Edited version of your private ruling

Authorisation Number: 1012466412739

Ruling

Subject: PAYG Withholding

Question/Answer

Do you have an obligation to withhold amounts from the payments under a new Government scheme paid to professionals under Division 12 of Schedule 1 to the Tax Administration Act 1953 (TAA)?

No.

Relevant facts:

A Commonwealth program will be introduced as one of the initiatives to respond to workforce shortages in particular areas in Australia.

The aim of the program is to improve access to certain services in particular areas of Australia through the provision of financial incentives.

Relevant legislative provisions:

Schedule 1 to the Taxation Administration Act 1953, Division 6

Schedule 1 to the Taxation Administration Act 1953, Subsection 6-5(2)

Schedule 1 to the Taxation Administration Act 1953, Section 10-5

Schedule 1 to the Taxation Administration Act 1953, Table item 1 of Subsection 10-5(1)

Schedule 1 to the Taxation Administration Act 1953, Section 12-35

Schedule 1 to the Taxation Administration Act 1953, Subsection 12-1(1)

The Income Tax Assessment Act 1997, Subsection 6-5(2)

Reasons for decision

PAYG Withholding

Division 6 of Schedule 1 to the Taxation Administration Act 1953 (TAA) requires taxpayers to pay income tax at regular intervals as it is earned during the year. This system of collecting is called Pay As You Go (PAYG), which has two components: PAYG withholding and PAYG instalment. Subsection 6-5(2) of Schedule 1 to the TAA states that:

Under PAYG withholding, amounts are collected in respect of particular kinds of payments or transactions. Usually, someone who makes a payment to you is required to withhold an amount from the payment, and then to pay the amount to the Commissioner.

Section 10-5 of Schedule 1 to the TAA lists a summary of the different kinds of payments that are subject to PAYG withholding.

Item 1 in the table contained in subsection 10-5(1) of Schedule 1 to the TAA includes a payment of salary etc. to an employee which is subject to PAYG withholding. Item 1 indicates that section 12-35 of Schedule1 to the TAA deals with this payment.

Section 12-35 of Schedule 1 to the TAA states that you must withhold an amount from salary, wages, commission, bonuses or allowances you pay to an individual as an employee (whether of you or another entity).

However, Subsection 12-1(1) of Schedule 1 to the TAA provides you with an exception that in working out the amount to be withheld under Section 12-35, you should disregard so much of the payment as is exempt income of the individuals receiving the payment.

Therefore, we need to first examine the assessability of the payments under OMRIG.

Assessability of the payments under OMRIG

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

An incentive bonus or reward comes within the meaning of ordinary income. An incentive bonus or reward is an additional reward payment derived by individuals in the capacity as an employee as a financial incentive or reward to remain in their employment (Dean & Anor v. Federal Commissioner of Taxation (1997) 78 FCR 140; (1997) 37 ATR 52; 97 ATC 4762) (Dean's Case). Dean's case also found that the payment need not be paid by the employer.

OMRIG provides incentives grants for doctors to relocate to, or remain in, outer metropolitan areas.

Consequently, payments made through OMRIG are considered income according to ordinary concepts and should be included in the recipients' assessable income, and are not exempt income of the individuals receiving the payments.

Payments for work and services

Section 12-35 of Schedule 1 to the TAA requires you to withhold tax from salary, wages, commission, bonuses or allowances paid to an individual as an employee whether or not such individual is employed by you or another entity.

Taxation Ruling TR 2005/16 provides the Commissioner's view on whether an individual is paid as an employee for the purposes of section 12-35 of the TAA and whether the paying entity has an obligation to withhold an amount from the relevant payment.

Paragraph 12 of TR 2005/16 states that payment does not necessarily have to be between employer and employee for the payment to be covered by Section 12-35 of Schedule 1 to the TAA. However, the payment made to the individual must be in their capacity as an employee, either of the payer or another entity. The essential element is the nature of any connection between the payment and the individual's employment with the payer or any other entity.

Paragraph 7 states whether a person is an employee of another is a question of fact to be determined by examining the facts and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

The contractual relationship between the recipient and the government department is not for the provision of services. Participants are not paid in their capacity as an employee of either the department or another institution.

Notwithstanding the payments constitute an advantage to the recipients, as the payments are not made as a consequence of the doctor's employment, the payments are not considered to be salary, wages, commission, bonuses or allowances pay to an individual as an employee.

Therefore we do not consider the essential elements of section 12-35 to be in existence and withholding from the payments under that provision is not required. This is irrespective of whether or not the recipients have obtained an ABN.