Edited version of private ruling

Authorisation Number: 1011816000908

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Contributions to/reimbursements from Worker Entitlement Fund (WEF)

Question 1

Are contributions made by an employer to the WEF deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the head company of the tax consolidated group (TCG)?

Answer

Yes

Question 2

(a) If an employer pays an amount of an employee entitlement directly to an employee, will the head company of the TCG be entitled to a deduction under section 8-1 of the ITAA 1997?

(b) If an employer seeks a reimbursement from the WEF, will the reimbursement be assessable under section 6-5 of the ITAA 1997 to the head company of the TCG in the income year in which it is derived?

Answers

(a) Yes

(b) Yes

Relevant facts and circumstances

The Worker Entitlement Fund (WEF or the Fund) was established by trust deed (Deed).

The WEF is a prescribed Approved Worker Entitlement Fund under section 58PB of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA).

The Deed provides that the purpose of the WEF is to fund and protect employee entitlements (ie entitlements provided for under various industrial instruments) in the event that an employer becomes insolvent or is otherwise unable to pay employee entitlements to employees. The Deed therefore permits an employer to make contributions, in respect of employee entitlements to the Fund, on a regular basis, to be held for employees (who become members of the Fund upon a contribution being made to the Fund on their behalf).

The employers that make contributions to the WEF are members of the tax consolidated group (TCG).

The main features of the WEF are:

· an employer becomes bound to the terms of the Deed by completing an application and executing a Deed of Adherence;

· only employees who are employed under a relevant industrial instrument are eligible to become members of the Fund;

· an 'employee entitlement' is a dollar amount which is:

o an entitlement that is specifically required by an industrial instrument to be paid by an employer to the Fund with respect to a member; or

o an entitlement payable to a member under a right provided under an industrial instrument and the relevant employer has elected to pay such entitlement to the Fund;

· an 'entitlement' means:

§ annual leave and annual leave loading,

§ sick leave,

§ long service leave,

§ severance or redundancy, or

§ any other amount from time to time payable by an employer to a member under an industrial instrument with respect to leave payments (including payments in lieu of leave) and payments made to an employee when an employee ceases to be employed;

· an employee becomes a 'member' when an employer contributes employee entitlements to be held by the Trustee (trustee);

· a 'member account' is a record that is established for each employee for the purpose of identifying amounts held by the trustee with respect to the employee at a given time;

· a 'contribution' is a payment to the Fund, either by an employer or a member. The trustee may generally accept into the Fund in respect of a member an amount transferred from another, similar, fund);

· all contributions are allocated to individual member accounts and credited to a bank account or bank accounts nominated by the trustee from time to time;

· employers must pay to the trustee an amount equal to the 'minimum contribution' for each member in accordance with the rights of the member under the relevant industrial instrument. The minimum contribution is the member's contribution rate specified in the relevant industrial instrument;

· interest on due but unpaid contributions is payable by employers;

· provided the employer is solvent or otherwise able to pay, an employer is at first instance responsible for the payment of all employee entitlements to employees. Employers who make such payments become entitled to reimbursement from the Fund (subject to the production of appropriate evidence);

· any payment or reimbursement shall be inclusive of any interest allocated to the member and any unallocated amounts held in the 'revenue account' with respect to a member;

· a reimbursement to an employer is payable immediately in cash upon the employer producing the relevant evidence of payment;

· should the trustee determine that an employee is not entitled to employee entitlements, the trustee must return the balance of the member's account in the employee's name to the relevant employer. This provision would be expected to be invoked in very limited circumstances given that the industrial instruments governing the legal obligations of employers to pay employee entitlements provide the employee with a legal right to such entitlements;

· to the extent a member's entitlements are greater than the contributions made by the relevant employer, the employer must pay an amount equal to that shortfall. Each employer indemnifies the Fund in respect of any shortfalls of contributions;

· the trustee is required to establish a 'revenue account' to which will be debited all losses and outgoings, and to which will be credited from time to time any income and receipts (but not contributions) including but not limited to any interest income of the Fund;

· the trustee may pay amounts to employers, which it is authorised to pay, out of the revenue account. These amounts include, but are not limited to, a refund of any excess contributions. The applicant advises that excess contributions would only arise as a result of a calculation or administrative mistake and that these types of reimbursement are generally treated as assessable income in employers' hands);

· on termination of the WEF, an employer will be entitled to a return of contributions made to the Fund after all costs and expenses incurred in relation to the winding up of the fund have been paid and employees are paid their employee entitlements (for which they are entitled to be paid directly from the Fund).

