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Authorisation Number: 1051291628879

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Date of advice: 17 October 2017

Ruling

Subject: Taxable payments annual reporting

Question 1

Do meeting fees and allowances paid to local government councillors need to be included in the Taxable Payments Annual Report for the purposes of Division 396 of the Taxation Administration Act 1953 (TAA)?

Answer

Yes. Payments made to local government councillors are required to be included in the Taxable Payments Annual Report (‘TPAR’).

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Shire Council has received conflicting advice as to whether councillors’ meeting fees and allowances should be included in the TPAR and has now asked the ATO to rule on the matter.

The Shire Council has confirmed that the Council has not passed a resolution for the purposes of Division 446 of the TAA to have the PAYG provisions apply to the payments made by the Council to its members.

Relevant legislative provisions

Taxation Administration Act 1953

Schedule 1

Part 2-5

Section 12-35

Subsection 12-45(1)

Division 396

Section 396-55

Division 446

Section 446-5

Superannuation Guarantee (Administration) Act 1992

Subsection 12(9A)

Subsection 12(10)

A New Tax System (Goods and Services Tax) Act 1999

Subdivision 9A

Section 9-5

Section 9-10

Section 9-15

Section 9-20

Paragraph 9-20(2)(d)

Section 184-1

Section 195-1

Income Tax Assessment Act 1997

Section 6-5

Subsection 960-100(1)

Section 995-1

Summary

It is considered that the payments to councillors need to be reported for the following reasons:

● Firstly, the reporting entity must be a ‘government related entity’. The Shire falls within the definition as it is a local governing body established under a State law.

● Secondly, the reporting entity must provide consideration to another entity wholly or partly for the supply of services. Payments to council members fall within the definition of ‘consideration’, as discussed above. The consideration is made by an entity (a body corporate) to another entity (an individual).

● Thirdly, the consideration is made wholly for the services provided by the council members. As the council members do not supply goods the supply of services is not merely incidental.

Detailed reasoning

Taxable Payments Reporting System (TPRS)

Schedule 4 to the Tax and Superannuation Laws Amendment (2015 Measures No. 5) Bill 2015 created a new third party reporting regime in Schedule 1 to the Taxation Administration Act 1953 (TAA). This regime requires certain entities (‘third parties’) to report information to the Commissioner about transactions that could reasonably be expected to have tax consequences for other entities.

Commonwealth, state and territory entities that are government related entities, including local governing bodies, which are listed in the table in section 396-55 of the TAA are required to report consideration for the supply of services.

Item 2 of the table in section 396-55 of the TAA provides that a government related entity (within the meaning of the GST Act) must report information on:

“the provision of consideration (within the meaning of the GST Act):

(a) by the entity to an entity; and

(b) wholly or partly for a supply of services;

unless the supply of services is merely incidental to a supply of goods (within the meaning of the GST Act).”

A “government related entity” is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as:

(a) a *government entity; or

(b) an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the A New Tax System (Australian Business Number) Act 1999; or

(c) a local governing body established by or under a *State law or *Territory law.

The Shire is a local governing body established under The Local Government Act (1995) (LG Act) which is a state law of X. It therefore meets the definition of ‘government related entity’.

Members of a local governing body

Section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) provides definitions of employee and employer for the purposes of the SGAA. Subsection 12(9A) states:

“Subject to subsection (10), a person who holds office as a member of a local government council is not an employee of the council.”

Section 12(10) of the SGAA provides that:

“A person covered by paragraph 12-45(1)(e) in Schedule 1 to the Taxation Administration Act 1953 (about members of local governing bodies subject to PAYG withholding) is an employee of the body mentioned in that paragraph.”

Section 12-45 in Schedule 1 to the TAA imposes an obligation on the paying entity to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual including a member of a local governing body to which subsection 12-45(3) in Schedule 1 to the TAA 1953 applies

Subsection12-45(3) in Schedule 1 to the TAA applies to a local governing body established by or under a State law or a territory law if:

(a) The body has unanimously resolved that it be treated as an eligible local governing body for the purposes of Division 2 of Part VI of the ITAA 1936 or of this Division; and

(b) The body has not unanimously resolved to cancel the resolution.

Members of local governing bodies are not employees at common law. However if the local governing body validly resolves that its members be subject to PAYG withholding, the members will be treated as employees for various tax purposes including superannuation guarantee.

Division 446 of Schedule 1 to the TAA explains how a local governing body can make a valid resolution that its members be subject to PAYG withholding. The Division also lists the tax consequences of making such a resolution and the time the resolution takes effect.

The Shire has confirmed that it has not made a resolution under Division 446 of Schedule 1 to the TAA to have payments it makes to council members subject to the PAYG provisions. Accordingly, the members of the council are not employees.

Are council members carrying on an ‘enterprise’?

Subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines ‘enterprise’ for the purpose of the GST Act. Subsection 9-20(2) of the GST Act gives a list of activities which are excluded from being an ‘enterprise’. In particular, paragraph 9-20(2)(d) of the GST Act excludes the following activity:

“as a member of a local governing body established by or under a *State law or *Territory law (except a local governing body to which paragraph 12-45(1)(e) in Schedule 1 to the Taxation Administration Act 1953 applies).”

The Shire is a local governing body established under the LG Act (XX) and the council members have not made a resolution that the PAYG provisions apply to the payments they receive from the Shire. Therefore the activities of the council members fall within the exclusion under paragraph 9-20(2)(d) of the GST Act.

Making a taxable supply

Section 9-5 of the GST Act explains the meaning of “taxable supply”:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with the indirect zone; and

(d) you are *registered or *required to be registered

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

Section 9-10 of the GST Act provides that a ‘supply' is any form of supply whatsoever, and includes a supply of services. As ‘service’ is not defined in the legislation, it takes its ordinary meaning. The Oxford Online Dictionary defines a ‘service’ as ‘the action of helping or doing work for someone’. It is therefore considered that the duties performed by council members constitute a ‘supply of services’.

Although council members receive “consideration” (payment) for their services they do not make a “taxable supply” as the supply is not made in the course of or furtherance of an “enterprise”. As they do not carry on an enterprise, they are not “required to be registered” under section 23-5 of the GST Act.

Consideration for services

“Consideration” is defined in subsection 9-15(1) of the GST Act. The subsection states:

(1) “Consideration includes

(a) Any payment, or any act or forbearance, in connection with a supply of anything; and

(b) Any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.”

“Payment” is not defined and therefore takes its ordinary meaning which includes cash or money. According to paragraph 12 of Goods and Services Tax Ruling 2001/6:

“A ‘payment’ is not limited to a payment of money. It includes a payment in a non-monetary or an ‘in kind’ form, such as:

● Providing goods

● Granting a right or performing a service (an act); and

● Entering into an obligation, for example to refrain from selling a particular product (a forbearance).”

Paragraph 1.3(8) of the Local Government Chief Executive Officers and Elected Members Determination No. 1 of 2017 highlights that payments are made for the supply of a service, namely, performance of duties associated with their office:

(8) The fees, expenses and allowances determined are intended to recognise the responsibilities of elected council members, mayors and presidents of local governments and chairmen of regional local governments and to remunerate them for the performance of the duties associated with their office.

It is evident from the definition of “consideration” that it can embrace a wide range of payments, non-cash benefits and constructive payments. Payments made by the Shire to the council members, as outlined above, would fall within the definition of “consideration” as a payment of cash or money.

Do payments to council members need to be reported?

Government related entities are required to report transactions which fall within the scope of Item 2 of the table in section 396-55 of Schedule 1 to the TAA. It is considered that the payments to councillors need to be reported for the following reasons:

Firstly, the reporting entity must be a ‘government related entity’. The Shire falls within the definition as it is a local governing body established under a State law.

Secondly, the reporting entity must provide consideration to another entity wholly or partly for the supply of services. Payments to council members fall within the definition of ‘consideration’, as discussed above. The consideration is made by an entity (a body corporate) to another entity (an individual).

Thirdly, the consideration is made wholly for the services provided by the council members. As the council members do not supply goods the supply of services is not merely incidental.

Therefore the payments made by the Shire to council members should be included in the Shire’s Third Party Annual Report.

It should be noted that Legislative Instrument Classes of Transactions for Which Government Related Entities Are Exempt From Providing Third Party Reports Determination 2016 (dated 1 April 2016) does not exempt from third party reporting the payment of fees, allowances or reimbursements to council members.

In addition, Legislative Instrument: Classes of Government Related Entities Exempt From Providing Third Party Reports Determination 2017 (dated 21 June 2017) does not exempt local governing bodies from providing third party reports.

Other matters- assessable income

A person who holds office as a member of a local government council is not an employee of the council, except where the council has passed a unanimous resolution pursuant to section 446-5 of the TAA that payments made to council members will be subject to the PAYG withholding provisions. As the Shire has confirmed that it has not passed such a resolution, council members are not considered to be employees of the Shire. However, this does not mean that fees and allowances paid to a member of a local governing body are not considered to be ordinary income under the general provisions in section 6-5 of the ITAA 1997.

Subsection 6-5(2) of the 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.

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.

All remuneration or rewards for personal services, whether received in the capacity of an employee or otherwise, in connection with personal services, is income according to ordinary concepts (see Scott v C of T (NSW) (1935) 3 ATD 142).

In this instance council members receive fees and allowances to remunerate them for the duties they perform as councillors. The fees and allowances are considered to be ordinary income because they are associated with rewards for personal services that are rendered to the Shire.

Accordingly, the fees and allowances paid to council members are fully assessable under subsection 6-5(2) of the ITAA 1997.