Edited version of your written advice

Authorisation Number: 1051457659709

Date of advice: 23 November 2018

Ruling

Subject: Honorarium payments

Question

Is the Taxpayer required to withhold Pay As You Go (PAYG) under Division 12 in Schedule 1 to the Taxation Administration Act 1953 (TAA) for honorarium payments made to its Branch Officers?

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer is a not for profit organisation (the Taxpayer).

Roles of its Officers

The Taxpayer is led by four Officers:

1. the President;

2. two Vice Presidents; and

3. the Treasurer.

The roles and responsibilities of the Officers are:

President:

1. Chair meetings, develop and guide the strategic direction of the Taxpayer and appoint chairpersons to committees.

2. Represent the Taxpayer in other forums.

3. Represent the Taxpayer in all manner of forums.

4. Deal with media communications.

5. Be involved in the Taxpayer’s structure.

6. Deal with Government representatives as appropriate.

7. Engage with and foster a constructive relationship between the Taxpayer and entities it deals with.

8. Provide oversight and guidance to the performance of senior staff.

The Vice Presidents:

The Vice Presidents must be capable of fulfilling the President’s duties if he is unavailable, represent the Taxpayer on behalf of the President when requested, chair committees and sub-committees and be given other duties as allotted by the President.

Treasurer:

The Treasurer is responsible for all the financial affairs of the Taxpayer and must ensure that proper accounts and books to record the financial affairs of the Taxpayer are kept.

Officer Time Commitments

All volunteers are encouraged to log their time into a computer system.

All Officers are required to sit and chair various sub-committee and forum meetings.

Officers authorise payments on behalf of the Taxpayer and sign cheques.

Officers authorise contracts entered into by the Taxpayer.

Honorariums

Payments, described by the Taxpayer as ‘honorariums’, are made to the Officers more than once per annum (the Payments). The total annual amounts of these Payments are:

President: $1x,000

Vice Presidents: $x,000 each

Treasurer: $x,000

The honorarium payments are entirely at the discretion of the Taxpayer. The Taxpayer is not bound to make these payments by any formal contract or agreement.

The payment of an honorarium to Officers is in accordance with the Taxpayer’s Rules (the Rules).

The Rules state: ‘The position held by an Officer is an honorary position’.

Travel expenses and other office expenses incurred by the Officers are reimbursed by the Taxpayer.

Legislation:

Income Tax Assessment Act 1997 subsection 6-5(1)

Taxation Administration Act 1953 Division 12

Taxation Administration Act 1953 section 12-45

Reasons for decision

Summary

The payments have the characteristics of ordinary income as they are expected and have an element of regularity and recurrence. Consequently, PAYG withholding is applicable to the payments.

Detailed reasoning

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.

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 (TR 92/5) 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 expenses already incurred although not necessarily disbursed. In general, the provider considers the expenses 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 the current case, two predetermined payments are paid to the Officers per annum in accordance with a decision made at the Taxpayer’s annual general meeting and the Rules.

As the payments do not constitute a reimbursement and are paid to the Officers when they are rendering services to the Taxpayer while undertaking official duties, it is therefore considered that they were remuneration for the purposes of section 12-40 of Schedule 1 of the TAA. The Taxpayer is therefore required to withhold from the payments made to the Branch Officers under section 12-40 of Schedule 1 of the TAA.

Honorarium

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 and will not be subject to PAYG withholding or instalments. If the payment is not a true honorarium, it may be classed as 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 TAA. Merely referring to a payment as an honorarium, however, does not mean that the payment is exempt from PAYG provisions and remuneration paid to a modern office holder would usually be ordinary salary for performing the duties of that office rather than an honorarium for filling an office.

Taxation Ruling TR 2002/21, at paragraph 28, discusses the notion of officer holders' 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...

What constitutes a 'True Honorarium'?

Whether a payment received is assessable income depends upon a close examination of all relevant circumstances.

Paragraph 29 of TR 2002/21 states 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 TAA. However, as indicated in paragraph 28, it is likely that the 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.

The following factors indicate a 'true honorarium':

a) The payment is received for personal reasons.

b) The payment has no connection to the recipient's income-producing activities or services rendered.

c) The payment is not received as remuneration or as a consequence of employment, services rendered, or any business.

d) The payment is not relied upon or expected by the recipient for day-to-day living.

e) The payment is not legally required or expected

f) There is no obligation on the part of the payer to make the payment.

