Edited version of private advice

Authorisation Number: 1012649974109

Ruling

Subject: Allowances

Question 1

Do you have PAYG withholding obligations in relation to the meal and motor vehicle allowances paid to the directors?

Answer

Yes.

Question 2

Is the PAYG withholding rate 46.5% for all payments to directors?

Answer

No.

Question 3

Are you required to show the meal and car payments on the director's payment summary?

Answer

Yes.

Question 4

Are you required to keep other records apart from the claim forms in relation to the director's payments?

Answer

Yes.

Question 5

Will a fringe benefit arise from the amount paid for meals and general expenses to a director who attends a board meeting?

Answer

No.

Question 6

Will a fringe benefit arise from a payment made on a cents per kilometre basis to a director who uses his or her private vehicle to attend a board meeting?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

The directors of a Corporation do not receive salary, wages or director's fees.

Directors receive meal payments when they travel to attend board meetings of the Corporation. A pro rata amount is paid per meal whilst the director is travelling.

These payments are not in excess of the reasonable amounts published annually by the Australian Taxation Office.

Directors also receive payments for using their private vehicles to travel to and from the Corporation to attend board meetings. The payment is based on less than the maximum cents per kilometre value for each type of private vehicle and the total kilometres paid per year to a director are limited to a specified value.

Board meetings are held over more than one day on a regular basis.

Directors also receive the allowances when they go interstate for business purposes to represent the Corporation.

The Directors complete an allowance claim form at the completion of the board meetings. The directors are not required to provide receipts for petrol or meals or other expenses.

Neither the meal and incidentals allowance nor the cents per kilometre payment for using a private vehicle to attend board meetings are paid under an award or an agreement.

The Directors generally spend all the meal and car allowances received.

Some Directors live in place A. Others live further away and stay in place A overnight when attending the board meeting.

The Corporation did not issue a payment summary to the Directors for the 2012-13 income year.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1, Division 12.

Taxation Administration Act 1953 Schedule 1, Section 12-40

Taxation Administration Act 1953 Schedule 1, Section 16-155

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 22

Fringe Benefits Tax Assessment Act 1986 Section 30

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 15-70

Income Tax Assessment Act 1997 Section 15-2

Reasons for decision

Pay as you go (PAYG) withholding requirements

Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA) outlines the payments from which amounts must be withheld. Under section 12-40 of Schedule 1 to the TAA a company must withhold an amount from a payment of remuneration it makes to an individual as a director of the company or as a person who performs the duties of a director of the company.

The allowances paid to the directors when they are undertaking official duties as a director are regarded as remuneration for the purposes of section 12-40 of Schedule 1 to the TAA. Please note, whether a director is an employee or contractor is not relevant for section 12-40 of Schedule 1 to the TAA purposes.

The TAA provides some exceptions to this rule, for example an entity need not withhold an amount under section 12-40 from a payment if the whole of the payment is exempt income or non-assessable non-exempt income of the entity receiving the payment.

If the payments made to the directors are in the nature of a reimbursement rather than an allowance, the payments will fall for consideration under the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and will not form part of the director's assessable income. Under section 23L of the Income Tax Assessment Act 1936, (ITAA 1936) income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer.

As outlined below, the payment to the directors are not considered to be a reimbursement or exempt income.

There are no other PAYG withholding exceptions that apply for the corporation, therefore the corporation is required to withhold the relevant amount from the payments paid to the directors.

The Australian Taxation Office publishes monthly withholding tables. The same rate is relevant for salary, allowances to employees and director's fees. Although your payments are not director's fees, the same PAYG withholding rates are relevant.

If the director does not quote their tax file number, then the corporation must withhold 46.5% from any payment made to them. Otherwise the normal rates apply based on their monthly earnings.

Are the payments an allowance or a reimbursement?

Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement states:

2. A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expenses already incurred although not necessarily disbursed. In general, the provider considers the expenses to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

4. The meaning of the word "reimburse" includes payments made in advance of expenditure as long as those payments possess the characteristics outlined in paragraph 3.

In the current situation, the meals and incidentals/travel allowance paid to the directors is clearly an allowance, and not a reimbursement. The directors are not paid with reference to actual amounts expended.

