Edited version of private ruling

Authorisation Number: 1011890449096

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Ruling

Subject: PAYG withholding - payments made to Council members

Question 1

Is the educational institution (the Institution) required by section 12-45 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to withhold tax from the payments it makes to its Council members?

Answer

No.

Question 2

Is the Institution liable to fringe benefits tax (FBT) on the payments it makes to its Council members?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The Institution was established and is governed by a State Act.

The State Act provides that:

· The purpose of the Institution is essentially to provide education.

· The Institution is a body politic and corporate with perpetual succession.

· The Council is the governing body of the Institution.

· Certain members of the Council may at the discretion of the Council be paid the remuneration and fees that are fixed from time to time by the Minister for that member.

The Institution will make payments to some of its Council members from 1 July 2011.

A Minister has in accordance with the relevant remuneration guidelines fixed levels of remuneration for these members.

The Institution wants to make the payments to the Council members to remunerate them for the work they will perform for the Institution.

The Council members are members of the governing body of the Institution. The roles, duties and responsibilities of the members are similar to those of a director of a corporation and are increasingly onerous and time consuming. The State Act imposes certain responsibilities upon the members.

A Council member's duties include all or some of the following:

· To attend 8 to 10 Council meetings per annum.

· To plan and attend the annual Council conference.

· To become a member of a Council Committee or Working Group.

· To become a member of a Board of an Institution controlled or related entity.

· To participate in an Institution Selection Committee.

· To attend other meetings.

· To participate in a range of Institution activities including attending graduation ceremonies and visiting campuses.

· To liaise with Institution staff and students.

It is expected that the Chancellor will work three days per week for approximately 40 weeks per year.

It is expected that the Committee Chairperson will work at least 175 hours per year.

It is expected that the Members will work at least 121 hours per year.

The Council members will continue to receive other benefits from the Institution including reimbursement for or payment of their work related expenses.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-45.
Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Summary

The Institution is not required by section 12-45 of Schedule 1 to the TAA to withhold tax from the payments it makes to its Council members.

Detailed reasoning

Division 12 of Schedule 1 to the TAA relates to payments from which tax must be withheld.

Section 12-45 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 member of a local governing body where there is in effect, in accordance with section 446-5, a unanimous resolution by the body that the remuneration of members of the body be subject to withholding.

Entity

Section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) defines the term 'entity' to include a body corporate and a body politic.

Salary, wages, commission, bonuses or allowances

The terms 'salary', 'wages', 'commission', 'bonuses' and 'allowances' are not defined in the ITAA 1997. Therefore, they have their ordinary meaning as determined by the courts. The courts have consistently held that they represent payments made for services rendered or work performed.

For example, in Roads and Traffic Authority of NSW v. Federal Commissioner of Taxation (1993) 43 FCR 223; 93 ATC 4508; (1993) 26 ATR 76, the Federal Court considered the meaning of the term 'salary or wages' in section 221A of the Income Tax Assessment Act 1936 (ITAA 1936).

Section 221A of the ITAA 1936 defined 'salary or wages' as 'salary, wages, commission, bonuses or allowances paid to an employee as such'.

In his judgment, Hill J said:

The language of the definition of "salary or wages'' in s. 221A(1) is deliberately wide. The legislative purpose was to include in the definition, and so that tax could be deducted by the employer and ultimately remitted to the Commissioner as an anticipatory payment of the employee's tax liability, all amounts paid as a reward for services rendered by the employee: FC of T v J Walter Thompson (Australia) Pty Ltd (1944) 7 ATD 401; (1944) 69 CLR 227 and at ATD 405-406; CLR 233-234. '

Taxation Ruling IT 2674 indicates that to determine whether a voluntary payment is made as a reward for services rendered it is necessary to consider the following:

· The whole of the circumstances surrounding the making of the payment.

· The payer's reason for making the payment.

· The quality or character of the payment in the hands of the recipient.

· Whether the payment is a product or an incident of services rendered by the recipient.

Local governing body

Section 995-1 of the ITAA 1997 provides that the term 'local governing body' means a local governing body established by or under a State law or a Territory law.

The term is not defined further in the legislation. However, guidance as to its meaning is provided by the following:

Section 24AT of the ITAA 1936 which provides the definition of the term 'excluded STB' for the purposes of section 24AN of that Act provides in part:

In this Division:

excluded STB means an STB that:

(a) at a particular time, is prescribed as an excluded STB in relation to that time; or

(b) is a municipal corporation or other local governing body (within the meaning of section 50-25 of the Income Tax Assessment Act 1997); or

(c) is a public educational institution to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(d) is a public hospital to which any of paragraphs 50-55 (a) to (c) of the Income Tax Assessment Act 1997 applies; or

(e) is a superannuation fund.

In section 50-25 of the ITAA 1997 the term 'local governing body' has the meaning given by section 995-1 of the ITAA 1997.

