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Edited version of your written advice
Authorisation Number: 1051209074650
Date of advice: 30 March 2017
Ruling
Subject: Fringe benefits tax: Approved worker entitlement fund
Question 1
If, under the circumstances outlined in scenario one in the facts, you cease all involvement with the Fund and payments of accrued employer contributions (EC payments) are made to employees prior to the termination of their employment, will the FBT exemption under section 58PA of the Fringe Benefits Tax Assessment Act (FBTAA) remain applicable on the employer contributions you previously made to the Fund?
Answer
Yes
Question 2
If under the circumstances outlined in scenario two in the facts, you cease making employer contributions (EC payments) to the Fund but interest generated is credited to the relevant employees' Fund accounts and is paid to employees upon termination of employment, will the FBT exemption under section 58PA of the FBTAA remain applicable on the employer contributions you previously made to the Fund?
Answer
Yes
Question 3
If, after the circumstances outlined in scenario one in the facts above occur, you subsequently change your new enterprise agreement to require you to again make employer contributions to the Fund that meet the requirements of subsection 58PA(b) and 58PA(c) of the FBTAA, will the new contributions be exempt benefits?
Answer
Yes
Question 4
If the Fund is no longer entitled to be endorsed as an AWEF under subsection 58PB(4) of the FBTAA, will contributions made by you to the Fund either under your existing EA or an amended EA that meet the requirements of subsections 58PA(b) and 58PA(c) of the FBTAA be exempt benefits:
(a) where the contributions were made while the Fund was entitled to endorsement as an AWEF
(b) after the Fund was no longer entitled to endorsement as an AWEF
Answer
(a) Yes
(b) No
This ruling applies for the following periods:
For a number of FBT years commencing in the year ended 31 March 2017
The scheme commences on:
1 April 2016
Relevant facts and circumstances
The terms of your employees' employment is covered by an enterprise agreement (existing EA). The existing EA is an industrial instrument as defined in subsection 136(1) of the FBTAA.
The terms of the existing EA require you to make employer contributions of a certain amount per week, per employee, to a particular entity (the Fund).
The Fund is an approved worker entitlement fund (AWEF) according to section 58PB of the FBTAA and the terms of the Fund's Trust Deed are incorporated into and form part of the scheme.
When an employee leaves employment with you they are entitled to access the employer contributions accrued on their behalf (EC payment).
The EC paid at the cessation of the employee's employment is in addition to and does not offset any statutory entitlements employees would be entitled to receive upon termination (for example, redundancy payments, leave payments etc.).
Usually upon termination of employment, the employee would receive their accrued EC payment and the EC would be taxable to the employee and subject to appropriate PAYG withholding at the time of payment.
Scenario one
You will negotiate an amendment to the existing EA through which you will cease making EC payment employer contributions to the Fund on behalf of your employees.
You would like to cease all involvement with the Fund and therefore would like the amendment to the existing EA to allow you to immediately pay out accrued EC amounts to your employees while they are your current employees.
The payment of the EC would occur while the employees are still your current employees, not at the time of termination of their employment.
Scenario two
You will negotiate an amendment to the existing EA through which you will cease making EC payment employer contributions to the Fund on behalf of your employees.
You will negotiate a further alteration to the existing EA whereby any interest generated from the accrued EC's in the Fund will be credited into the relevant employees' Fund accounts.
The employees will not have early access to the EC amounts but will be entitled to receive the EC upon termination of their employment.
Relevant legislative provisions
Fringe Benefits Tax Assessment Act 1986 section 58PA
Fringe Benefits Tax Assessment Act 1986 section 58PB
Fringe Benefits Tax Assessment Act 1986 subsection 136(1)
Taxation Administration Act 1953 section 426-55 of Schedule 1
Reasons for decision
Question 1
If, under the circumstances outlined in scenario one in the facts, you cease all involvement with the Fund and payments of accrued employer contributions (EC payments) are made to employees prior to the termination of their employment, will the FBT exemption under section 58PA of the Fringe Benefits Tax Assessment Act (FBTAA) remain applicable on the employer contributions you previously made to the Fund?