Directors also receive a payment if they use their private motor vehicle to travel to board meetings.

Again, these payments will be an allowance and not a reimbursement as they are based on an estimate of expenses incurred, for example, petrol, registration, and depreciation. The rate is not varied to take into account changes to petrol price, nor the size of the vehicle being driven.

Therefore, both the meal and incidentals/travel allowance and cents per kilometre payment are not reimbursements and are correctly classified as allowances.

As outlined below the allowances are not regarded as fringe benefits.

Section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997) states that 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.

The allowances received by the directors are assessable income. There is no exemption for the payments made to the directors. Therefore the payments are assessable income for the directors.

Payment summary requirements

Under section 16-155 of Schedule 1 to the TAA an entity (the payer) must give a payment summary to another entity (the recipient) if the payer has made a withholding payment. As the motor vehicle and meal allowances are regarded as withholding payments, the total allowances amount paid to the Director should be shown on their payment summary.

Allowances such as meal allowances and motor vehicle allowances, including car expense payments on a cents per kilometre basis are shown separately in the allowance box on the payment summary with an explanation, such as car allowance.

Record keeping

Taxation Ruling TR 96/7 Income tax: record keeping - section 262A - general principles provides information on record keeping under section 262A of the ITAA 1936. Subsection 262A(1) of the ITAA 1936 imposes an obligation on a person carrying on a business to keep records that record and explain all transactions engaged in by them that are relevant. Relevant records to be kept include documents that are relevant for the purpose of ascertaining the income and expenditure.

The principles in TR 96/7 are relevant for the corporation.

Apart from keeping the allowance claim forms, the corporation should keep records relating to the allowances paid, PAYG withholding payments made and payment summary details.

Fringe benefits

Will a fringe benefit arise from the amount paid for meals and general expenses to a director who attends a board meeting?

Paragraph 1 of TR 92/15 states that other than living-away-from-home allowances, most allowances will fall for consideration under the Income Tax Assessment Acts. On the other hand, most reimbursements will fall for consideration under the FBTAA.

Therefore, we need to consider whether the allowances paid are a living away from home allowance.

The definition of a living-away-from-home allowance is contained in section 30 of the FBTAA. Subsection 30(1) of the FBTAA states:

Where:

(a)  at a particular time, in respect of the employment of an employee of an employer, the employer pays an allowance to the employee; and

(b)  it would be concluded that the whole or a part of the allowance is in the nature of compensation to the employee for:

(i)  additional expenses (not being deductible expenses) incurred by the employee during a period; or

(ii)  additional expenses (not being deductible expenses) incurred by the employee, and other additional disadvantages to which the employee is subject, during a period;

by reason that the duties of that employment require the employee to live away from his or her normal residence;

the payment of the whole, or of the part, as the case may be, of the allowance constitutes a benefit provided by the employer to the employee at that time.

[emphasis added]

In considering these requirements an allowance for meals and general expenses paid to a director who attends a board meeting will be a living-away-from-home allowance if the following conditions are met:

i. the allowance is paid to an employee;

ii. the allowance is paid for additional expenses incurred by the employee that are not deductible expenses;

iii. the additional expenses are incurred by the employee as a result of the duties of employment requiring the employee to live away from his or her normal residence.

These conditions are considered in relation to an allowance for meals and general expenses paid to a director who attends a board meeting below.

Is the allowance paid to an employee?

An 'employee' is defined at subsection 136(1) of the FBTAA to mean a current, future or former employee.

A 'current employee' is defined at subsection 136(1) of the FBTAA to mean 'a person who receives, or is entitled to receive, salary or wages'.

'Salary or wages' is defined at subsection 136(1) of the FBTAA to mean a payment from which an amount must be withheld under one of the listed provisions in Schedule 1 to the Taxation Administration Act 1953 (TAA). The listed provisions include section 12-40 of Schedule 1 to the TAA which provides that a company must withhold an amount from a payment of remuneration it makes to a 'company director'.

As the allowance for meals and general expenses paid to a director who attends a board meeting is a payment that comes within section 12-40 of Schedule 1 to the TAA the allowance is paid to an employee.

Is the allowance paid for additional expenses incurred by the employee that are not deductible expenses?

