Edited version of your private ruling

Authorisation Number: 1012464167568

Ruling

Subject: Effective salary sacrifice arrangement

Question 1

Is your employee eligible to enter into an effective salary sacrifice arrangement, whilst receiving work cover compensation payments, in the 2013-14 fringe benefits tax (FBT) year?

Answer

Yes

This ruling applies for the following periods:

1 April 2013 - 31 March 2014

The scheme commences on:

1 April 2013

Relevant facts and circumstances

Employer is a public benevolent institution (PBI) which provides staff to enter a salary sacrifice arrangement (SSA) for their personal expenses reimbursement in the beginning of every fringe benefits tax (FBT) year.

An employee lodged a work cover compensation claim for the loss of wages due to a work-related injury or illness. The employer's insurer agent, accepted his claim on condition that he must provide you with an ongoing valid certificate of capacity.

Since then, you have paid your employee work cover compensation payment fortnightly with pay as your go (PAYG) tax withheld. You put through a claim for reimbursement each fortnight to cover the previous fortnight's payment to your employee.

The previous SSA between you and your employee who is currently on work cover compensation payment ceased to operate at the end of 2012-13 FBT year.

The employee wants to participant in a SSA for personal expenses reimbursement for the 2013-14 FBT year.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

section 12-120 of the Taxation Administration act 1953

subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Salary sacrifice arrangements (SSA)

A salary sacrifice arrangement is an arrangement between the employer and the employee, where the employee agrees to forego part of their future entitlement to there remuneration, in most cases this will be salary and wages, in return for the employer providing benefits of a similar cost to the employee.

SSA may be either 'effective' or 'ineffective'.

Paragraphs 21 and 22 of the Taxation Ruling TR 2001/10 state that

Effective SSA - an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

Ineffective SSA - an ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned is to be paid in a form other than as salary or wages.

Salary or wages

Under subsection 136(1) of the Fringe Benefits Assessment Act 1986 (FBTAA), the definition of salary or wages states:

(a) a payment from which an amount must be withheld…to the extent the payment is assessable.

Section 12-120 of the Taxation Administration Act 1953 basically states that withholding payments made from compensation, sickness or accident payment, are assessable income.

Therefore, for the purposes of the FBTAA salary or wages includes amounts for lost salary or wages paid under

· an income protection policy

· a sickness or accident insurance policy, or

· a workers compensation scheme

· provided they are assessable and PAYG withholding amounts are withheld.

Therefore, compensation, sickness or accident payments can be the subject of a SSA. ATO ID 2002/372 addresses a valid SSA between the employer and an employee applies to workers compensation payments received in lieu of wages. Note: although this ATOID has been withdrawn, it was only withdrawn because it is a restatement of the law, not because it incorrectly applied the law.

Payments of salary and wages are ordinary income and are included in assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Your case

In your case, the periodic work cover compensation payments that your employee receives under the policy are to replace lost earnings. The payments are a substitute for the salary and wages income which he would otherwise have earned and they are subject to PAYG withholding. They are therefore salary or wages to be included in assessable income when derived, under section 6-5 of the ITAA 1997.

Therefore your employee is eligible to enter into an effective SSA whilst receiving work cover compensation payment for the 2013-14 FBT year.