Summary
At the time the contributions were made The Fund was an AWEF and the requirements of section 58PA of the FBTAA were met. The contributions previously made are exempt benefits under section 58PA.
Detailed reasoning
In accordance with section 58PA of the FBTAA benefits that arise when employers make contributions to worker entitlement funds will be exempt benefits where:
● the fund is an 'approved worker entitlement fund',
● the contribution is made under an industrial instrument, and
● the contribution is made either:
● for the purposes of ensuring that an obligation under the industrial instrument to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met; or
● for the reasonable administrative costs of the fund.
The Fund is an 'approved worker entitlement fund' (AWEF) in accordance with section 58PB of the FBTAA. As required by the terms of the existing EA, you make employer contributions of a certain amount per week, per employee to the Fund. According to the existing EA, when an employee leaves employment with you they are entitled to access the employer contributions accrued on their behalf (EC payment).
Therefore, as the fund you are making contributions to is an AWEF, the contributions are being made under an industrial instrument and the contributions are being made for the purposes of ensuring that an obligation under the industrial instrument to make payments when an employee ceases employment is met, all of the requirements of section 58PA are currently being met and the EC employer contributions you are currently making to the Fund are exempt benefits.
Will the fund continue to be an 'approved worker entitlement fund'?
As discussed above, in order for employer contributions to worker entitlement funds to be exempt benefits the fund must be an AWEF. Section 426-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that endorsement of a fund as an AWEF through subsection 58PB(2) of the FBTAA may be revoked by the Commissioner if, at any time after endorsement, the entity is not entitled to endorsement.
The conditions that must be met for an entity to be entitled to endorsement as an AWEF are set out in subsections 58PB(4), 58PB(4A) and 58PB(5) of the FBTAA.
Specifically relating to the limitations on payments from contributions to an AWEF, the conditions that must be met for an entity to be entitled to endorsement are set out in paragraph 58PB(4)(c) of the FBTAA which states:
A fund is entitled to be endorsed as an approved worker entitlement fund if:
…
c) under the fund's constituting documents, payments from contributions to the fund are to be made only for the following purposes:
(i) to pay worker entitlements to persons in respect of whom contributions are made, or to death benefits dependants (within the meaning of the Income Tax Assessment Act 1997) or legal personal representatives (within the meaning of that Act) of those persons;
(ii) to make investments to generate income from the assets of the fund;
(iii) to reimburse contributors who have paid entitlements directly to persons in respect of whom contributions are made;
(iv) to return contributions to contributors;
(v) to pay, for the benefit of a person in respect of whom contributions are made, an employment termination payment (within the meaning of the Income Tax Assessment Act 1997) into a complying superannuation fund (within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993), a complying approved deposit fund (within the meaning of section 47b of the Superannuation Industry (Supervision) Act 1993) or a retirement savings account (within the meaning of the Retirement Savings Accounts Act 1997);
(vi) to transfer contributions to another approved worker entitlement fund;
(vii) to pay the reasonable administrative expenses of the fund;
(viii) to pay amounts to a contributor's external administrator that would otherwise be payable as mentioned in subparagraph (iii) or (iv) to the contributor;
(ix) to pay interest on, or to repay, money lent to the fund; and
That is, in order for an entity to be entitled to endorsement as an AWEF and retain its entitlement for endorsement as an AWEF, the entity, in accordance with its constituting documents, must only allow payments to be made from contributions to the fund for a purpose listed in paragraph 58PB(4)(c) of the FBTAA.
You would like to cease all involvement with the Fund and therefore would like the amendment to the existing EA to allow you to immediately pay out accrued EC amounts to your employees while they are your current employees.
As set out in subparagraph 58PB(4)(c)(i) of the FBTAA, one of the permissible ways in which payments from contributions to the fund can be made under the fund's constituting documents, is to pay worker entitlements to persons in respect of whom contributions are made, or to death benefit dependants or legal personal representatives of those people.
The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 2003 clarifies what is considered to be a worker entitlement at paragraph 7.39:
It is considered that a worker entitlement would include payments agreed between an employer and a worker in compensation for services rendered by the worker or payments to a worker stipulated in an industrial instrument. A worker entitlement would also include any benefit to be provided to the worker which has been agreed between an employer and a worker entitlement fund. However, an ex gratia distribution of income from the fund would not be considered to be a worker entitlement.
