Edited version of your written advice

Authorisation Number: 1051241066696

Date of advice: 26 June 2017

Ruling

Subject: Approved Worker Entitlement Fund

Question 1

If Fund A and Fund B enters into the administrative arrangement outlined in this ruling, will the Commissioner exercise his powers under subsection 426-55(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA), to revoke Fund B’s endorsement as an Approved Worker Entitlement Fund (AWEF) under section 58PB of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2018

Year ended 31 March 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Background

Fund A was established on Date A to provide security of termination and redundancy benefits to workers in a specified industry.

Fund B was established on Date B to provide benefits to workers who leave or change their employment in certain circumstances.

Fund B is endorsed as an AWEF for the purposes of section 58PB of the FBTAA.

Operation of Fund A and Fund B

Under the trust deed of both Funds, a Worker is entitled to payment under a list of Severance Events:

Beginning from on or around Date X it is intended that Fund A will no longer accept contributions and Fund B will begin accepting contributions.

It is likely that under this new framework, there will be Workers who will have interests in both Funds. As such, if a Worker’s employment is terminated because of one of the Severance Events, the worker will be entitled to payment out of both Funds.

Proposed Administrative Arrangement

To achieve transactional efficiency and reduce administrative expense, Funds A & B propose to enter into the following administrative arrangement (the Proposed Administrative Arrangement).

Where a Worker requests the payment of their benefit (Severance Payment) and they have an interest in both schemes, the Severance Payment will be funded from their balance in Fund B in priority to their balance in Fund A.

If the Severance Payment is more than the amount standing to the Worker’s account balance in Fund B, an amount will be rolled over from Fund A to the worker’s account balance in Fund B and then a single payment will be made to the worker.

This approach will overcome the need for the worker to receive separate payments from both Funds to fund a single Severance Payment.

To facilitate the payments to workers efficiently, Fund B has proposed that all claim payments will be made by Fund B, then periodically Fund A will make a single reconciliation payment for all of the interests which have been rolled over to Fund B for the period.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 58PB

Fringe Benefits Tax Assessment Act 1986 subsection 58PB(4)

Fringe Benefits Tax Assessment Act 1986 sub-subparagraph 58PB(4)(b)(ii)

Fringe Benefits Tax Assessment Act 1986 paragraph 58PB(4)(c)

Fringe Benefits Tax Assessment Act 1986 sub-paragraph 58PB(4)(c)(vi)

Fringe Benefits Tax Assessment Ac 1986 paragraph 58PB(4)(e)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 section 318 ITAA 1936

Income Tax Assessment Act 1936 paragraph 318(1)(d) of the ITAA 1936

Schedule 1 to the Taxation Administration Act 1953 subsection 426-55(1)

Reasons for decision

Question 1

All legislative references are to the FBTAA 1986 unless otherwise indicated.

Summary

The Commissioner would not exercise his power under subsection 426-55(1) of Schedule 1 to the TAA to revoke Fund B’s endorsement as an AWEF where Fund A receives a financial assistance resulting from making periodic transfers to Fund B.

Detailed reasoning

Background

In respect of an AWEF, sub-subparagraph 58PB(4)(b)(ii) requires that a worker entitlement fund’s constituent documents include a clause which states that:

the assets of the fund are not to be used to provide or facilitate any form of financial assistance, including a loan, to a contributor, a person in respect of whom contributions are made or an associate of a contributor or an associate of a person in respect of whom contributions are made

Fund B’s Deed of Trust contains this restriction.

An associate is defined under subsection 136(1to have the same meaning as section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In respect of a natural person, paragraph 318(1)(d) of the ITAA 1936 includes as an associate:

a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

As the Worker is a beneficiary of Fund A they are by definition an associate of Fund A.

A loan is defined under subsection 136(1) as:

includes:

(a) an advance of money;

(b) the provision of credit or any other form of financial accommodation;

(c) the payment of an amount for, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount; and

Looking at the definitions of a loan and an associate, sub-subparagraph 58PB(4)(b)(ii) and Fund B’s deed of trust, Fund B is prohibited from entering into an arrangement in which they provided 'credit of any other form of financial accommodation’ to Fund A.

Under the proposed Administrative Arrangement Fund A will only transfer funds to Fund B on a periodic basis. There will be a period between the date Fund B makes a Severance Payment and the date the funds are transferred from Fund A. Depending on the Worker’s circumstances a loan (as defined in the FBTAA) could arise between Fund B and Fund A (who is an associate of the Worker) for the period between the date of payment and date of transfer.

As this could be contrary to the clause required under sub-subparagraph 58PB(4)(b)(ii), Fund B is asking whether the Commissioner would exercise his power to revoke their endorsement if they accept a transfer of funds on a periodic basis.

Application to the Fund’s circumstances

In respect of revocation of an endorsement subsection 426-55(1) of Schedule 1 to the TAA states:

The Commissioner may revoke the endorsement of an entity if:

(a) at any time after the date of effect of the endorsement, the entity is not, or was not, entitled to be endorsed; or

(b) the Commissioner has required the entity under section 426-40 to provide information or a document that is relevant to its entitlement to endorsement and the entity has not provided the required information or document within the time specified in the requirement; or

(c) in the case of an entity endorsed under section 30-120 of the Income Tax Assessment Act 1997 - the entity has contravened Subdivision 30-CA of that Act (which requires the entity to ensure that certain things are stated in any receipts it issues for certain gifts).