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

h) The form of the receipt, that is, whether it is received as a lump sum or periodically.

i) Whether the payments have been earned.

a) The payment is received for personal reasons

In the current case, the payments made are in respect to services rendered rather than as a token of appreciation. As stated in paragraph 28 of TR 2002/21, it is likely that the 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. There is a close association between the payments and the services rendered to the Taxpayer by the Officers.

We consider this factor indicates the payments should be subject to withholdings.

b) The payment has no connection to the recipient’s income-producing activities or services rendered

The payments are twice a year and approved by the Taxpayer’s members annually for the period of the appointment of each office holder.

There are clear links between the payments to the Officers and the services they render to the Taxpayer in their capacity as Officers as follows:

● the various authorities and obligations provided in relation to office holder positions pursuant to the Taxpayer’s Rules – these authorities and obligations are very similar, if not identical to authorities and obligations fulfilled by company directors in their capacity rendering service to a company and its shareholders;

● the inclusion of ‘officers liability’ in the Taxpayer’s Management Liability Policy (MLP) – this policy covers the Taxpayer for insured liabilities, losses and/or costs incurred as a result of the conduct of its ‘directors and officers’; and

● in the case of the position of Treasurer, the requirement that they be an active member of a recognised Professional Accounting Association, in addition to the standard requirements of all Officers, indicates the role involves the provision of professional accounting services and that the payments made for filling that role constitute payments for services rendered.

We consider this factor indicates the payments should be subject to withholdings.

c) The payment is not received as remuneration or as a consequence of employment, services rendered or any business

There are indications that the payments to Officers are a consequence of employment and services rendered as follows:

● Employment – the use of the computer system to record the time spent as a representative of the Taxpayer

● Services rendered – contributions to business strategy decisions such as representation at a workshop and meetings;

● Services rendered – a meeting scheduled to discuss fiduciary duties; and

● Services rendered – representation at executive committee meetings in 20XX:

● Corporate & Business Services –x meetings;

● Finance Audit – x meetings; and

● Property & Legal – x meetings.

The significance of these roles to the Taxpayer’s business function and the requirement that the Officers fulfil these roles as part of their duties indicate the payments made to Officers are partly employment related and predominantly services rendered.

We consider this factor indicates the payments should be subject to withholdings.

d) The payment is not relied upon or expected by the recipient for day-to-day living

The Officers are retired and live on their retirement savings or pensions. While the retirement savings and pensions may cover their day-to-day living expenses, the payments provided to them by the Taxpayer are additional to the reimbursement of the costs they incur performing their duties and supplement their livelihood.

We consider this factor is neutral in indicating whether the payments should be subject to withholdings.

e) The payment is not legally required or expected

While there is no obligation on the part of the Taxpayer to make the Payments, it is arguable a legal obligation to pay is established once they are approved by the AGM in accordance with the Rules.

The historical pattern of Payments and the Taxpayer’s provisioning for the Payments in the Taxpayer’s budget indicates an organisational expectation that they will be paid, notwithstanding the expectations of the Officers or the absence of a legal obligation.

We consider this factor indicates the payments should be subject to withholdings.

f) There is no obligation on the part of the payer to make the payment;

As per e), the historical pattern of Payments and the Taxpayer’s provisioning for the Payments in the Taxpayer’s budget indicates an organisational expectation that they will be paid, notwithstanding the expectations of the Officers or the absence of a legal obligation

We consider this factor indicates the payments should be subject to withholdings.

g) The payment is a token amount compared to the services provided or expenses incurred by the recipient

While the Officers render a wide range of services and the Payments may be less than what might be paid for similar role in another organisation, they are not token amounts when compared to examples of honorariums deemed to be exempt for income tax purposes.

We consider this factor is neutral in indicating whether the payments should be subject to withholdings.

h) The form of the receipt, that is, whether it is received as a lump sum or periodically.

As the Payments are made every six months, they are both periodical and regular, if relatively infrequent compared to most forms of remuneration. The timing of the payments reflects the rendering of services over that period. As this requirement only requires the payments to be ‘periodically’ made, we consider this factor indicates the payments should be subject to withholdings.

i). Whether the payments have been earned

The Payments have been earned by the Officers in fulfilling their duties to the Taxpayer.

We consider this factor indicates the payments should be subject to withholdings.