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Edited version of your written advice
Authorisation Number: 1051410625636
Date of advice: 2 August 2018
Ruling
Subject: PAYG withholding – Employment termination payment
Question 1
Do you have to withhold Pay As You Go (PAYG) withholding on the investment of funds in Trust A under any provision of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?
Answer
No.
Question 2
Do you have to withhold PAYG withholding on the withdrawal of the invested amounts from the Trust A under any provision of Schedule 1 to the TAA 1953?
Answer
No.
Question 3
Do you have to withhold PAYG withholding on payment of the amount payable to the employee on their termination under section 12-85 of Schedule 1 to the TAA 1953?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
The scheme commenced on
1 July 2017
Relevant facts
You are an employer.
You entered into an employment agreement (Agreement) with an employee
In accordance with the Agreement you pay the employee a Gross Base Salary. This Gross Base Salary is subject to PAYG withholding under section 12-35 of Schedule 1 to the TAA 1953.
Under the Agreement you are also obligated to make a payment to the employee on the termination of their employment.
You invest money in Trust A to ensure you have sufficient funding to make the payment to the employee on the termination of their employment.
The trustee of Trust A at all times holds the funds on trust for the absolute benefit of each beneficiary and all income shall be for each beneficiary’s benefit absolutely.
You are a beneficiary of Trust A.
The payment on termination will be made within 12 months of the termination of employment and is not a payment mentioned in section 82-135 of the Income Tax Assessment Act 1997.
Relevant legislative provisions
Taxation Administration Act 1953 Schedule 1 section 12-85
Income Tax Assessment Act 1997 section 82-130
Reasons for decision
Part 2-5 in Schedule 1 to the TAA 1953 is about PAYG withholding.
Under section 12-35 (Payment to employee) of Schedule 1 to the TAA 1953 an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
Under section 12-85 (Superannuation lump sums and payments for termination of employment) of Schedule 1 to the TAA 1953 an entity must withhold an amount from any of the following payments it makes to an individual:
(a) a superannuation lump sum, or
(b) a payment that is an employment termination payment or would be one except that it is received more than 12 months after termination of employment.
Application to your circumstances
When you invest monies in Trust A you are not investing those funds on behalf of the employee. Under the terms of the Deed of Trust and the Agreement the monies invested in Trust A belong to you. As such, when you invest monies in Trust A you are not making a payment of the types mentioned in sections 12-35, 12-85 or any other provision of Part 2-5 in Schedule 1 to the TAA 1953 to the employee. As such, you are not required to withhold any amount of PAYG withholding under any provision of Schedule 1 to the TAA 1953 from the amounts you invest in Trust A.
Similarly, when you withdraw the invested monies from Trust A you are not making a payment to the employee. You are simply withdrawing monies that belong to you. Therefore, you are not required to withhold any amount of PAYG withholding under any provision of Schedule 1 to the TAA 1953 when you withdraw amounts from Trust A.
However, in accordance with the Agreement you are obliged to make a payment to the employee when their employment is terminated. The payment that you are obliged to make is not considered to be a payment of the types mentioned in section 12-35 of Schedule 1 to the TAA 1953; rather, the payment is considered to be an employment termination payment.
As the payment will be an employment termination payment you will be required to withhold PAYG withholding from the payment in accordance with section 12-85 of Schedule 1 to the TAA 1953 and remit that amount to the Commissioner.