Class Ruling

CR 2006/84

Income tax: Department of Human Services (Vic) Disability Support Direct Payment Plan

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FOI status:

What this Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates.

Relevant provision(s)

2. The relevant provisions dealt with in this Ruling are:

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paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936);

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section 159P of the ITAA 1936;

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section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997);

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section 6-10 of the ITAA 1997;

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section 8-1 of the ITAA 1997;

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section 10-5 of the ITAA 1997; and

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Subdivision 20-A of the ITAA 1997.

Class of entities

3. The class of entities to which this Ruling applies is those direct payment users who receive direct payments, for disability support, from the Department of Human Services (Vic) (the Department) under the trial of the Direct Payment Project (DPP) for the purposes of purchasing goods or services for themselves or a disabled person. In this Ruling these entities are referred to as 'direct payment users'.

4. The class of entities does not include any person who carries on a business of supplying support services to the disabled.

Qualifications

5. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling.

6. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 13 to 26 of this Ruling.

7. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then:

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this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and

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this Ruling may be withdrawn or modified.

8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Commonwealth Copyright Administration

Attorney General's Department

Robert Garran Offices

National Circuit

Barton ACT 2600

or posted at: http://www.ag.gov.au/cca

Date of effect

9. This Ruling applies from 1 January 2006. However, this Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling Furthermore, the Ruling only applies to the extent that:

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it is not later withdrawn by notice in the Gazette; or

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the relevant taxation provisions are not amended.

10. If this Class Ruling is inconsistent with a later public or private ruling, the relevant class of entities may rely on either ruling which applies to them (item 1 of subsection 357-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)).

11. If this Class Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Class Ruling is made, the following two conditions are met:

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the income year or other period to which the rulings relate has not begun; and

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the scheme to which the rulings relate has not begun to be carried out.

12. If the above two conditions do not apply, the relevant class of entities may rely on either ruling which applies to them (item 3 of subsection 357-75(1) of Schedule 1 to the TAA).

Scheme

13. The scheme that is the subject of the Ruling is described below. This description is based on the following documents and telephone records which are attached to the file record maintained by the Tax Office for this Ruling. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or part of documents incorporated into this description of the scheme are:

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Application for Ruling received by facsimile dated 20 January 2006;

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Direct Payments Information Sheet;

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Victorian State Disability Plan 2002-2012;

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Direct Payments User Manual; and

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Draft Deed of Agreement.

14. The Department currently administers programs that provide persons with a disability with their support services through the funding of support providers. The support services provided are based on an assessment of the individual's needs.

15. The Department intends to trial a change to these arrangements under the DPP by providing direct payments to a direct payment user. A direct payment user may be;

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a person with a disability;

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a parent of a child with a disability;

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a guardian or administrator of a person with a disability;

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a person acting under a power of attorney in respect of a person with a disability;

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a support person of a person with a disability, for example a parent of an adult with a disability; or

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a support person jointly with a person with a disability.

16. The direct payment user is then able to use that money to choose, arrange and buy the supports and services the disabled person requires to meet their identified needs. Direct payments are designed to give persons with a disability greater flexibility and control over the supports and services they use, and ensure that those supports are tailored to best meet their individual needs.

17. To participate in the DPP, the following are required:

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An up to date funding plan which outlines the goals of the person with a disability and details what funding will be provided and how the funding will be used to meet those goals.

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The direct payment user will enter into a Direct Payment Deed of Agreement with the Department.

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A separate bank account (direct payment account), must be established in the name of the direct payment user, for the receipt of the direct payments.

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The direct payment user must authorise the Department to view the details of the direct payment account for the purpose of allowing the Department to identify any irregularities in the spending of the funds.

18. The direct payment funds in relation to disability-specific services are provided based on an hourly rate (unit price) determined by the Department each year. The unit cost is a guide as to the expected reasonable costs for those services. The direct payment user can pay higher rates for these services by using payments allocated to other goods or services under the funding plan.

19. Funds will be transferred into the direct payment account of the direct payment user each month. At the start of the first month, funding will be provided for the estimated funding needs for that month together with one month's funding in advance.

20. All expenditure from the bank account must be for an approved purpose in accordance with the funding plan, which has been endorsed by the Department. Where the direct payment user is not the disabled person they must consult with the disabled person as to the use and management of the funds.

21. The expenditure can be for a variety of support needs and for example may include specific items of equipment, professional services by a therapist, provision of child care or one to one attendant care for a disabled person.

22. The direct payment user is required to keep records of how the funds are used and will have their spending regularly reviewed.

23. Under an acquittal process, the direct payment user is required to account for the spending of the funds on the goals in the funding plan. Surplus funds up to a maximum of 5% of the total funds can be carried forward for 3 months to be spent under the funding plan. At the end of the acquittal process or on termination of the DPP, any unspent and uncommitted funds will be returned to the Department within 14 days by the direct payment user.

24. The direct payment funds cannot be used to employ workers directly (although services can be purchased indirectly through a service provider) and they are not to be used for gambling, illegal purposes or to support illegal activities. Where funds are used for a prohibited purpose, the Department will require the direct payment user to repay those funds together with any remaining funds within 14 days of being requested to do so.