Under this subsection the Commissioner is not required to revoke endorsement in all circumstances. He has the power to revoke endorsement in situations where he believes it is appropriate to do so after examining the facts of each case.

Sub-subparagraph 58PB(4)(b)(ii) is only a part of the overall requirements needed to be endorsed as a AWEF and in looking at the proposed Administrative Arrangement we should examine all of the conditions of subsection 58PB(4) which are:

A fund is entitled to be endorsed as an approved worker entitlement fund if:

(a) the management of the fund (including the management of the investments of the fund) is carried out at arm's length from the contributors to the fund and their associates; and

(b) under the fund's constituting documents:

(i) no more than 5% of the total assets of the fund are to be invested in an entity controlled by a contributor or an associate of a contributor; and

(ii) the assets of the fund are not to be used to provide or facilitate any form of financial assistance, including a loan, to a contributor, a person in respect of whom contributions are made or an associate of a contributor or an associate of a person in respect of whom contributions are made; and

(c) under the fund's constituting documents, payments from contributions to the fund are to be made only for the following purposes:

(i) to pay worker entitlements to persons in respect of whom contributions are made, or to death benefits dependants (within the meaning of the Income Tax Assessment Act 1997) or legal personal representatives (within the meaning of that Act) of those persons;

(ii) to make investments to generate income from the assets of the fund;

(iii) to reimburse contributors who have paid entitlements directly to persons in respect of whom contributions are made;

(iv) to return contributions to contributors;

(v) to pay, for the benefit of a person in respect of whom contributions are made, an employment termination payment (within the meaning of the Income Tax Assessment Act 1997) into a complying superannuation fund (within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993), a complying approved deposit fund (within the meaning of section 47 of the Superannuation Industry (Supervision) Act 1993) or a retirement savings account (within the meaning of the Retirement Savings Accounts Act 1997);

(vi) to transfer contributions to another approved worker entitlement fund;

(vii) to pay the reasonable administrative expenses of the fund;

(viii) to pay amounts to a contributor's external administrator that would otherwise be payable as mentioned in subparagraph (iii) or (iv) to the contributor;

(ix) to pay interest on, or to repay, money lent to the fund; and

(d) under the fund's constituting documents, payments from the income of the fund are to be made only for the following purposes:

(i) a purpose mentioned in subparagraphs (c)(ii) to (ix);

(ii) to make payments to contributors to the fund;

(iii) to make payments to other persons where the payment is specified in subsection (5); and

(e) under the fund's constituting documents:

(i) an account must be kept for each person in respect of whom contributions to the fund are made; and

(ii) the account must be kept in a manner that enables entitlements in respect of the person to be calculated; and

(f) the fund, or the entity that operates the fund, has an ABN.

Fund A will be closed off in respect of receiving contributions and an employer cannot choose to continue to contribute to Fund A. This includes situations where a Worker already has an account in Fund A. As a result both Fund A and Fund B could have accounts for contributions made by an employer in respect of a Worker.

At some point that Worker would be entitled to a permissible payment under paragraph 58PB(4)(c). In looking at the proposed Administrative Arrangement this permissible payment arises from the relevant Severance Event.

The entitlements (and contributions) in respect of that Severance Event could be spread between Fund A and Fund B 2 and the intent of proposed Administrative Arrangement is to make a single payment to that Worker in respect of the Severance Event that arose out of their employment with their employer.

If we look at sub-paragraph 58PB(4)(c)(vi) an AWEF is allowed to transfer funds to another AWEF. So Fund A (where it is an AWEF), is entitled to transfer contributions to Fund B. However if Fund A is not approved there is nothing in 58PB that prohibits Fund B from accepting contributions from a 'non-approved’ worker entitlement fund.

Under paragraph 58PB(4)(e) Fund B would have to allocate the amounts (and entitlements) received from Fund A to the relevant Worker’s account. This will happen as Fund B will pay the Worker their full entitlement in accordance with the relevant Severance Event and Fund B need to know the exact amount to be paid to the Worker based on their total entitlement originally spread over the two funds.

Each transfer is to facilitate a legitimate Severance Payment to a Worker. However as Fund B is replacing Fund A, Fund A could be required to make multiple transfers to Fund B as multiple Severance Events occur.

Returning to the proposed Administrative Arrangement, although Fund A may be an 'associate’ of the Worker when we look at each account individually, the intent is not to provide financial assistance to an 'associate’ of a Worker. The proposed Administrative Arrangement allows a periodic transfer of funds in respect of multiple accounts rather than making Fund A make a transfer in respect of each Severance Event as they occur.

Given the volume of accounts that may need to be transferred the Commissioner does not consider that the proposed Administrative Arrangement would be contrary to the intended purpose of section 58PB, which is to exempt payments into an endorsed AWEF that makes worker entitlement payments to employees.

Therefore the Commissioner would not use his power under subsection 426-55(1) of Schedule 1 to the TAA to revoke Fund B’s endorsement as an AWEF where Fund A receives a financial assistance from making periodic transfers to Fund B.