creates (but does not address) is that the non application of PAYG, and therefore FBT for some non-resident employers, does not mean that benefits received by formerly section 23AG exempt employees become free from tax.
The potential operation of Division 6 and section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997) must be considered. Section 15-2 includes in assessable income the value of, inter alia, gratuities and benefits provided in respect of employment. Section 23L of the Income Tax Assessment Act 1936 (ITAA 1936), which exempts certain fringe benefits from personal taxation, will not operate in relation to employees of non-resident employers who do not have a sufficient connection to Australia. This is because the benefits are not 'fringe benefits' under the approach of TD 2010/DI, as there is no 'employer', where there is no requirement for PAYG withholding.
The ICAA further advised that a number of interpretational difficulties will arise, including:
1. Whether or not s15-2 applies only to items of ordinary income or whether it extends the law to turn non cash benefits that would not otherwise be ordinary income into statutory income.
2. Substantial valuation difficulties and inequities would arise as exemptions and reductions such as the otherwise deductible rule, applicable under FBT, would not be available where the benefits fall within individual taxation.
Both these problems would create compliance difficulties which appear to be at odds with the very reason why FBT was introduced in the first place.
Treasury noted that a number of concerns about the interaction of the section 23AG Budget changes and the FBT system remain. Treasury advised these issues remain the subject of ongoing discussions between the ATO and Treasury. Members attention was drawn to the Assistant Treasurer's Press Release of 1 April 2010 entitled Additional Certainty for the Taxation of Overseas-Based Employees.
Treasury acknowledged that TD 2010/D1 raises some further issues with the existing framework for the taxation of non-cash benefits within the income tax system and those issues are under consideration.
Treasury asked participants to provide them with their concerns and any implications from TD 2010/D1 (through the NTLG FBT Sub-committee secretariat). Treasury advised that consideration of these implications will be undertaken following the completion of the ATO taxation determination consultation process.
ATO response
Following a general discussion of the issues raised in the CTA agenda item and those issues raised by the ICAA at the meeting, and noting the limited scope of TD 2010/D1, both the CTA and the ICAA were advised to consider making formal detailed submissions to the ATO through the taxation determination consultation process.
The ATO explained that the scope of TD 2010/D1 is limited in relation to the issues that it can cover. TD 2010/D1 sets out the Commissioner's preliminary view about the way the relevant taxation provisions apply to the question of whether a non-resident employer who pays resident Australian employees working overseas is required to withhold amounts under the PAYG regime and whether that employer will be subject to obligations under the FBTAA.
Paragraph 23 of TD 2010/D1 states the following;
Where a non-resident employer has a sufficient connection with Australia to have an obligation to withhold from payments made to an Australian resident employee for work performed overseas, it will also have obligations under the FBTAA in relation to any benefit provided to that employee. In these circumstances, the payment will be 'salary or wages' for the purposes of the terms 'current employer' and 'current employee' as defined in subsection 136(1) of the FBTAA. As a result, the non-resident employer and the Australian resident employee will be an 'employer' and an 'employee' respectively as these expressions are defined in subsection 136(1) of the FBTAA.
In discussing the general statements in the above extract from TD 2010/D1 at the meeting, the ATO advised that the definition of 'employer' in subsection 136(1) of the FBTAA relevantly means a 'current employer', future employer' or 'former employer'. Current employer is in turn defined to mean, as relevant, a person who pays, or is liable to pay, salary or wages.
The FBTAA also contains a definition of 'salary or wages' in subsection 136(1). Salary or wages means, as relevant, a payment from which an amount must be withheld (even if not withheld) under a provision of Schedule 1 to the TAA listed in the table, to the extent that the payment is assessable income. The table includes withholding payments under section 12-35; payment to employee.
That is, the 'payer' of 'salary or wages' is an 'employer' for the purposes of the FBTAA.
The concept of an entity that pays salary, wages, commissions, bonuses or allowances to an individual as an employee (whether of the paying entity or another entity) is explained in Taxation Ruling TR 2005/16; Income tax: Pay As You Go - Withholding from payments to employees. In particular, the ATO referred to the following relevant paragraphs (footnotes excluded):
Has a payment of salary, wages, commission, bonuses or allowances been made to an individual as an employee, of that or another entity?
64. The employment relationship does not necessarily have to be between the entity making the payment and the individual. Section 12-35 of Schedule 1 to the TAA 1953 provides that a withholding must be made from a payment of salary, wages, commission, bonuses or allowances paid to an individual as an employee of the payer or some other entity. The essential element is the nature of any connection between the payment and the individual's employment with the payer or any other entity.
65. If the payment is in respect of the employment of the individual, it is not relevant who actually made the payment. Federal Commissioner of Taxation v. Dixon discusses whether a payment is in respect of a person's employment. In that case, Dixon CJ and Williams J stated:
Indeed, it is clear that if payments are really incidental to an employment, it is unimportant whether they come from the employer or from somebody else and are obtained as of right or merely as a recognized incident of the employment or work.
66. Where the payment is a reward for services provided by the employee to the employer in the capacity of employee, the payment would be incidental to the employment regardless of whether the payment is made by the employer or another entity. If the payment is a payment of salary, wages, commission, bonus or allowance then the entity that made the payment will be required to withhold under section 12-35 of Schedule 1 to the TAA 1953.
67. For example, where a parent company decides to sell a subsidiary company it may decide to pay key personnel of the subsidiary company a retention payment to ensure that those personnel remain employees of the subsidiary for a certain period of time. This payment would be a payment of salary or wages or a bonus to the individual in connection with their employment with the subsidiary company. The entity making the payment, the parent company, would be required to withhold from the payment under section 12-35 of Schedule 1 to the TAA 1953.
The ATO indicated that in the scenario put forward by the CTA, it is likely that AusCo would be a 'current employer' and therefore an 'employer' for the purposes of the FBTAA. Whether, and to what extent benefits are provided in respect of the employment of an employee will, of course, be a question of fact.
In relation to the numerous issues raised in discussion by the ICAA, the ATO agreed there will be a number of matters that may require further ATO advice and/or guidance. In particular, the assessability of benefits received by a resident employee working overseas which have been provided by a non-resident employer. Where that employer has no requirement to withhold under the PAYG regime, and therefore FBT is not applicable, benefits received by formerly section 23AG exempt employees will not be free from tax but rather have to be returned in assessable income.
The ATO did acknowledge that it may be appropriate to include a sentence or two in the final taxation determination at 'Other matters' (currently paragraphs 24-26) to 'point' to the fact that an employee may nonetheless need to be aware the benefits do not escape tax as they will be subject to income tax. The ATO also advised that 'detail' relating to the assessability of benefits will be included in the soon to be released Employee Frequently Asked Questions fact sheet in relation to the section 23AG changes.
Sections within Agenda items
Last Modified: Monday, 13 September 2010