The Fund's trust deed defines 'Employee Entitlements' and applying that definition the EC payments will be an 'employee entitlement' where:
1. the amount is payable under an Industrial Agreement,
2. the amount is identified in the Industrial Agreement, and
3. the amount relates to an amount payable by an employer of an employee that is accepted by the trustee.
Subject to the trustee being in agreement to the EC payment being paid by you under the circumstances in scenario one, the EC payment will be a 'worker entitlement' as:
1. the EC amount will be payable under an Industrial Instrument (your new EA),
2. the EC amount will be identified in the Industrial Instrument (your new EA), and
3. the EC amount relates to an amount payable by you, as the employer of your employees that is accepted by the trustee.
Therefore, under scenario one, payments from the fund will be made for the purpose of paying worker entitlements to the employees and the requirements of paragraph 58PB(4)(c) will be met. The proposed changes to your existing EA do not affect any of the other requirements set out in subsection 58PB(4) of the FBTAA and therefore the changes to your existing EA will not affect the Fund's entitlement to endorsement as an AWEF under subsection 58PB(4) of the FBTAA.
Question 2
If under the circumstances outlined in scenario two in the facts, you cease making employer contributions (EC payments) to the Fund but interest generated is credited to the relevant employees' Fund accounts and is paid to employees upon termination of employment, will the FBT exemption under section 58PA of the FBTAA remain applicable on the employer contributions you previously made to the Fund?
Summary
At the time the contributions were made the Fund was an AWEF and the requirements of section 58PA of the FBTAA were met. The contributions previously made are exempt benefits under section 58PA.
Detailed reasoning
Refer to the reasoning in question one above. The same reasoning can be applied to conclude that the changes outlined in scenario two in the facts will not affect the status of your contributions to the Fund made before your existing EA is changed from being exempt benefits.
The Fund is an AWEF in accordance with section 58PB of the FBTAA. As required by your existing EA, you make weekly employer contributions for each of your employees to the Fund. Your existing EA specifies that when an employee leaves employment with you they are entitled to access the employer contributions accrued on their behalf (EC payment).
You will negotiate an amendment to the existing EA through which you will cease making EC payment employer contributions to the Fund on behalf of your employees and any interest generated from the accrued EC's in the fund will be credited to the relevant employees' Fund accounts. The employees will not have early access to the EC amounts but will be entitled to receive the EC upon termination of their employment.
Under these circumstances the requirements of section 58PA are being met at the time you make the employer contribution (and the benefit arises) and the EC contributions are exempt benefits.
Will the fund continue to be an 'approved worker entitlement fund'?
As discussed above, in order for an entity to be entitled to endorsement as an AWEF it must only make payments from the fund as allowed by the FBTAA. As discussed above, the EC payments as set out in your existing EA paid from the contributions to the fund will be worker entitlements under subparagraph 58PB(4)(c)(i) of the FBTAA. If you amend you existing EA in accordance with scenario two as set out in the facts, interest will credited to the relevant employees Fund accounts which will have to be paid out at some point. Paragraph 58PB(4)(d) of the FBTAA disallows payments to be made from the income of the fund to pay worker entitlements as described in subparagraph 58PB(4)(c)(i) but allows a fund to be entitled to endorsement where, under the fund's constituting documents, payments from the income of the fund are made according to the circumstances of subsection 58PB(5) of the FBTAA.
Subsection 58PB(5) states:
A payment made by a fund to a person in the following circumstances is specified for the purposes of subparagraph (4)(d)(iii):
(a) a contribution has been made to the fund in respect of the person; and
(b) the contribution would be an exempt benefit under section 58PA if the fund were an approved worker entitlement fund; and
(c) either:
(i) the payment is of a worker entitlement the contribution for which would be an exempt benefit under section 58PA if the fund were an approved worker entitlement fund; or
(ii) the payment is of some kind other than a worker entitlement.
