• Material variation - change in employer

    Issue

    Clarification is sought around the correct interpretation of movements by staff between Government Departments.

    Background

    Government employees can move between Departments under a variety of circumstances. Each of these Departments is a separately nominated body pursuant to section 135 of the FBTAA. The circumstances include:

    • employees securing a position in a different Department and choosing to move Departments permanently;
    • employee long-term secondments where the new Department becomes responsible for the payment of salary and wages;
    • employee short-term secondments where the original department remains responsible for the payment of salary and wages; and
    • Machinery-of-Government changes where an employee is moved permanently from one Department to another Department.

    While the salary packaging participation agreement (SPPA) may remain unchanged, according to paragraph 7.48 of the Explanatory Memorandum (EM), a change of employer may give rise to a material alteration or variation to an existing arrangement. Such an alteration or variation would result in the arrangements no longer being subject to the transitional arrangements.

    The question of a change of employer for the purposes of Government's salary packaging arrangements in relation to the statutory percentage used in relation to car fringe benefits arising from novated leases was recently ruled upon by the ATO in a private ruling. That ruling set out the specific secondment and re-assignment scenarios listed above. If the ATO applies the same general principles to the in-house benefit changes, then the same employment conditions ruled by the ATO to give rise to a change of employer will apply. An employee claiming any reimbursement for in-house benefit claims following a change of employer would therefore incur an FBT liability under their salary packaging arrangement.

    Industry view/suggested treatment

    Based on the draft legislation and EM, it would appear that a change of employer after 22 October 2012 in situations where the new employer becomes responsible for the payment of an employee's salary or wages (1, 2 and 4 set out above) would give rise to a material alteration or variation of an existing arrangement, causing the transitional arrangements to cease. Confirmation of this from the ATO will assist employers implement the proposed changes to in-house benefits.

    Technical references

    Tax Laws Amendment (2012 Measures No. 6) Bill 2012

    Tax Laws Amendment (2012 Measures No. 6) Bill 2012 Explanatory Memorandum

    ATO Response

    This agenda item concerns the application of the transitional arrangements where there is a change of employer after 22 October 2012.

    As Royal Assent had not been received at the date of the meeting the ATO advised it was unable to provide indicative interpretative advice at the meeting.

    However, the ATO referred to the Official Committee Hansard of the House of Representatives Standing Committee on Economics held of 30 January 2013. In response to a question about the application of the transitional arrangements and what will constitute a material variation the representative from The Treasury said at page 11:

    With the material variation, in a lot of cases it is going to depend on the facts of the circumstances-specifically, what is in the terms of the employment contract. But generally variations of a minor or inconsequential nature it will not be considered to be a material variation. A change in employer would be considered to be a material variation. The fact that the employee is part of a large corporate group and there is a restructure would probably constitute a material variation.

    A question was then asked by a committee member about the situation if an employee moves between two government owned corporations, to which the response given by the representative from The Treasury was '… there would be a change in employer'.

    The committee member then asked:

    It is virtually a change of government departments. How would that go if someone was shifting from, say, the taxation department to Treasury?

    The response given by the representative from The Treasury was:

    That is a change in employer. The FBT law applies in relation to the Commonwealth as if the departments or the agencies, rather than the Commonwealth itself, are the employer.

    Under item 13 of Tax Laws Amendment (2012 Measures No. 6) Bill 2012, the proposed reforms will apply to a benefit provided on or after 22 October 2012, unless the benefit is provided under an existing salary packaging arrangement that has not been varied in a material way.

    As set out in paragraph 7.46 of the Explanatory Memorandum to Tax Laws Amendment (2012 Measures No. 6) Bill 2012, where an existing salary packaging arrangement is materially altered or varied on or after 22 October 2012, it will no longer be subject to the transitional arrangements.

    Sub item 13(3) of Tax Laws Amendment (2012 Measures No. 6) Bill 2012 defines an existing salary packaging arrangement as 'a salary packaging arrangement entered into by the employer and employee before 22 October 2012'.

    In reference to this definition, paragraph 7.44 of the Explanatory Memorandum to Tax Laws Amendment (2012 Measures No. 6) Bill 2012 states:

    An 'existing salary packaging arrangement' means a 'salary packaging arrangement' (as introduced by these amendments) that was both agreed to (employer and employee agree to conditions of arrangement) and was entered into (the arrangement was given legal force) before 22 October 2012.

    That is, an existing salary packaging arrangement is an arrangement entered into before 22 October 2012 by the employee and the employer of the employee at the time the benefit is provided to the employee.

    Therefore, for a benefit to be provided under an existing salary packaging arrangement where a change of employer has occurred, it is necessary for the new employer to have entered into the arrangement with the employee before 22 October 2012. If this did not occur, the benefit will not be provided under an existing salary packaging arrangement and the transitional arrangements will not apply.

    The agenda item sets out 4 situations in which an employee can move between departments. From the limited information provided it is possible to determine whether there is a change of employer. It is possible the employer does not change. For example, in the third situation the original department remains responsible for the payment of salary or wages. If the original department still retains the responsibility for paying the salary or wages it may continue to be the employer for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

    If there is not a change of employers, then the transitional arrangements may apply.

    In discussion, the ATO noted that in applying these provisions it is necessary to identify the body that is the employer for the purposes of the FBTAA. This may be different to the employer for common law purposes.

    For example, section 4 of the Fringe Benefits Tax (Application to the Commonwealth) Act 1986 provides that the FBTAA applies in respect of the employment of a Commonwealth employee as if the employee were employed by the responsible Department and not by the Commonwealth.

    Similarly, paragraph 135U(5)(c) of the FBTAA provides that a nominated State or Territory body, rather than the relevant State or Territory is taken to be a government body and therefore the employer for the purposes of the FBTAA where it pays or is responsible for paying the salary or wages of the employee.

    Therefore, generally it is the responsible Department or the nominated State or Territory body that will be the relevant employer.

    However, the State or Territory may be the employer if the department is not a nominated State or Territory body. If an employee moves between departments which are not nominated State or Territory bodies, there will not be a change of employer and there may be an existing salary packaging arrangement.

    The agenda item refers to the transitional rules that apply to the changes to the statutory formula that is used to calculate the taxable value of car fringe benefits. These rules which are contained in paragraph 8(b) of Tax Laws Amendment (2011 Measures No. 5) Act 2011 use the last time at which the employer, or an associate of the employer, or the employee, or an associate of the employee committed to the application or availability of the car.

    This is a different test to the proposed test contained in the in house transitional rules. The proposed test in the in house transitional rules uses the date on which the salary packaging arrangement was entered into by the employer and the employee.

    Given the different test that is used, a private ruling concerning the statutory percentage that will apply following a machinery of government change will not have any application to the application of the transitional provisions that apply to the in house benefit reforms.

      Last modified: 20 May 2013QC 34349