Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon. J. Kerin, M.P.)Chapter 25 The Pay-As-You-Earn (PAYE) Provisions
[Clause: 3, 4, 67, 68, 69, 87, 98, 99 Schedule 3]
Overview
Restructures the definitions and corrects a technical inconsistency in the pay-as-you-earn (PAYE) provisions.
Summary of proposed amendments
25.1. The amendments in Part 4 of the Bill will :
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- restructure the definitions of "employee" and "salary or wages" in subsection 221A(1) of the Principal Act;
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- update definitions referring to arrangements between the Governor-General and the States; and
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- correct a technical inconsistency between the definition of "employer" in subsection 221A(1) and the penalty provisions contained in section 221EAA and subsection 221F(12) of the Principal Act, to ensure that the Commonwealth is not subject to the PAYE penalties.
Background to the legislation
25.2. The definitions of "employee" and "salary or wages" in subsection 221A(1) will be restructured by the amendments proposed. These definitions have been subject to judicial criticism because of the circularity contained in them.
25.3. "Employee" is currently defined as a person entitled to receive salary or wages and includes specific references to members of the Commonwealth Parliament, persons employed by the Commonwealth or Commonwealth authority and members of the Defence Forces.
25.4. The term "salary or wages" is defined as salary, wages etc paid to an "employee as such". This definition covers a broader range of employees than the common law definition. The effect is that the two definitions are not only confusing but also rely on each other for meaning. Both their clarity and certainly can be improved.
25.5. The definitions of "employer" and "employee" currently refer to section 221B. This section empowers the Governor-General to enter into arrangements with the States or State authorities in respect of any obligation imposed by the Principal Act on the States in their capacity as employers.
25.6. This reference is no longer required as it is now clear from case law [ Victoria v Commonwealth (1971) 122 CLR 353 (The Payroll Tax case)], that the Commonwealth has direct power under the Constitution to apply the PAYE provisions to the States, Territories and their authorities.
Correcting a technical inconsistency in the scope of the exemption from PAYE penalties
25.7. A technical inconsistency currently exists between the definition in subsection 221A(1) of "employer" in relation to the exemption from the imposition of a PAYE penalty, and the penalty provisions contained in section 221EAA and subsection 221F(12).
25.8. The definition of "employer" excludes, in relation to the imposition of a penalty,
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- the Commonwealth,
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- an authority of the Commonwealth,
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- a State, or
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- an authority of a State.
25.9. However, the existing PAYE penalty arrangements and the provisions relating to the Prescribed Payments System which were inserted in the Principal Act in 1984, exclude only the Commonwealth from the imposition of PAYE penalties. This is the intended effect of the penalty provisions and is inconsistent with the definition of "employer".
25.10. The reference to penalties in the definition of "employer" which should have been removed in 1984, will now be deleted to remove this inconsistency.
Explanation of the proposed amendments
Restructuring the definition of "employee" to improve clarity and certainty
25.11. The circularity, mentioned earlier, which is presently contained in the definitions of "employee" and "salary or wages" has led to confusion in the application of the PAYE provisions. The proposed amendment will simplify the definition of "employee" and insert a new definition, that of "eligible person". The definition of "salary or wages" will include a reference to "eligible person as such". This will improve the clarity of the definition of "employee" and resolve the present circularity.
25.12. The restructured definition of "employee" will be "a person who receives, or is entitled to receive, salary or wages". Also, in the definition of "salary or wages" the words "employee as such" will be substituted by the words "eligible person as such".
25.13. The new definition of "eligible person" will restate the position that the PAYE provisions extend to members of an Australian Parliament, persons holding or performing the duties of a statutory office, appointment or position and persons otherwise in the service of the Commonwealth, State or Territory. [Paragraph 67(g)]
25.14. The replacement of the definition of "employee" with "eligible person" will not affect the current extension of the PAYE arrangements. These arrangements currently extend to payments made, and persons who are not "employees as such". These payments and persons are listed in paragraphs (a) to (nb) of the definition of "salary or wages" in subsection 221A(1), and include the following:-
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- payments made under a contract for labour (paragraph (a));
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- payments made by way of remuneration to a director of a company (paragraph (b));
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- pension and annuity payments (paragraph (c));
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- commissions (paragraph (d));
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- compensation payments (paragraph (f));
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- some education and training allowances (paragraphs(g) to (nb))
25.15. The meaning of "director" in paragraph (b), will be expanded to clarify persons who perform the duties of a director. "Company" is defined in subsection 6(1) to include "all bodies and associations corporate and unincorporated". The expanded definition of "director" will clarify that office holders of unincorporated bodies are directors for PAYE purposes. [Paragraph 67(d)]
25.16. The restructure will not disturb the current scope of the PAYE provisions as they apply to these persons and payments.
25.17. A new definition of "Australian Parliament" will be inserted to enable all parliamentarians to be referred to in one term in the new definition of "eligible person", rather than having separate references to Commonwealth, State and Territory members. [Paragraph 67(g)]
Effect of the restructuring of the definition of "employee" on local government councillors
25.18. A local government councillor would be included in the new definition of "eligible person" as being a person who holds or performs the duties of a position under a law of State or a Territory. As a result, allowances received by a local government councillor would fall within the definition of "salary or wages".
