Edited version of your private ruling

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Ruling

Subject: Payment of Honorarium

Issue 1

Question 1: Is the payment made to the employee an Honorarium?

Answer: No.

Question 2: Is the payment made to the employee subject to withholding as provided under section 12-45 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer: Yes.

This ruling applies for the following period:

Financial year ending 30 June 2012

The scheme commenced on:

1 July 2011

Issue 2

Question: Is there any action necessary to rectify the treatment of payments made to the previous employee paid through the payroll system and issued with group certificates/payment summaries each year since 1996?

Answer: No.

This ruling applies for the following period:

Financial year ended 30 June 1997

Financial year ended 30 June 1998

Financial year ended 30 June 1999

Financial year ended 30 June 2000

Financial year ended 30 June 2001

Financial year ended 30 June 2002

Financial year ended 30 June 2003

Financial year ended 30 June 2004

Financial year ended 30 June 2005

Financial year ended 30 June 2006

Financial year ended 30 June 2007

Financial year ended 30 June 2008

Financial year ended 30 June 2009

Financial year ended 30 June 2010

Financial year ended 30 June 2011

The scheme commenced on

1 July 1996

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The unit in the Council is operated by volunteers. The Council supports the unit by providing financial assistance towards building maintenance costs, vehicle and small plant operating costs, electricity, phone and some consumables. The Council also provides a payment to the employee of the unit who is appointed by a state government department.

There is no legal obligation for the Council to make this payment. It is a Council decision.

For the financial year ended 30 June 2011, fortnightly payments were made to the employee. The value of this payment is usually increased each year in line with the Council's enterprising bargaining wages increase.

The payment is considered an honorarium.

The payment has historically been paid through the Council's payroll system and a PAYG summary or Group Certificate issued at the end of the year. On 30 June 2011, the employee resigned from the position and a new person has been appointed.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-45 of Schedule 1

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1

An honorarium is a payment or gesture made on personal grounds that is either tangible or intangible and can be referred to as an ex-gratia payment, bona-fide (or true) honorarium or gift.

True honorariums are not included in assessable income and will not be subject to PAYG withholding or instalments.

A true honorarium is typified by the following:

§ the payment is received for personal reasons;

§ the payment has no connection to the recipient's income producing activities or services rendered;

§ the payment is not received as remuneration or a consequence of employment;

§ the payment is not relied upon or expected by the recipient for day-to day living;

§ the payment is not legally required or expected;

§ there is no obligation on the part of the payer to make the payment, and

§ the payment is a token amount compared to the services provided or expenses incurred by the recipient.

If the payment is not a true honorarium, it may be classed as assessable income.

The Pay As You Go (PAYG) withholding provisions contained in Part 2-5 of Schedule 1 to the TAA require amounts to be withheld from various types of payments made to individuals and entities. In addition, an entity making a payment (the payer) to another entity for a supply made by the other entity (the supplier) in the course of an enterprise or business carried on by the other entity in Australia is required to withhold from the payment it makes if the supplier has not provided an ABN.

Subsection 12-190(1) of the TAA requires an entity making a payment for a supply made by another entity in the course of carrying an enterprise in Australia to withhold an amount from the payment if the entity has not provided an ABN. However, there are exceptions to which this withholding event applies and these exceptions include:

§ the payment does not exceed $50 (excluding GST);

§ the supply is wholly input taxed;

§ the supply is made otherwise than in the course or furtherance of an enterprise carried on in Australia;

§ the payment is exempt income of the supplier;

§ the recipient is an individual and has made a written, signed statement that the supply is private or domestic in nature, or relates to a private, recreational pursuit or hobby (unless the payer has reasonable grounds to think the payer has reasonable grounds to think the statement is false).

Paragraph 29 of Taxation Ruling TR 2002/21 Income tax: Pay As You Go (PAYG) Withholding from salary, wages, commissions, bonuses or allowances paid to office holders states:

A true honorarium paid to an office holder would not be salary, wages, commission, bonuses or allowances that would be subject to withholding under section 12-45 in Schedule 1 to the TAA. However, as indicated in the above paragraph, it is likely that the remuneration paid to a modern office holder would be ordinary salary for performing the duties of the office rather than an honorarium for filling an office.

Paragraph 116 of TR 2002/21 states:

Paragraph 12-45(1)(d) in Schedule 1 to the TAA provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as a person who is otherwise in the service of the Commonwealth, a State or a Territory.

Paragraph 28 of TR 2002/21 discusses the notion of an office holder's remuneration being a salary. It states:

The notion of office holder's remuneration being a 'salary' is affirmed in Halsbury's Law, Volume 16 at paragraph 7:

Office-holders, The categorisation of an individual as an office-holder tends to be of more significance in the law relating to income taxation than in employment law. While it is true that in the case of certain major offices the individual's status as an office-holder may mean that he is not an employee, in most cases this will not be so and there will be nothing to prevent the ordinary definition of 'employee' from being satisfied. Even if the office-holder does not qualify as an employee, there may still be aspects of employment law applicable to him, particularly in relation to the payment of wages, since the remuneration of a modern office-holder is likely to be construed as an ordinary salary for performing the duties of the office, not as the archaic form of an honorarium for filling an office…….

Applying the above factors to the given circumstances:

The payment to the employee by the Council is not made for personal reasons and there is no legal obligation for the Council to make the payment. The Council supports the unit by providing financial assistance towards building maintenance costs, vehicle and small plant operating costs, electricity, phone and some consumables.

The Council has made the payment to the former employee since his appointment to the position several years earlier and has withheld tax on the gross payments made. The Council has issued an annual PAYG payment summary to the payee since his appointment. The initial letter of appointment to the position in the unit indicates that the appointment was made by the Council and that the position attracted an annual amount paid in equal monthly instalments. Although the former employee resigned from the position on 30 June 2011, a new person has been appointed by a state government department and the Council is continuing with the practice of making a payment to the new employee. Under the circumstances, it is considered that there is a connection between the payment made to the employee and the services rendered by the unit which are utilised by the Council.

As mentioned above, the employee receives a payment for the services provided by the unit. These services are utilised by the Council.

There was no legal requirement for the Council to pay the employee. However, the Council decided to support the unit by providing financial assistance towards its costs in providing emergency services to the Council.

The payments are usually increased each year in line with the Council's enterprise bargaining wages increase. This indicates that the payments are not token amounts but are in line with the actual salaries/wages expenditure relating to the employee. Although the position at the unit is now appointed by a state government department, the Council is still continuing with the practice of making a payment to the appointed person.

Taking the above factors as a whole, it is considered that the amount paid to the employee is not a true honorarium but rather it is considered to be a payment made by virtue of the holding of the position at the unit.

Hence, these payments are regarded as withholding payments under Division 12 in Schedule 1 to the TAA.

Section 12-45(1)(d) of Schedule 1 to the TAA provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as a person who is otherwise in the service of the Commonwealth, a State or a Territory. The employee who is appointed by a state government department is considered to be a person who is in the service of the State.

Issue 2

Under Issue 1, we have determined that the payment made to the employee is not an honorarium and that the payment is subject to the withholding provisions under section 12-45(1)(d) of Schedule 1 to the TAA.

Historically the payment to the employee was made through the Council's payroll system and subject to withholding tax and at the end of each financial year a PAYG summary or Group certificate was issued to the payee.

This procedure is in line with the provisions of section 12-45(1)(d) of Schedule 1 to the TAA.

Accordingly, there is no requirement to make any changes to the administrative arrangements that have been in place since 1996.

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