25. Direct payment users are required to keep the funding provided under the DPP in the direct payment account until used to acquire the goods or services approved under their funding plan.

26. The direct payment user is responsible for paying any bank fees that may apply to the direct payment account. Any interest earned on the direct payment account will become part of the funds which are to be used for the purpose of meeting the disabled person's goals under their funding plan. Any interest earned on the account becomes part of the funds dealt with as part of the acquittal process referred to in paragraph 23 of this Ruling.

Ruling

27. The direct payments received from the Department do not form part of the direct payment user's assessable income under section 6-5 of the ITAA 1997.

28. The grants received from the Department are:

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not given or granted to the direct payment user for employment or services rendered under paragraph 26(e) of the ITAA 1936; and

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not assessable recoupments of the direct payment user under Subdivision 20-A of the ITAA 1997.

29. Any interest earned on the special account into which the funding is paid does not form part of the direct payment user's assessable income.

30. Any losses or outgoings incurred by the direct payment user for the acquisition of goods and services under the DPP are not deductible under section 8-1 of the ITAA 1997 or any other provision of the ITAA 1997.

31. None of the amounts paid by the direct payment user for the acquisition of goods and services under the DPP in respect of which a grant has been received, are treated as rebatable amounts for the purposes of the medical expenses tax offset under section 159P of the ITAA 1997.

Commissioner of Taxation
30 August 2006

Appendix 1 - Explanation

32. A payment or other benefit received by a taxpayer is assessable income if it is:

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income in the ordinary sense of the word (ordinary income); or

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an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income).

Ordinary income

33. Under subsection 6-5(1) of the ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income).

34. In determining whether an amount is ordinary income, the courts have established the following principles:

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what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as a statute dictates otherwise;

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whether the payment received is income depends upon a close examination of all relevant circumstances; and

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whether the payment received is income is an objective test.

35. Relevant factors in determining whether an amount is ordinary income include:

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whether the payment is the product of any employment, services rendered, or any business;

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the quality or character of the payment in the hands of the recipient;

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the form of the receipt, that is, whether it is received as a lump sum or periodically; and

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the motive of the person making the payment. Motive however, is rarely decisive as in many cases a mixture of motives may exist.

36. It is necessary to look at these factors in the context of the direct payment user's circumstances. The direct payment user is neither an employee of the Department nor receiving the payments in relation to the carrying on of a business. However whether the payments have been received for services rendered must be examined since payments to a taxpayer for services rendered are assessable income even though the taxpayer does not provide those services as an employee or in carrying on a business (Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418; 71 ATC 4195; (1971) 2 ATR 563).

37. Although the direct payment user is arranging either their own care or that of the person with a disability, which is a service previously performed by the Department, they are not paid any amount for their time or to reward them for any services to the Department or others. The payments are made to the direct payment user for the sole purpose of allowing them to acquire suitable goods and services for themselves or the person with a disability.

38. Taxation Ruling TR 92/15 in discussing the difference between an allowance and a reimbursement, provides at paragraphs 3 and 4:

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement. A requirement that the recipient refunds unexpended amounts to the provider of the funds adds further weight to that presumption.

4. The meaning of the word "reimburse" includes payments made in advance of expenditure as long as those payments possess the characteristics outlined in paragraph 3.

39. The payments to the direct payment user, are intended to cover the costs they have incurred in directly obtaining the agreed goods and services. There is no intention to provide a gain or profit to them. Although the direct payment user obtains the funds in advance, the quality and character of the payment in their hands is, on balance, in the nature of a reimbursement of the expenses they have incurred.

40. Although the payments made to the direct payment user are made on a periodic basis, this is insufficient, by itself, to characterise those payments as income.

41. Given the discussion in paragraphs 33 to 40 of this Ruling, it is considered that the payments received by the direct payment users do not possess the characteristics of ordinary income. As such the payments received are not income according to ordinary concepts and therefore are not assessable as ordinary income under section 6-5 of the ITAA 1997.

Statutory income

42. Section 6-10 of the ITAA 1997 includes in assessable income amounts that are not ordinary income. These amounts are called statutory income. A list of the statutory income provisions can be found in section 10-5 of the ITAA 1997. That list includes a reference to paragraph 26(e) of the ITAA 1936 and Subdivision 20-A of the ITAA 1997.

Employment or services rendered

43. Paragraph 26(e) of the ITAA 1936, provides that assessable income shall include:

... the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered ...

44. While the direct payment user is not an employee of the Department, paragraph 26(e) of the ITAA 1936 also includes in assessable income those amounts which are paid in respect of 'services rendered'.

45. However, as discussed at paragraph 37 of this Ruling, the direct payment user does not receive the grants directly for services rendered either to the Department or to any other party. Likewise, there is no indirect connection between the payments and any services rendered. Therefore the payments to the direct payment user is not statutory income under paragraph 26(e) of the ITAA 1936.