Section 24AT was inserted into the ITAA 1936 by the Taxation Laws Amendment Act (No.2) 1995. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No.2) 1995 states that:

1.27 The second type of excluded STB is a municipal corporation or other local governing body (within the meaning of paragraph 23(d)) [new section 24AT]. Local Government may be created or imposed by State or Territory legislation and local government entities may be creatures of a State or Territory. It was not the intention of the Commonwealth, States and Territories to subject such entities to tax equivalent regimes. Therefore, despite the fact that they may technically be STBs they have been excluded and their treatment will remain as if new Division 1AB had not been enacted.

Section 25-65 of the ITAA 1997 which is titled Local government election expenses provides in part:

25-65(1)

You can deduct expenditure you incur in contesting an election for membership of a local governing body, but you cannot deduct more than $1,000 per election. You deduct the expenditure for the income year in which you incur it.

This section includes an example which relates to a person who is elected to the Bunyip Shire Council.

In this section, the term 'local governing body' has the meaning given by section 995-1 of the ITAA 1997.

Section 22-65 which replaces section 74A of the ITAA 1936 was inserted into the ITAA 1997 by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006. The Explanatory Memorandum to the Tax Laws Amendment (Repeal of Inoperative Provisions) Bill 2006 states that:

Local government election expenses

2.98 Section 74A of the ITAA 1936 allows a deduction of up to $1,000 for expenses incurred in contesting a local government election. Section 74B ensures that the deduction does not include expenditure incurred in providing non-public entertainment. 'Providing entertainment' takes the meaning given by section 51AE (see subsection 74B(3)), which is an inoperative provision that is being repealed.

2.99 To avoid the need to either retain the inoperative section 51AE or to rewrite its definition of 'providing entertainment', this Bill repeals sections 74A and 74B. It rewrites section 74A into the ITAA 1997 [Schedule 2, item 660, section 25 - 65 of the ITAA 1997]. That rewrite picks up the effect of section 25-70 (a version of section 74B, rewritten in 1997 to support section 25-60), and extends it to also cover entertainment expenses incurred in local government elections [Schedule 2, item 661, subsection 25 - 70(1 ) of the ITAA 1997].

Section 26-22 of the ITAA 1997 which is titled Political contributions and gifts provides in part:

26-22(1)

You cannot deduct under this Act (other than Subdivision 30-DA):

(a) a contribution (including a membership fee) or gift to a political party that is registered under Part XI of the Commonwealth Electoral Act 1918 or under corresponding State or Territory legislation; or

(b) a contribution or gift to an individual when the individual is a candidate in an election for members of:

(i) an Australian legislature; or

(ii) a local governing body; or

(c) a contribution or gift to an individual who is a member of:

(i) an Australian legislature; or

(ii) a local governing body.

In the section, the terms 'Australian legislature' and 'local governing body' have the meaning given by section 995-1 of the ITAA 1997.

Section 995-1 provides that the term 'Australian legislature' means:

· the Parliament of the Commonwealth of Australia;

· the Parliament of a State;

· the Legislative Assembly for the Australian Capital Territory; or

· the Legislative Assembly of the Northern Territory of Australia.

Section 26-22 was inserted into the ITAA 1997 by the Tax Laws Amendment (Political Contributions and Gifts) Act 2010. The Explanatory Memorandum to the Tax Laws Amendment (Political Contributions and Gifts) Bill 2008 states that:

1.9 Division 26 of the ITAA 1997 sets out amounts that cannot be deducted, or deducted in full, from assessable income. To ensure that a deduction is not available:

a section is added to Division 26 to deny taxpayers who are not employees or office holders from deducting contributions and gifts to political parties, members and candidates under other parts of the Act, including the general deduction provision in section 8-1 of the ITAA 1997. The general deduction provision allows deductions for losses or outgoings to the extent that they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income. This amendment applies to gifts and contributions to parties, members and candidates at the federal, state and local government level

In the Administrative Appeals Tribunal (AAT) case AAT No.6709, the Tribunal considered the meaning of the term 'municipal corporation or other local governing body' in section 3 of the Debits Administration Tax Act 1982. In her judgment, Mrs R A Balmford (Senior Member) stated that:

In my view, all of this material, allowing for its inconsistencies (again, notably as to membership) describes broadly the kind of body which is intended to be comprised within the expression "municipal corporation" in sub-paragraph (vii)(c) of the definition of "excluded debt" in the Act. That expression, combined with "or other local governing body" is calculated to subsume any body, wherever it is situate within the Commonwealth, and under whatever legislation it is established, which, in terms of the decision in Tribe v Salt Lake City (paragraph 15 supra) "is a body politic and corporate created to administer the internal concerns of the district embraced with its corporate limits, in matters peculiar to such place and not common to the state at large". The words "municipal" and "local" in sub-paragraph (vii)(c) indicate that that provision is concerned with bodies operating in respect of a discrete district, region or area within a State or Territory.

The member councils of the Western Region Commission are, each in respect of its own municipal district, "municipal corporations" by virtue, since 1989, of the Local Government Act 1989, and before that of the various predecessors of that Act since they were severally established. It is possible to conceive of there being two bodies, in respect of a given district, which might fall within that description, each having powers under different heads, in the same way as State (or Territory) and Federal Governments operate on a larger scale. However, on the basis of the evidence set out in paragraphs 8-12 supra, I cannot find that the Western Region Commission is a "municipal corporation or other local governing body" in respect of the whole or any part of the Western Region of Melbourne. It has no powers of government or administration in the region, but operates to supplement, assist and facilitate in a variety of ways the operations of its member Councils, which do have such powers.