The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 2003 further clarifies at paragraph 7.38:
The fund can make payments out of the income of the fund to persons in respect of whom contributions to the fund have been made and where the contribution would be an exempt benefit under section 58PA if the fund were an approved worker entitlement fund. The payment can either be a payment of a worker entitlement where the contribution for that payment would be an exempt benefit under section 58PA if the fund were an approved worker entitlement fund or a payment of some kind other than a worker entitlement. That is, if an employer has placed an employee entitlement into an approved worker entitlement fund of a kind that receives the FBT exemption under section 58PA, then payments can be made out of the fund income to that employee for such FBT exempt worker entitlements or for reasons other than a worker entitlement. For example, the income of the fund can be distributed to that worker. Other worker entitlements, for example a fringe benefit that is not exempt under section 58PA, cannot be paid out of the income of the fund. [Schedule 7, item 1, subparagraphs 58PB(4)(d)(ii) and (iii)]
Subject to the trustee being in agreement and crediting interest into the relevant employees Fund accounts, and the proposed changes to your EA not affecting any of the other requirements set out subsection 58PB(4) of the FBTAA, the changes proposed in scenario two will not affect the Fund's entitlement to endorsement as an AWEF.
Question 3
If, after the circumstances outlined in scenario one in the facts above occur, you subsequently change your new enterprise agreement to require you to again make employer contributions to the Fund that meet the requirements of subsection 58PA(b) and 58PA(c) of the FBTAA, will the new contributions be exempt benefits?
Summary
The circumstances described in scenario one will not change the status of the fund as an AWEF and therefore the requirements of section 58PA of the FBTAA will be met and the contributions will be exempt benefits.
Detailed reasoning
Refer to the reasoning in question one above.
As discussed above, the facts described in scenario one will not cause the requirements of subsection 58PB(4) of the FBTAA to not be met and those changes will not affect the Fund's entitlement to endorsement as an AWEF under subsection 58PB(4) of the FBTAA. Assuming the Fund has not taken any action to affect their entitlement to endorsement and has continued to meet the requirements of subsection 58PB(4) of the FBTAA, the new contributions you will make under any subsequent changes to your new EA will be made to an AWEF and the subsection 58PA(a) requirement for the exemption will be met.
Where the new contributions satisfy the requirements of subsection 58PA(b) and 58PA(c) of the FBTAA, the contributions will be an exempt benefit under section 58PA of the FBTAA.
Question 4
If the Fund is no longer entitled to be endorsed as an AWEF under subsection 58PB(4) of the FBTAA, will contributions made by you to the Fund either under your existing EA or an amended EA that meet the requirements of subsections 58PA(b) and 58PA(c) of the FBTAA be exempt benefits:
(a) where the contributions were made while the Fund was entitled to endorsement as an AWEF
(b) after the Fund was no longer entitled to endorsement as an AWEF
Detailed reasoning
(a) Contributions made while the Fund was entitled to endorsement as an AWEF will be exempt where subsections 58PA(b) and 58PA(c) of the FBTAA are met.
As discussed above in order for employer contributions made to a worker entitlement fund to be exempt under section 58PA of the FBTAA, the fund must be an approved worker entitlement fund (58PA(a)).
Where the Fund is entitled to endorsement as an AWEF under subsection 58PB(4) of the FBTAA it will be an approved worker entitlement fund according to subsection 58PB(2) of the FBTAA.
Any contributions made by you that meet the requirements of subsection 58PA(b) and 58PA(c) of the FBTAA that are made to the Fund at a time when the Fund is an approved worker entitlement fund according to subsection 58PB(2) of the FBTAA will be exempt benefits according to section 58PA of the FBTAA.
(b) Contributions made after the Fund is no longer entitled to endorsement as an AWEF will not be exempt as one of the requirements of section 58PA of the FBTAA will not be met.
Where the Fund is no longer entitled to endorsement as an AWEF it will not be an approved worker entitlement fund according to subsection 58PB(2) of the FBTAA.
Any contributions made by you after the time that the Fund is no longer entitled to endorsement will not be an exempt benefit under section 58PA of the FBTAA as the requirement set out in subsection 58PA(a) of the FBTAA that the contributions be made to an AWEF will not have been met. This is regardless of whether the requirements of subsections 58PA(b) and 58PB(c) have been met.
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