25.19. The Government recently reviewed the taxation position of local government councillors. As a result, local government councillors will remain outside the PAYE provisions in respect of remuneration and allowances related to their council duties. A Treasurer Press Release dated 5 September 1991 outlined the current position which is achieved through these amendments.
25.20. To achieve this, a new paragraph (pa) will be inserted in the definition of "salary or wages" in subsection 221A(1) to exclude such payments from the scope of the PAYE arrangements. [Paragraphs 67(e)]
Effect of the restructuring on the definition of "employer"
25.21. The definition of "employer" will be amended to remove any requirement for special arrangements with the States in respect of the application of the PAYE provisions. [Paragraphs 67(a) and (b)]
25.22. As a consequence of the removal of the reference to these arrangements it is necessary for a definition of "government body" to be included in the definition of employer. [Paragraph 67(b)]
25.23. A "government body" is defined in subsection 221A(1) to mean the Commonwealth, State or Territory or their authorities.
25.24. Paragraphs 72(iii) and 103(iii) of the Constitution provide that federal judges and members of the Inter-State Commission "shall receive such remuneration as the Parliament may fix".
25.25. In a recent opinion, the Solicitor-General concluded that paragraph 72(iii) does not prevent the Parliament providing for PAYE deductions from salaries of federal judges as part of the non-discriminatory operation of revenue laws as they affect all citizens. This conclusion would also apply to the remuneration received by members of the Inter-State Commission under paragraph 103(iii) of the Constitution.
25.26. This matter has not been considered by the High Court. In the event of the High Court disagreeing with the Solicitor-General, proposed new section 221DA (and proposed new subsection 46(9) of the Child Support (Registration and Collection) Act 1988) will ensure that only the provisions of the law which create obligations to make PAYE deductions (and deductions under the Child Support legislation) will be read down so as not to apply to federal judges and members of the Inter-State Commission. The definitions of "employee", "employer" and "salary or wages" in the PAYE provisions will not be read down. Accordingly, the income tax substantiation and the fringe benefits tax provisions, which rely on those definitions of provisions in the Principal Act, will not be affected. [Clause 69]
25.27. Part 2 of the Bill proposes the necessary amendment to the Child Support (Registration and Collection) Act 1988 . [Clause 3 and 4]
Updating definitions which contain references to arrangements between the Governor-General and the States
Authority for Commonwealth/State Taxation Arrangements
25.28. Section 221B allows the Governor-General to enter into arrangements with the States with regard to the States' obligations as employers. These arrangements were entered into in 1942. It has been established by case law that the Commonwealth has constitutional power to apply the PAYE provisions directly to the States, Territories and their authorities. The reference to such arrangements is thus no longer necessary and can be removed.
25.29. The repeal of section 221B will result in a consequential amendment to the definitions of "employer" and "employee" in subsection 221A(1). The reference to the section 221B arrangements will be removed from both definitions. [Paragraphs 67(c), 67(f) and clause 68]
Correcting a technical inconsistency in the scope/exemption from PAYE penalties
25.30. In 1984, section 221EAA and subsection 221F(12) were inserted into the Principal Act to provide a PAYE penalty regime which extended to all employers except the Commonwealth.
25.31. However, this was inconsistent with the existing definition of "employer" which excludes not only the Commonwealth, but also the States and authorities thereof from the imposition of a penalty.
25.32. The "employer" definition therefore requires amendment to remove the reference to penalty which became obsolete as a result of the insertion in 1984 of the new penalty regime. PAYE penalties are provided for in sections 221EAA and subsection 221F(12). [Paragraph 67(b)]
Transitional arrangements
25.33. The amendments to section 221A made by these amendments are to be disregarded in determining the meaning that an expression had before these amendments were made. [Clause 98]
Commencement date
25.34. The amendments will take effect from the date of Royal Assent of the Amending Act. [Subclause 2(1)]
25.35. Other provisions affected by the amendments:
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- Fringe Benefits Tax Assessment Act 1986,
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- Income Tax Rates Act 1986,
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- Income Tax Assessment Act 1936 provisions relating to -
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- substantiation,
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- provisional tax,
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- lump sum payment in arrears, and
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- income of children [Clause 87]
Clauses involved in the proposed amendments
Clause 67 : amends some existing definitions (paragraphs 67(a) to 67(f)) and inserts new definitions (paragraph 67 (g)) in subsection 221A(1) of the Principal Act.
Clause 98 : is transitional and retains the existing meaning of the PAYE definitions until these amendments have effect.
Clause 99 : allows the amendment of assessments under the Principal Act where the assessment was made prior to the commencement of this Amending Act.
Amendments consequential to the proposed amendments
The definitions of "employer", "employee", and "salary or wages" as used in the Principal Act, are relied upon in other taxation laws. The updating of these definitions in the Principal Act will result in consequential amendments to the following Acts, including the Principal Act. [Schedule 3]
Child Support (Registration and Collection) Act 1988
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- The definition of "employer" in subsection 4(1).
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- The definition of "employee" in subsection 4(1).
Fringe Benefits Tax Assessment Act 1986
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- The definition of "current employer" in subsection 136(1).
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- The definition of "current employee" in subsection 136(1).
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- The definition of "salary or wages" in subsection 16(1)
Income Tax Assessment Act 1936 (The Principal Act)
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- The definition of "employer" in section 82KT.
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- The definition of "employee" in section 82KT.
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- Subsection 159ZR(3) will be omitted.