Edited version of your written advice

Authorisation Number: 1051510959531

Date of advice: 10 May 2019

Ruling

Subject: PAYG withholding

Question 1

Is the transition allowance paid to Members of Parliament (Members) subject to withholding under section 12-45 of Schedule 1 to the Taxation Administration Act 1953 (TAA) as a payment of an allowance to an office holder?

Answer

No

Question 2

Is the transition allowance paid to Members subject to withholding under section 12-85 of Schedule 1 to the TAA as the payment of an employment termination payment to an office holder?

Answer

Yes

Question 3

Is the resettlement allowance paid to Members subject to withholding under section 12-45 of Schedule 1 to the TAA as a payment of an allowance to an office holder?

Answer

No

Question 4

Is the resettlement allowance paid to Members subject to withholding under section 12-85 of Schedule 1 to the TAA as the payment of an employment termination payment to an office holder?

Answer

Yes

Question 5

Is the alternate travel kilometric allowance subject to withholding under section 12-45 of Schedule 1 to the TAA as a payment of an allowance to an office holder where the number of kilometres travelled is less than 5,000 business kilometres?

Answer

No

Question 6

Is the alternate travel kilometric allowance subject to withholding under section 12-45 of Schedule 1 to the TAA as a payment of an allowance to an office holder once the number of kilometres travelled exceeds 5,000 business kilometres?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

A former Member may be eligible for the payment of a Transition Allowance in certain circumstances.

The circumstances that affect whether or not a Transition Allowance is payable include when the Member was elected, the basis on which the Member ceased as a Member, and eligibility to access pension or superannuation benefits.

Due to transitional arrangements, some Members will qualify for the former Resettlement Allowance. The eligibility criteria for this allowance are similar to that for the Transitional Allowance.

The Remuneration Tribunal responsible for the Transition Allowance considers it to be a severance payment that should be provided to Members to assist as necessary in their return to private life and enable them to re-skill for alternate employment.

All Members receive a Motor Vehicle Allowance which is provided to cover expenditure incurred in acquiring and maintaining their vehicle.

The Handbook also provides for the payment of an ‘Alternate travel kilometric allowance’ to Members in certain circumstances.

Members who represent certain regional electorates are allocated ‘Air Warrants’ to facilitate commercial air travel from the Member’s electorate to the capital city (and/or return).

Members who are entitled to these Air Warrants are also able to use alternate travel options when commercial air travel options are unsuitable. These alternate travel arrangements are:

a) Travel by Charter flight

b) Travel by Member’s private aircraft

c) Travel by private vehicle

Where Members claim alternate travel by private vehicle they are entitled to a kilometric payment up to the value of the normal business class airfare. The purpose of this allocation is to support the long-standing principal that regional Members should not be disadvantaged in respect of the need to travel to and from the capital city to conduct Parliamentary business.

The kilometric rate is currently 37.5 cents per km for automobiles.

Unlike the general Motor Vehicle Allowance, claims for Alternate Travel kilometric allowance are submitted on an individual basis after the trip is completed and must include the following information:

● Dates of travel

● Distance travelled (in kilometres)

● Specific purpose of travel

Members who are entitled to access alternate travel arrangements typically reside in large electorates and would usually be expected to use their motor vehicle to travel more than 5,000 work-related kilometres per year.

Assumptions

The transition allowance and resettlement allowance is received no later than 12 months after termination of employment.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-5

Taxation Administration Act 1953 section 12-45 of Schedule 1

Taxation Administration Act 1953 section 12-85 of Schedule 1

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 82-130(1)

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 15-70

Fringe Benefits Tax Assessment Act 1986 section 22

Reasons for decision

Questions 1-4

Section 12-45 in Schedule 1 to the Taxation Administration Act 1953 (TAA) imposes an obligation on the paying entity to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an office holder.

Section 12-85 of Schedule 1 to the TAA states:

An entity must withhold an amount from any of the following payments it makes to an individual:

(a) a superannuation lump sum;

(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.

