Edited version of your written advice

Authorisation Number: 1051350061689

Date of advice: 16 March 2018

Ruling

Subject: PAYG withholding

Question 1

Are the amounts paid to the Directors considered remuneration under Section 12-40 of Schedule 1 of the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

Question 2

Are you required to withhold amounts from the payments made to the Directors under section 12-40 of Schedule 1 of the TAA?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a body corporate, incorporated under ‘letters patent’.

All Directors are volunteers and are not employees of the body corporate. On being appointed as a Director, Directors enter into a volunteer agreement which specifies that the agreement does not in any way create any employment relationship.

The Constitution and By-laws of the body corporate do not stipulate that any payment is required to be made to any Director, other than for the reimbursement of expenses.

The Directors do not receive directors’ fees for the performance of their director duties.

Directors are entitled to be reimbursed for out of pocket expenses, reasonably and properly incurred (including travel and accommodation expenses).

The Board of Directors determined that monthly payments should be made to Directors for the purposes of covering any out of pocket expenses that Directors may have incurred in undertaking their role as a Director.

The Directors Policy expressly specifies that the allowance is to cover any expenditure incurred by Directors in fulfilment of their role and any unexpended funds must be refunded back to the body corporate. Board members are required to substantiate monies spent and receipts are to be provided to the body corporate.

Payments were deposited directly to the Directors’ personal bank account.

Directors spend a varying amount of time on their duties. These duties include, but are not limited to, the following:

a. travel to and attending board

b. preparing and reading board papers to be presented at board meetings.

c. travel to and attending other committee meetings.

In their role as Director, they have access to the following resources:

a. mobile phone and laptop

b. travel expenses to meetings

c. meals whilst on travel

d. credit cards.

No PAYG withholding has been made on any out of pocket expenses made to Directors.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-40 of Schedule 1

Income Tax Assessment Act 1936 Section 23L

Income Tax Assessment Act 1997 Division 900

Reasons for decision

Section 12-40 of Schedule 1 of the Taxation Administration Act 1953 (TAA) provides that a company must withhold an amount from a payment of remuneration it makes to an individual:

a) if the company is incorporated - as a director of the company, or as a person who performs the duties of a director of the company; or

b) if the company is not incorporated - as a member of the committee of management of the company, or as a person who performs the duties of such a member.

‘Remuneration’ is not a defined term. The Macquarie Dictionary defines ‘remuneration’ as:

1. the act of remunerating

2. that which remunerates; reward; pay.

Subsections 12-1(1) and 12-1(1A) of Schedule 1 of the TAA provide that there is no requirement to withhold an amount from a payment under section 12-40 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, and will not form part of the director’s assessable income. Pursuant to section 23L of the Income Tax Assessment Act 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.

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 expense already incurred although not necessarily disbursed. In general, the provider considers the expense 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.

Consequently, a payment will only be a reimbursement when the payment exactly matches the expenses incurred.

In your case, you provided monthly predetermined payments to the Directors for the purposes of covering any out of pocket expenses that the Directors may incur in undertaking their role as a Director. The Directors Policy also stated that the responsibility rests with the Director to notify the body corporate if the full allowance is not expended in the month and refund the unexpended funds back to the body corporate.

Although the policies stated that the Directors were required to return any unexpended funds, there is no evidence that this occurred. Additionally there is no indication that additional payments were made to match the amount of expenses incurred. Consequently, it cannot be said that the payments received have exactly compensated an expense. The payments more closely reflect that of an allowance, being a definite predetermined amount to cover an estimated expense.

As the payments were an allowance, you were required to withhold from the payments made to Directors under section 12-40 of Schedule 1 of the TAA.

Additionally, the allowances were paid to the Directors when they were undertaking official duties as a Director of the body corporate, and it is therefore considered that they were remuneration for the purposes of section 12-40 of Schedule 1 of the TAA.