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Edited version of your written advice
Authorisation Number: 1051488661479
Date of advice: 04 March 2019
Ruling
Subject: PAYG withholding
Question 1
Is the entity required to withhold an amount pursuant to section 12-35 or 12-120 of Schedule 1 to the Taxation Administration Act 1953 (Cth) for payments made to the employer of individuals in respect of their loss of wages as a result of visiting an injured dependent child in hospital?
Answer
No
Question 2
Is the entity required to withhold an amount pursuant to section 12-35 or 12-120 of Schedule 1 to the Taxation Administration Act 1953 (Cth) for payments made to individuals in respect of their loss of wages as a result of visiting an injured dependent child in hospital?
Answer
No
Question 3
Is the entity required to withhold an amount pursuant to section 12-35 or 12-120 of Schedule 1 to the Taxation Administration Act 1953 (Cth) for payments made to the employer of individuals in respect of their loss of wages as a result of attending hospital?
Answer
No
Question 4
Is the entity required to withhold an amount pursuant to section 12-35 or 12-120 of Schedule 1 to the Taxation Administration Act 1953 (Cth) for payments made to individuals in respect of their loss of wages as a result of attending hospital?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
Year ending 30 June 2022
Year ending 30 June 2023
The scheme commences on:
1 July 2018
Relevant facts and circumstances
The entity makes compensation payments to individuals as a result of circumstances outlined in the relevant legislation.
There are two specific payment types as follows:
Payment A
This payment arises where a child is admitted to hospital, and as a result of visiting this child in hospital, the parent(s) incur a loss of wages for more than five days.
The payment is made to a parent or parents of a dependent child.
Payment B
This payment is made to clients who suffer loss of wages as a result of attending hospital or recovering from treatment that they receive in hospital.
Relevant legislative provisions
Taxation Administration Act 1953 section 12-35
Taxation Administration Act 1953 section 12-120
Reasons for decision
Assessable income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of the Australian resident individual includes the ordinary income they derive directly or indirectly from all sources, whether in or out of Australia, during the income year.
In order for a receipt to be characterised as ordinary income, it must be considered to be income in nature, as opposed to capital.
For income tax purposes, the relevant principles in determining whether a compensation payment is a receipt of income (or capital) include:
● An amount paid to compensate for a loss generally acquires the character of that for which it is substituted.
● Payments which are a substitute for income have been held to be income under ordinary concepts.
As the Payment A is made to parents of dependent children, this represent payments for a loss of earnings incurred, and the character of these payments is tantamount to that of a substitution of income the parent would have expected to derive had the event not occurred.
As the Payment B is made to clients represent compensation payments for the loss of wages, the payments are essentially substitutes for income.
Therefore both compensation payments will have the character of income and should be considered as assessable income and will be assessable in the hands of the recipient.
PAYG Withholding obligations
According to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) 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).
Taxation Ruling TR 2005/16 outlines that for an entity to be required to withhold an amount, then:
● The payment must be made by an entity
● A payment of salary and wages made to an employee as a consequence of their employment
● The payment must be made to an employee
As the payments will be compensation payments made under legislation rather than as a consequence of the individual’s employment, the entity will not have a PAYG withholding obligation under section 12-35 of Schedule 1 to the TAA.
Section 12-120 of Schedule 1 to the TAA outlines the requirements of payments which relate to compensation, sickness, and accident payments and states that:
An entity must withhold an amount from the payment of compensation, or of sickness, or accident pay, it makes to the individual if the payment:
● Is made because of that or another individual’s incapacity for work;
● Is calculated at a periodical rate; and
● Is not a payment made under an insurance policy to the policy owner.
Application to Payment A
In these circumstances, the parent(s) do not have a incapacity to work. Rather, they are not working as they have made the choice to remain with their dependent child in hospital.
Alternatively, it is the dependent child that has the incapacity to work. The purpose of the payment is to compensate a parent who incurs a loss of wages as a result of visiting their child in hospital.
Therefore, the payment is not made because of the child’s incapacity for work, but for their parent’s inability to attend work.
In regards to the periodic rate of payment, it appears that the payments will be made periodically to incorporate the parent’s periodic earnings.
Although the entity provides a form of insurance to the people involved, it is not a formal insurance policy held by a policy owner.
As the first limb under section 12-120 of Schedule 1 of the TAA has not been satisfied, there will be no PAYG withholding obligation for the entity in relation to these payments made to the individual parents.
Application to Payment B
In these circumstances, the client who receive Payment B are suffering from an incapacity for work as they only receive the payments for loss of wages for the period they are in hospital, or while recovering from the treatment received in hospital.
In regards to the periodic rate of payment, it appears that the payments will be made periodically to incorporate periodic earnings of each client.
Although the entity provides a form of insurance to people, it is not a formal insurance policy held by a policy owner.
As all three limbs under section 12-120 of Schedule 1 of the TAA have been satisfied, there will be PAYG withholding obligation for the TAC in relation to these payments made to the individuals.
Payments made to the employer of the recipients
The legislation contains a provision that enables both payments to be made to the employer of the individual.
Therefore the entity may (with the written request of the client) pay an amount payable to the employer of the relevant client rather than to the client directly. This provision enables the client to assign their right to the payments to their employer.
Based on the PAYG withholding provisions in Schedule 1 to the TAA, the entity will not have PAYG withholding obligations when the payment is made to the employer of an individual.