Edited version of private advice

Authorisation Number: 1012679780719

Ruling

Subject: Assessable income - honorarium payments

Question 1

Are the honorarium payments made to the Directors, assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore subject to Pay As You Go (PAYG) withholding under Division 12 in Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013;

Year ending 30 June 2014;

Year ending 30 June 2015;

Year ending 30 June 2016.

The scheme commences on:

1July 2012.

Relevant facts and circumstances

The Club operates as a registered club in an Australian state.

The Club is an incorporated entity.

The Club has X Directors (including a Chairman and Deputy Chairman). The Directors are paid monthly.

The Directors attend monthly board meetings and other subcommittee meetings.

The Directors attend community events and represent the Club. This is usually 2 events per month.

The Directors are employed with full-time jobs and all meetings are held out of business hours.

The Directors have alternate employment within the community.

Directors are put through a course detailing their responsibilities.

The Honorarium is recognition of services of the Directors time to be an office-holder of the Club. They do not receive any other money for attending functions, meetings or representing the Club.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5;

Taxation Administration Act 1953 Division 12;

Taxation Administration Act 1953 section 12-45.

Reasons for decision

Question 1

Are the honorarium payments made to the Directors, assessable income under subsection 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore subject to Pay As You Go (PAYG) withholding under Division 12 in Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Summary

The payments to the Directors do not come under the general interpretation as being an honorarium. The payments have the characteristics of ordinary income as they are expected and have an element of regularity and recurrence.

Therefore, the payments made to the Directors are regarded as withholding payments under Division 12 in Schedule 1 to the TAA. As such the Club may be required to withhold amounts from these payments and provide payment summaries.

Detailed reasoning

An honorarium is a payment or gesture made on personal grounds that is either tangible or intangible and can be referred to as an ex gratia payment, bona fide (or true) honorarium or gift.

True honorariums are not included in assessable income. Taxation Ruling TR 2002/21 Income tax: Pay As You Go (PAYG) Withholding from salary, wages, commissions, bonuses or allowances paid to office holders (TR 2002/21) states, at paragraph 29, that a true honorarium paid to an office holder would not be salary, wages, commission, bonuses or allowances that would be subject to withholding under section 12-45 in Schedule 1 to the Taxation Administration Act 1953 (TAA). It is likely that remuneration paid to a modern office holder would be ordinary salary for performing the duties of the office rather than an honorarium for filling an office.

A true honorarium is typified by the following:

• the payment is received for personal reasons;

• the payment has no connection to the recipient's income producing activities or services rendered;

• the payment is not received as remuneration or a consequence of employment;

• the payment is not relied upon or expected by the recipient for day-to-day living;

• the payment is not legally required or expected;

• there is no obligation on the part of the payer to make the payment; and

• the payment is a token amount compared to the services provided or expenses incurred by the recipient.

Merely referring to a payment as an honorarium, however, does not mean that the payment is exempt from PAYG provisions. TR 2002/21, at paragraph 28, discusses the notion of officer holder's remuneration being a salary. It states that:

…. Even if the office-holder does not qualify as an employee, there may still be aspects of employment law applicable to him, particularly in relation to the payment of wages, since the remuneration of a modern office-holder is likely to be construed as an ordinary salary for performing the duties of the office, not as the archaic form of an honorarium for filling an office...

A payment or other benefit received by a taxpayer is assessable income if it is either income in the ordinary sense of the word (ordinary income), or an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income).

Under subsection 6-5(1) of the ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income). Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Paragraph 3 of Taxation Ruling IT 2639 Income tax: Personal services income defines 'income from personal services' and states that:

"Income from personal services" is income that an individual taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour. The inclusion of predominantly in this definition allows for the situation where personal services involve the use of some equipment, for example the drawing board of an architect.

Ordinary income has the characteristics of being periodic, recurring and regular (FC of T v. Dixon (1952) 86 CLR 540; ATD 82). Other characteristics of income that have evolved from case law include receipts that:

• are earned;

• are expected;

• are relied upon;

• have an element of periodicity, recurrence or regularity.

The Directors of the Club receive their payments monthly for the services provided in their capacity as directors. The payments do not come under the general interpretation as being an honorarium. The payments have characteristics of being ordinary income as they are expected and have an element of regularity and recurrence.

Therefore, the payments made to the Directors are regarded as withholding payments under Division 12 in Schedule 1 to the TAA. As such the Club may be required to withhold amounts from these payments and provide payment summaries.