Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Pay-As-You-Earn (PAYE) Provisions - Definition of 'Salary or Wages', Variations of Deductions
This Chapter is divided into two parts. Part A explains the amendments to the definition of 'salary or wages'. Part B explains the amendments relating to variations of tax instalment deductions.
Part A: Amendments to the definition of 'salary or wages'
Summary of proposed amendments
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Purpose of amendment:
to include in the definition of salary or wages in the PAYE provisions:
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- payments of training allowances made to participants in the Landcare and Environment Action Program; and
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- remuneration and allowances of members of certain local governing bodies.
Date of effect: The amendments will apply on or after the date the amending Bill receives the Royal Assent.
The Landcare and Environment Action Program
In July 1992, as part of its National Employment and Training Plan for Young Australians, the Government announced a new training program called the Landcare and Environment Action Program (LEAP). LEAP commenced on 19 October 1992 and provides young people aged 15-20 with practical training and vocational experience in landcare, conservation, environmental protection and cultural heritage activities.
Participants in LEAP receive a fortnightly training allowance of between $250 and $300, depending on age. The training allowance is taxable. However, the allowance does not fall within the present definition of 'salary or wages' in subsection 221A(1) of the Act. Consequently, tax instalments are not being deducted from participants' training allowances.
The PAYE provisions currently extend to certain training allowances such as those paid under the National Employment and Training System scheme (paragraph (g) of the salary or wages definition).
The definition of salary or wages in subsection 221A(1) of the Act was amended in 1991 to exclude from its scope 'payments by way of remuneration or allowances to a member of a local governing body established by or under a law of a State or Territory'.
As a result of the 1991 amendment, payments to members of local governing bodies are excluded from the PAYE provisions of the Act. Additionally, local government bodies are not subject to fringe benefits tax in relation to any benefits provided to councillors.
These arrangements do not suit the circumstances of every local governing body. For example, members of a local governing body who are remunerated for full time service are more akin to members of Parliament and may wish to be subject to the PAYE provisions of the Act.
Explanation of proposed amendments
The Landcare and Environment Action Program
The proposed amendment will include payments of training allowances made to participants in LEAP in new
paragraph (ha) of the definition of 'salary or wages' in subsection 221A(1) of the Act [Subclause 36(1)] .
As a consequence of the proposed amendment, program sponsors will be required to deduct tax instalments from training allowances paid to participants. This will ensure that participants are not subjected to a large income tax bill on assessment at the end of the income year.
The proposed amendments will enable members of a local governing body, provided that all of those members agree, to bring themselves within the PAYE provisions of the Act.
How will members of a local governing body be able to come within the PAYE provisions of the Act?
The definition of 'salary or wages', while continuing to exclude payments made to a member of a local governing body, will not exclude payments made to a member of an eligible local governing body [Paragraph (b) of subclause 36(2)] .
A local governing body will be able to resolve that it will be treated as an eligible local governing body, for the purposes of Division 2 of Part VI of the Act, by passing a unanimous resolution [paragraph (c) of subclause 36(2)] . If a local governing body passes such a resolution, it will be required to specify in that resolution a date on which the resolution is to take effect. To ensure timely action, the date of effect must be within 28 days after making the resolution [new subsection 221B(2)] . Having made a resolution, the local governing body must provide the Commissioner with written notice of the resolution within 7 days of the resolution being made [new subsection 221B(11)] . The Commissioner must, in turn, publish a notice in the Gazette , setting out:
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- the name of the local governing body; and
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- the day on which the resolution takes effect
[New subsection 221B(12)] .
To ensure that members of eligible local governing bodies fall within the PAYE provisions of the Act, the definition of 'eligible person' in subsection 221A(1) will be amended to include a member of an eligible local governing body [Paragraph (a) of subclause 36(2)] .
When will a resolution passed by a local governing body apply for taxation purposes?
The definition of 'employer', 'employee' and 'salary or wages' in the PAYE provisions are relied upon in other taxation laws. A unanimous resolution by a local governing body that it be treated as an eligible local governing body will therefore affect councillors through the application of other laws administered by the Commissioner such as:
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- the Income Tax Rates Act 1986 ;
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- the fringe benefits tax laws; and
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- the laws relating to child support,
after the day on which the resolution takes effect [New subsections 221B(3) to 221B(9)] .
Can a resolution be cancelled?
Yes. A local governing body will be able, by a unanimous resolution, to cancel an earlier unanimous resolution that it be treated as an eligible local governing body for the purposes of Division 2 of Part VI of the Act [Subclause 36(2), definition of 'eligible local governing body'] .
