Edited version of your private ruling

Authorisation Number: 1012538696487

Ruling

Subject: Worker Entitlement Fund

Question

Will contributions made by employers to the worker entitlement fund constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore, form part of the 'net income of the trust estate' for the purposes of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The fund is a trust that has been endorsed as an approved worker entitlement fund under subsection 58PB(3) of the Fringe Benefits Tax Assessment Act 1986.

The object of the fund is set out at clause X of the Trust Deed, which states:

· The overriding objects of the Scheme are the acceptance of Contributions and the preservation of Entitlements to facilitate the satisfaction of the obligations of Employers under an Industrial Agreement to pay Entitlements to Employees.

(Capitalised terms are defined in the Trust Deed).

The term 'Entitlements' is defined in clause X of the Trust Deed as '... amounts payable to an Employee as required by law in respect of leave'.

Contributions to the fund

Under clause X of the Trust Deed, contributions can be made to the fund by employers on account of any employee as contemplated by an industrial agreement and such contributions will form part of the fund. The term contribution is defined in clause X of the Trust Deed as '... a payment to the Scheme by an Employer in respect of any Employee in accordance with the provisions of this Deed'.

Schedule X of the Trust Deed states that by applying to enter into the fund the employer agrees to pay into the fund, as contributions, the employee's entitlements monthly in arrears and within seven calendar days from the end of any monthly period.

Clause X of the Trust Deed requires the Trustee to establish an 'Employee Member Account' in respect of each employee who is admitted to the membership of the fund. Amounts received by the fund from an employer in respect of a particular employee's entitlements must be credited to that employee's Employee Member Account and, on payment, will be debited against the same account.

Payments from the fund

Payments can be made out of the income or the capital of the fund to satisfy the objects of the fund.

Payments from amounts received by the fund as contributions from employers can only be applied for the purposes set out at clause X to Y, which include making payments to employees, reimbursing employers who have paid entitlements (in respect of which they have already made a contribution) to employees, returning contributions to employers and to pay an employment termination payment.

Payments from the fund to employees will be payable:

· as and when they take leave (in accordance with their entitlement to do so under the industrial agreement) during the year; and/or

· upon the termination of their employment.

In practical terms, payments of benefits from the fund to employees will be made in one of, or both, of the following ways:

· from the fund directly to the employees; and/or

· from the fund to the employer in order to reimburse the employer who has made a payment to an employee in respect of their entitlement, where the employer has already made a contribution to the fund representing that employee's entitlement.

The Trustee has rigorous substantiation and evidentiary requirements to ensure that payments of benefits are made from the fund, either directly to employees or to employers as a reimbursement, only in circumstances contemplated by the Trust Deed and consistently with the objects of the fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1936 Subsection 95(1).

Reasons for decision

Summary

The employer contributions represent the corpus of the trust and therefore are not income of the trust.

Detailed reasoning

'Net income' in relation to a trust is defined in section 95 of the ITAA 1936 to mean the total assessable income of the trust estate calculated as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.

Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts and subsection 6-5(2) of the ITAA 1997 provides that an Australian resident's income will include the ordinary income derived directly or indirectly form all sources, whether in or out of Australia, during the income year.

So, section 6-5 of the ITAA 1997 provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of 'ordinary income' in income tax legislation it is necessary to turn to the decisions of the courts.

Taxation Ruling TR 1999/17 provides some guidance on what the relevant factors are in determining whether an amount is ordinary income. These factors include:

· whether the payment is the product of any employment, services rendered, or any business

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

· the form of the receipt, that is whether it is received as a lump sum or periodically, and

· the motive of the person making the payment. Motive, however, is rarely decisive as in many cases a mixture of motives may exist.

In Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367, Windeyer J stated that 'Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.'

Therefore whether the contributions are on revenue account for the employers is irrelevant in determining whether they are income in the hands of the recipient.

In GP International Pipecoaters Proprietary Limited v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court considered the following factors were important in determining the nature of a receipt:

To determine whether a receipt is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

ATO Interpretative Decision 2003/42 deals with a similar set of circumstances as in the present case. The circumstances considered in the Interpretative Decision are that a trust was established as part of a scheme under which employees in an industry are insured for the provision of income protection and portable sick leave. The trust uses contributions made by participating employers to purchase these insurance policies. The payments under the policies are made directly to the employees.

The Interpretative Decision states that the purpose of receiving the employers' contributions is solely to establish the scheme under which employees in the industry may be insured. As such, the payments in the hands of the trustee are of a capital nature as they represent the corpus of the trust.

The scheme in this case is analogous to the scheme dealt with by the Interpretative Decision and it can be concluded, when looking at all of the relevant factors when determining whether the payments received are ordinary income, that the payments received by the trust more closely resemble receipts of capital rather than of income. The contributions are not considered to be ordinary income and are therefore not assessable income.

Subsection 95(1) of the ITAA 1936 provides a definition of net income in relation to a trust estate, which very broadly is the assessable income of the trust estate, calculated as if the trustee were a taxpayer less certain deductions.

In this situation, the contributions made by employers are not considered to be amounts contributing to any 'net income of the trust estate'.