In considering whether the expenses for which the allowance is paid are deductible expenses, it is necessary to distinguish the situation of the directors who are required to stay away from their home to attend the meetings and the situation of the directors who live locally.

Director required to stay away from home

In the case of a director who is required to stay away overnight to attend a board meeting, such a director will be entitled to a deduction for meals and general expenses.

Therefore, the allowance paid to these directors will not be a living-away-from-home allowance as it is paid for deductible expenses.

Local directors

In the case of a director who lives locally and is not required to stay away overnight to attend a board meeting, the director will not be entitled to a deduction for meals and general expenses. Therefore, the allowance paid to a local director is paid in relation to a non-deductible expense.

Are the additional expenses incurred by a local director incurred as a result of the duties of employment requiring the employee to live away from his or her normal residence?

In the case of a director who lives locally and is not required to stay away overnight to attend a board meeting, it is clear that such a director is not required to live away from his or her normal residence as a result of the duties of employment.

Therefore, the allowance paid to these directors will not be a living-away-from-home allowance as the directors are not required to stay away from their normal residence when attending a board meeting.

Conclusion

The allowance paid to a director for meals and general expenses will not be a living-away-from-home allowance as either:

• the expenses for which the allowance is paid are deductible expenses (directors required to stay away from their normal residence); or

• the director is not required to stay away from his or her normal residence to attend the meetings (local director).

Therefore, a fringe benefit for which the employer is liable to pay tax will not arise from the payment of an allowance for meals and general expenses to a director who attends a board meeting. Rather, the payment will be assessable income of the director under the ITAA 1997.

Will a fringe benefit arise from a payment made on a cents per kilometre basis to a director who uses his or her private vehicle to attend a board meeting?

Section 20 of the FBTAA provides that where a person reimburses another person in respect of an amount of expenditure incurred by that person, the making of that reimbursement shall be taken to constitute the provision of an expense payment benefit.

Therefore, a payment made on a cents per kilometre basis as reimbursement to a director for using his or her private vehicle to attend a board meeting constitutes the provision of an expense payment benefit in accordance with section 20 of the FBTAA.

However, section 22 of the FBTAA, provides that, in general, where an expense payment benefit is 'constituted by the reimbursement … of a car expense … calculated by reference to the distance travelled of the car', the expense payment benefit is an exempt benefit.

Exceptions to this general rule are where the car expense is in respect of relocation transport, work-related medical examinations, medical screening, preventative health care or counselling, migrant language training, holiday transport or transport provided to a person who has ceased to be an employee as listed in section 22 of the FBTAA.

The ATO publication, Fringe benefits tax - a guide for employers, at chapter 9.9 states the following in relation to how reimbursed car expenses on a cents per kilometre basis are treated for fringe benefits tax purposes:

Car expenses - reimbursed cents per kilometre

Reimbursement of car expenses on a rate per kilometre basis is not a fringe benefit, except in relation to remote area holiday transport … and overseas employment holiday transport... . This is the exception to the general rule that reimbursement for expenses incurred by an employee gives rise to an expense payment fringe benefit.

In the circumstances that are the subject of this ruling, the expense payment benefit provided to a director is made on a cents per kilometre basis. As such, the payment is 'constituted by the reimbursement … of a car expense … calculated by reference to the distance travelled of the car' as referred to in section 22 of the FBTAA. Further, none of the exceptions listed in section 22 apply to the expense payment benefit.

Therefore, consistent with section 22 of the FBTAA and Fringe benefits tax - a guide for employers, a payment on a cents per kilometre basis made as reimbursement to a director for using a private vehicle to attend board meetings is an exempt benefit.

As mentioned above, a benefit that comes within paragraphs (f) to (s) of the definition of fringe benefit in subsection 136(1) of the FBTAA does not give rise to a fringe benefit. Paragraph (g) of that definition excludes an exempt benefit.

As such, a fringe benefit will not arise from a payment made on a cents per kilometre basis to a director who uses his or her private vehicle to attend a board meeting.

However, it is noted that pursuant to section 15-70 of the ITAA 1997, a reimbursement mentioned in section 22 of the FBTAA is specifically included in assessable income of the director.