Relevant legislative provisions

Income Tax Assessment Act 1997 8-1 and

Income Tax Assessment Act 1997 6-5.

Question 1

Are contributions made by an employer to the WEF deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the head company of the tax consolidated group (TCG)?

Summary

Yes, the head company of the TCG is entitled to a deduction under section 8-1 of the ITAA 1997 for contributions made to the WEF to fund the payment of employee entitlements set out in the trust deed (Deed).

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings

· to the extent to which they are incurred in gaining or producing assessable income,

· except where the outgoings are capital, private or domestic in nature, or

· prevented from being deductible by a provision of the ITAA 1997.

Incurred in gaining and producing assessable income

The employers, in the course of carrying on their business activities, are obligated by various industrial instruments to provide various leave and redundancy benefits (employee entitlements) to their employees.

In addition to satisfying their legal obligations under the relevant industrial instrument, employers are also required to meet their obligations under the Deed of Adherence and the Deed.

There is a nexus between the business activities being carried on by the employer and the employer's obligation to provide for worker entitlements such that the payment of the contributions is incidental and relevant to the production of the assessable income of the business.

Under the Deed, if the employer is solvent or otherwise able, it is the employer who at first instance is responsible for the payment of employee entitlements to employees who become eligible to such payments.

An employer who makes a payment directly to an employee in accordance with the Deed is entitled to reimbursement of this payment from the Fund.

At the point at which an employer makes a contribution to the WEF the contribution is allocated to individual member accounts and credited to a bank account or accounts nominated by the trustee and accordingly is no longer available to the employer.

The fact that amounts may be returned to an employer under the Deed when the employer is reimbursed for payments made directly to a worker (a factor which does not prevent the WEF being an approved worker entitlement fund under section 58PB of the FBTAA) does not affect whether the recurrent periodical contributions are incurred by the employer.

Even though the Deed enables an employer to seek reimbursement in certain circumstances, the contributions to the WEF are definite payments which employers are required to make to meet the legal obligations under the industrial instruments or Deed of Adherence which arise in the course of carrying on their business activities. As such an employer incurs the expenditure on contributions when the liability to make the payment arises.

Is the amount capital in nature?

Whether the payment of employee entitlements to the WEF is revenue or capital in nature depends on the character of the payment when made by the taxpayer (G.P. International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1).

When employers make the contributions to the WEF, the employers are meeting their recurring legal obligations to make contributions for their workers' entitlements. This obligation is recurrent and is a factor which points toward the amount being revenue in nature.

The employers are making repetitive contributions as required by the industrial instruments to discharge an immediate obligation, and the obligation is directly connected to the income earning capacity of the business and is part of the immediate ordinary flow of business expenditure. As such, the payment of the contributions is revenue in nature.

Question 2

(a) If an employer pays an amount of an employee entitlement directly to an employee, will the head company of the TCG be entitled to a deduction under section 8-1 of the ITAA 1997?

(b) If an employer seeks a reimbursement from the WEF, will the reimbursement be assessable under section 6-5 of the ITAA 1997 to the head company of the TCG in the income year in which it is derived?

Summary

(a) If an employer pays an amount of employee entitlement directly to an employee, the head company of the TCG will be entitled to a deduction under section 8-1 of the ITAA 1997.

(b) If an employer receives a reimbursement from the WEF in respect of an amount of employee entitlement that it has paid directly to an employee, the amount received by the employer will be assessable income to the head company of the TCG under section 6-5 of the ITAA 1997 in the income year in which it is derived.

Detailed reasoning

Payments by employer to employee

It is accepted that there is a nexus between the business activities being carried on by the employers and the employers' obligations to provide for employee entitlements, such that payment of employee entitlements directly to a worker by an employer is incidental and relevant to the production of the assessable income of the employers.

Accordingly, the payment of an employee entitlement directly to an employee by an employer would be an allowable deduction under section 8-1 of the ITAA 1997 as it is an outgoing incurred in gaining or producing assessable income or in carrying on a business for that purpose.

Reimbursement of payment by employer

Where an employer has paid an employee an employee entitlement directly, the employer may apply to the WEF for a reimbursement of this amount. The WEF may reimburse the employer for this amount under the Deed.

Where an employer has claimed or will claim a deduction for an employee entitlement it has paid directly to an employee under section 8-1 of the ITAA 1997 the reimbursement of this expense must be declared as income. In these cases it is considered that the reimbursement is income received in the ordinary course of business and assessable under section 6-5 of the ITAA 1997 in the income year in which it is derived.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).