Edited version of your written advice

Authorisation Number: 1051383000487

Date of advice: 12 June 2018

Ruling

Subject: Pay As You Go (PAYG) withholding

Question

Is a Crisis Benefit received by Company A (the employer) under its Group Income Protection Policy subject to PAYG withholding in terms of section 12-35 in Schedule 1 to the Taxation Administration Act 1953 when passed on to an employee?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A, the employer, maintains a Corporate Insurance Policy for employees.

The insurer is Company B.

The Policy has a commencement date of 1 July 20XX.

The Policy provides a Crisis Benefit.

An employee received a terminal illness diagnosis.

The definition of a Crisis Benefit Medical Condition in Clause 31.5 includes “Malignant Cancer” which in turn is defined in the “Definitions” of the Policy.

The employer, as the Policy Owner, made a claim under the Policy for a Crisis Benefit.

The Crisis Benefit was paid to the employer as the Policy Owner in terms of Clause 23.1 of the Policy.

The Crisis Benefit will be passed on by the employer to the employee.

Relevant legislative provisions

Taxation Administration Act 1953

Schedule 1

Section 12-35

Income Tax Assessment Act 1997

Section 6-5

Section 6-10

Section 15-2

Reasons for decision

Summary

A Crisis Benefit received by Company A (the employer) under its Group Income Protection Policy is not subject to PAYG withholding in terms of section 12-35 in Schedule 1 to the Taxation Administration Act 1953 when passed on to an employee.

Detailed reasoning

Pay As You Go (PAYG) withholding

Division 12 in schedule 1 to the Taxation Administration Act 1953 (TAA) relates to PAYG withholding and sets out the types of payments from which an amount must be withheld.

Subdivision 12-B is concerned with payments for work and services and within that subdivision section 12-35, which relates to payments to employees, reads as follows:

12-35 An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

None of the terms “salary”, “wages”, “commission” or “bonuses” is defined in the legislation and therefore each takes its ordinary meaning.

The Crisis Benefit does not come within the ordinary meaning of any of those terms.

However, with respect to the need to withhold from allowances it is necessary to consider section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997) which deals with “allowances and other things provided in respect of employment or services”.

That provision includes allowances and benefits, amongst other payments, received by an employee as assessable income of the recipient. Accordingly an employer making such a payment would be required to make a PAYG withholding.

Subsection 15-2(1) relevantly reads:

Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any services as a member of the Defence Force).

The issue is whether the Crisis Benefit comes within this provision.

To determine the character of the Crisis Benefit it is necessary to consider the terms of the Policy and the reason for the benefit being received.

One or more of the following characteristics will combine with periodicity to give an amount an income character:

● it is made in substitution for income;

● it is made to provide financial support, for example, as an income supplement; or

● it is received in circumstances where the recipient has an expectation of receiving the payment on a regular basis so that the recipient is able to depend upon the payment for the recipient’s regular expenditure.

In the present case, the Crisis Benefit is a lump sum that is a once only payment; it is not a periodic payment. The Crisis Benefit is not paid to compensate for loss of earnings: it is paid because the employee suffered with a specific medical condition that is covered under the Group Income Protection Policy.

The Crisis Benefit is not income from rendering personal services nor is it an allowance or any other category of payment within the terms of section 15-2 of the ITAA 1997.

Therefore, the employer is not required to withhold an amount in terms of section 12-35 in Schedule 1 to the TAA in respect of the Crisis Benefit to be passed on to the employee.

Assessable income

Subsection 6-1(1) of the ITAA 1997 states that assessable income consists of:

• ordinary income, and

• statutory income.

If an amount is not ordinary income and is not statutory income it is not assessable income, so the recipient does not have to pay income tax on it (subsection 6-15(1) of the ITAA 1997).

Ordinary income

Ordinary income is income according to ordinary concepts (section 6-5 of the ITAA 1997).

Ordinary income has generally been held to include three categories: income from rendering personal services, income from property and income from carrying on a business.

The courts have identified a number of factors which indicate whether an amount has the character of income according to ordinary concepts.

A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 26 ALJ 505; (1952) 10 ATD 82; [1953] ALR 17; [1952] HCA 65. Other characteristics of income that combine with periodicity are that the receipts:

• are earned

• are expected, and

• are relied upon.

Statutory income

Statutory income is not ordinary income, but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997).

These specific provisions are listed in section 10-5 of the ITAA 1997.

Application to your circumstances

In this case, the Crisis Benefit payment that you intend to pass to your employee is a one off or non-periodic payment and so it does not have an element of regularity. The Crisis Benefit payment will be made as a result of the employee receiving a terminal illness diagnosis which is considered a Crisis Benefit Medical Condition under the Company A Income Protection Policy Document.

Taxation Determination TD 95/41 discusses whether a premium payable on a trauma insurance policy by a self employed person or an employee is an allowable deduction to the self employed person or employee. The Determination states that the purpose of the trauma insurance is to provide a capital amount to the insured if the insured suffers a specified medical condition. The policy does not replace earnings lost by the taxpayer. The benefits payable under this type of policy do not constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

The intended Crisis Benefit payment does not have the characteristics of ordinary income and was not earned by the employee and does not relate to services performed. The payment is also a one-off payment and does not have an element of recurrence or regularity.

Therefore the payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997.

As such, you are not obliged to withhold tax from payments that will be made from the Crisis Benefit to the employee pursuant to section 12-35 of the TAA 1953.

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