Assessable recoupment

46. Subdivision 20-A of the ITAA 1997 operates to include in assessable income amounts received as recoupments of specified losses or outgoings allowed or allowable as deductions. As the grants are not being made by way of insurance or indemnity, the relevant provisions is subsection 20-20(3) of the ITAA 1997 which provides that an amount is an assessable recoupment of a loss or outgoing if a taxpayer:

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receives the amount (except by way of insurance or indemnity); and

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can deduct an amount for the loss or outgoing in the current year or has deducted or can deduct an amount for it in an earlier year under a provision listed in the tables at section 20-30 of the ITAA 1997.

47. As no deduction is allowable or would be allowable to the direct payment user in respect of the expenditure incurred for the goods and services acquired (see paragraph 54 of this Ruling), the payments received by them from the Department are not assessable recoupments and therefore no amounts are included in their assessable income under Subdivision 20-A of the ITAA 1997.

Interest earned

48. In considering who is liable for tax on the interest earned on the direct payment account, the essential question is: 'Whose money is it?'. It will be the taxpayer who has the beneficial entitlement to the money in the account who will be assessed on any interest earned (Taxation Determination TD 92/182).

49. There is a general presumption that the legal owner of a bank account will also be the beneficial owner, however this is a rebuttable presumption (Taxation Determination TD 92/106). Therefore we need to look at whether there is evidence to indicate that the direct payment user does not have the beneficial ownership of the money in the account.

50. Beneficial ownership has been held to mean the right to deal with property as one's own, free of any contractual obligations in respect of it (Woods Preservation Ltd v. Prior (Inspector of Taxes) [1969] 1 WLR 107). Further in Ayerst (Inspector of Taxes) v. C & K (Construction) Ltd [ 1976] AC 167, Lord Diplock determined that beneficial ownership of property subsists in a person if the person can enjoy the fruits of the property himself or dispose of it for his own benefit.

51. The deed of agreement between the Department and the direct payment user essentially is an agreement governing the spending of the money deposited into the direct payment account. Whilst the direct payment user is the legal owner of the money in the account their use of that money is governed and limited by this contractual arrangement they have with the Department. They can only spend the money for an approved purpose and any funds spent on a prohibited purpose, or remaining unspent, must be repaid by the direct payment user to the Department.

52. Interest earned on the direct payment account is subject to the same limitations as the other funds deposited into the account. Any interest earned on the account is accounted for in the acquittal process with the Department.

53. The direct payment user does not have the right to deal with the money in the account as 'one's own, free of any contractual obligations' and further they are not able to enjoy the interest (the 'fruit' of the property) without similar limitations. Therefore, the interest does not form part of the assessable income of the direct payment user as they are not the beneficial owner of the money, including the interest, in the account.

General deductions

54. As the payments received by the direct payment user are not assessable as either ordinary or statutory income, the losses and outgoings that are incurred in connection with those payments are not allowable as deductions under section 8-1 of the ITAA 1997 or any other provision of the ITAA 1997. Consequently, expenses incurred by the direct payment user for goods and services in accordance with the funding agreement and the bank charges on the direct payment account are not deductible.

Medical expenses tax offset

55. Section 159P of the ITAA 1936 provides that an amount paid by a taxpayer as medical expenses less any amount paid, or entitled to be paid, to the taxpayer or any other person in respect of those medical expenses, is a rebatable amount for the purposes of the medical expenses tax offset.

56. Medical expenses include payments:

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to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of an illness or operation;

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for therapeutic treatment administered by direction of a legally qualified medical practitioner; and

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made as remuneration of a person for services rendered by him as an attendant of a person who is blind or permanently confined to a bed or invalid chair.

57. The payments made by the direct payment user may qualify as medical expenses. However those expenses must be reduced by any payment received or receivable in respect of the expenses to determine the rebatable amount. As the direct payment user will receive a payment from the Department under the DPP in respect of these expenses there will be no amount which can be treated as a rebatable amount for the purposes of the medical expenses tax offset.

Appendix 2 - Detailed contents list

58. The following is a detailed contents list for this Ruling:

Not previously issued as a draft

References

ATO references:
NO 2006/15502

Related Rulings/Determinations:

TR 92/15
TD 92/106
TD 92/182

Subject References:
allowances vs. reimbursements
assessable income
assessable recoupments
deductions & expenses
disabled care expenses
income
medical expenses
medical expenses rebates
rebates and offsets

Legislative References:
ITAA 1936 26(e)
ITAA 1936 159P
ITAA 1997 6-5
ITAA 1997 6-5(1)
ITAA 1997 6-10
ITAA 1997 8-1
ITAA 1997 10-5
ITAA 1997 Subdiv 20-A
ITAA 1997 20-20(3)
ITAA 1997 20-30
TAA 1953
TAA 1953 Sch 1 357-75(1)
Copyright Act 1968

Case References:
Ayerst (Inspector of Taxes) v. C & K (Construction) Ltd
[1976] AC 167

Brent v. Federal Commissioner of Taxation
(1971) 125 CLR 418
71 ATC 4195
(1971) 2 ATR 563
Woods Preservation Ltd v. Prior (Inspector of Taxes)
[1969] 1 WLR 10