If a local governing body resolves to cancel an earlier resolution, it will be required to specify in that resolution a date on which the resolution to cancel the earlier resolution will take effect [new subsection 221B(2)]. The same arrangements which applied to the resolution being cancelled (i.e., the date of effect [28 days] and notifying the Commissioner [7 days]) will apply to the new resolution [New subsections 221B(2),(11) and (12)] .
Will future members of a local governing body be bound by a unanimous resolution?
Yes. If a local governing body passes a unanimous resolution that it be treated as an eligible local governing body for the purposes of Division 2 of Part VI of the Act, that resolution will be binding on any new members of the body [new subsection 221B(10)] . However, the differently constituted body will still be able, by a unanimous resolution, to cancel the resolution of the members who formerly made up the body.
Part B: Amendments relating to variations of tax instalment deductions
Summary of proposed amendments
Purpose of amendment: to allow an employee with more than one employer to obtain from the Commissioner a single variation in PAYE tax instalment deductions which will apply to more than one employer.
Date of effect: The amendments will apply on or after the date the amending Bill receives the Royal Assent.
Section 221D of the Act gives the Commissioner a discretion to vary the amount of tax that is to be deducted from salary or wages paid to an employee or class of employees. The rates of tax to be deducted are prescribed in the Income Tax Regulations (the prescribed rates). The Commissioner exercises this discretion if an employee states in an application to the Commissioner that the prescribed rates are not appropriate to his or her circumstances. For example, the prescribed rates could be inappropriate if an employee incurs abnormal deductible expenses or has more than one employer during an income year.
If the Commissioner exercises this discretion and varies the amount of tax to be deducted from an employee's salary or wages, he must notify the employer paying the salary or wages, in writing, of the variation, and the employer must make future deductions at the varied rate.
If an employee has more than one employer, that employee must apply for a variation in respect of each one of his or her employers. The Commissioner must then notify each employer in writing of any variation made. This places additional administrative burdens on employees as well as the Australian Taxation Office. The proposed amendments will reduce these administrative burdens.
Explanation of proposed amendments
Under the proposed amendments, the Commissioner will be able, in response to a request from an employee, to give that employee a notice of variation, called a 'PAYE variation certificate', which authorises a variation in the amounts to be deducted from the employee's salary or wages [New subsection 221D(3)] .
An employee will be able to give that certificate to any one or more of his or her employers. Those employers will then be required to make tax instalment deductions in accordance with the certificate. The amendments proposed will also increase the penalty from $500 to $1,000 where an employer does not deduct tax in accordance with the certificate. [New subsections 221D(5), 221D(6)] .
The increased penalty in new subsection 221D(6) will then be the same as the penalty imposed under subsection 221C(1A) where an employer fails to make tax instalment deductions at the prescribed rates.
In what circumstances will the Commissioner issue a PAYE variation certificate?
The Commissioner will issue a PAYE variation certificate if he is satisfied that:
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- an employee is likely to be successively employed by two or more employers [New paragraph 221D(3)(a)] ; and
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- an employee requires a variation because of the special circumstances of the employee [New paragraph 221D(3)(b)] .
Example
Rachel works as a fashion model and undertakes modelling assignments for many different employers.
Under the proposed amendments, the Commissioner would issue a PAYE variation certificate to Rachel because:
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- she is likely to be employed by two or more employers; and
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- a variation is required to meet Rachel's special circumstances. The fact that Rachel works, on average, less than a normal working week and that she can only claim the tax-free threshold for one employer, means that Rachel would pay too much tax if tax instalment deductions were made at the prescribed rates.
What information will a PAYE variation certificate contain?
A PAYE variation certificate will always contain the following information:
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- the name of the employee;
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- the method by which the amounts to be deducted from the salary or wages payable to the employee by any of his or her employers is to be worked out;
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- a statement to the effect that an employee who holds a PAYE variation certificate may give the certificate to a current employer or a person who is about to become an employer of the employee; and
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- a statement of the obligations of an employer who is given a certificate by an employee or a person who is about to become an employee
[New subsection 221D(4)] .
What are the obligations of an employer who is given a PAYE variation certificate?
If an employer is given a PAYE variation certificate by a person who is an employee or is about to become an employee, the employer must:
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- make a copy of the certificate (the original copy);
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- sign and date the original copy;
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- make a copy of the signed and dated original copy;
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- give the signed and dated original copy to the person;
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- return the certificate to the person; and
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- make deductions from the salary or wages payable to the person in accordance with the certificate
[New subsection 221D(6)] .
In this way the employer will have a record of the certificate and the employee will be able to repeat the process with the certificate for second and subsequent employers.
In addition to the amendments explained in this chapter, the Bill proposes to increase the penalty in subsection 221F(13) from $50 to $100 where an employer fails to apply for registration as a group employer. This increase is in line with current penalty reforms in the Crimes Legislation (Amendment) Bill 1992 [Clause 39].