The Explanatory Memorandum for section 24AT of the ITAA 1936 indicates that a 'municipal corporation or other local governing body' is a local government body, that is, a council or a corporation owned and controlled by a council.

Section 25-65 of the ITAA 1997 and the Explanatory Memorandum for that section indicate that a 'local governing body' is a local government council as they refer to local government election expenses and the Bunyip Shire Council.

Section 26-22 of the ITAA 1997 and the Explanatory Memorandum for that section also indicate that a 'local governing body' is a local government council. The Explanatory Memorandum indicates that the section applies to contributions and gifts to candidates and members at the federal, state and local government level. The section denies a deduction for a contribution or gift to an individual who is a candidate in an election for members of an Australian legislature or a local governing body or a member of an Australian legislature or a local governing body. The definition of the term 'Australian legislature' in section 995-1 of the ITAA 1997 covers the decision making bodies of the Federal, State and Territory governments. Hence, a 'local governing body' must be a decision making body of local government, that is, a council.

AAT case AAT No. 6709 indicates that a 'municipal corporation or other local governing body' is a body which has powers of government or administration in a district, region or area within a State or Territory.

Section 74A of the Constitution Act 1975 (Vic) provides that:

· Local government is a distinct level of government consisting of democratically elected Councils having the functions and powers that the Parliament considers are necessary to ensure the peace, order and good government of each municipal district.

· Each Council is responsible for the governance of the area designated by its municipal boundaries.

Section 1 of the Local Government Act 1989 (Vic) provides that the purpose of that Act is to establish a legislative scheme that supports the system of local government in accordance with Part IIA of the Constitution Act 1975 (Vic).

The Local Government (Financial Assistance) Act 1995 provides that 'local governing body' means:

· a local governing body established by or under a law of a State, other than a body whose sole or principal function is to provide a particular service, such as the supply of electricity or water; or

· a body declared by the Minister, on the advice of the relevant State Minister, by notice published in the Gazette, to be a local governing body for the purposes of this Act.

This Act only applies to local government. Hence, the term 'local governing body' in it applies only to local government bodies, that is, councils and corporations owned and controlled by councils.

On the basis of the above, it is considered that the term 'local governing body' in section 995-1 of the ITAA 1997 refers to a local government council, that is, a council established by a Local Government Act of a State or a Territory.

Application to your circumstances

To determine whether the Institution is required by section 12-45 of Schedule 1 to the TAA to withhold tax from the payments it makes to its Council members it is necessary to determine whether:

· the Institution constitutes an 'entity';

· the payments constitute 'salary, wages, commission, bonuses or allowances'; and

· the Institution constitutes a 'local governing body'.

The State Act provides that the Institution is a body politic and corporate. Section 960-100 of the ITAA 1997 defines the term 'entity' to include a body corporate and a body politic. Hence, the Institution constitutes an entity for the purposes of section 12-45 of Schedule 1 to the TAA.

The Institution wants to make the payments to the Council members to remunerate them for the work they will perform. The payments will not be made to cover the work related expenses the members are expected to incur. The numbers of hours the members are expected to work, the nature of the members' work and the fact that the amounts of the payments will be based on the relevant remuneration guidelines indicate that the payments will represent remuneration for the work that will be performed by the members. The payments will be a product or an incident of the work that will be performed by the members. The quality or character of the payments in the hands of the members will be that of payments received for work performed by them. Hence, the payments will be made as a reward for work performed by the members and will constitute 'salary' or 'wages' of the members for the purposes of section 12-45 of Schedule 1 to the TAA.

As the Council is a part of the Institution it is necessary to consider whether the Institution rather than the Council is a 'local governing body'.

The Institution is not a local government council.

The Institution may be considered to be governed 'locally' by the Council. However, this means that it is a 'locally governed body', that is, a body which is controlled locally rather than a 'local governing body', that is, a body which controls a part of a state, territory or country.

The fact that the Institution was established under a State law does not in itself mean that it is a 'local governing body'.

Hence, the Institution does not constitute a 'local governing body' for the purposes of section 12-45 of Schedule 1 to the TAA and is not able to make a resolution under section 446-5 of that Schedule.

Therefore, the Institution is not required to withhold tax under section 12-45 of Schedule 1 to the TAA from the payments it makes to the Council members.

Question 2

Summary

The Institution is not liable to FBT on the payments it makes to its Council members.

Detailed reasoning

FBT is payable on certain fringe benefits provided.

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 provides that a 'fringe benefit' does not include a payment of salary or wages and that 'salary or wages' is a payment from which an amount must be withheld under certain provisions in Schedule 1 to the TAA.

The Institution is not required to withhold tax from the payments it makes to its Council members. Hence, the payments are not fringe benefits as they do not constitute salary or wages.

Therefore, the Institution is not liable to FBT on the payments.