Section 12-5 of Schedule 1 to the TAA provides that if more than one provision requires a payer to withhold, only one amount is to be withheld from the payment. The general rule is that the provision that is the most specific to the circumstances of the payment is to apply.

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 excludes certain payments such as accrued annual and long service leave, the tax-free parts of a genuine redundancy payment and an early retirement scheme payment from being an employment termination payment.

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a consequence of the termination of your employment

In Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' the Commissioner has considered the meaning of the phrase ‘in consequence of’.

In paragraph 5 of TR 2003/13 the Commissioner states:

5. …a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment ‘follows as an effect or result of’ the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

6. …a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Paragraph 36 of TR 1999/10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments states that Members are not common law employees.

Paragraphs 38 to 40 of TR 1999/10 state:

38. However, a Member of an Australian Parliament is specifically incorporated into the definition of 'employee' by virtue of the definitions of 'salary or wages' and 'eligible person' in section 221A of the ITAA 1936. The person or government body who pays a Member's Parliamentary remuneration is also defined in section 221A as the Member's 'employer'.

39. ' Member of an Australian Parliament' also comes within the statutory definition of 'employee' in the FBTAA by virtue of its link to section 221A of the ITAA 1936.

40. In addition, a Member is treated as an 'employee' for Superannuation Guarantee purposes (section 12, Superannuation Guarantee (Administration) Act 1992).

It is considered a Member is an employee for the purposes of receiving an employment termination payment.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

A Member of Parliament may be eligible for either a Transition Allowance or a Resettlement Allowance, based on when the Member was elected to parliament, the basis on which the Member ceased as a Member, and eligibility to access pension or superannuation benefits.

The Transition Allowance is paid to eligible Members who cease to be in office, have retired involuntarily through loss of part pre-selection for reasons other than misconduct, or through defeat at an election, and are not eligible to access a pension or superannuation benefit related to their service in Parliament immediately upon ceasing to be an MP.

The Resettlement Allowance is paid to eligible Members who ‘retire involuntarily’ from the Parliament by choosing not to stand for re-election following loss of party endorsement for reasons other than misconduct, or being defeated at an election.

In either case, the applicable allowance is calculated based on the Member’s base salary.

It is accepted that both the Transition Allowance and Resettlement Allowance are made in consequence of the termination of employment. Therefore, the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The payment is received no later than 12 months after termination

The second condition for the payment to meet the criteria, as an employment termination payment, is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the employee’s termination of employment, unless they are covered by a determination exempting them from the 12 month rule.

If the Transition Allowance or Resettlement Allowance are paid to a Member within 12 months of termination the second requirement of paragraph 82-130(1)(b) of the ITAA 1997 will be satisfied.

Exclusions under section 82-135 of the ITAA 1997

As already noted, certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997.

The Transition Allowance and Resettlement Allowance do not fall within any of the exclusions contained in section 82-135 of the ITAA 1997.

The Transition Allowance and Resettlement Allowance are paid in the event that the employment relationship is terminated, to compensate the employee for the loss of their job.

Therefore, the Transition Allowance and Resettlement Allowance are employment termination payments under section 82-130 of the ITAA 1997.

Application to your circumstances

In your case, the Transition Allowance and Resettlement Allowance are employment termination payments. As section 12-85 of Schedule 1 to the TAA is the most specific provision, an amount must be withheld from the payments under this provision.

Questions 5 & 6

Taxation Ruling TR 92/15 explains the difference between an allowance and a reimbursement for the purposes of determining whether a payment is a fringe benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986), or whether that payment is assessable income under the Income Tax Assessment Act 1936 (ITAA 1936). Paragraphs 2 and 3 of TR 92/15 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. A further indication of a reimbursement is where the recipient is required to refund unexpended amounts to the provider.

Paragraph 4 of Income Tax Ruling IT 2543 specifies that the treatment of transport allowances differs to the reimbursement by an employer of expenses incurred by an employee on transport. Reimbursement for expenses are generally considered under the fringe benefits tax legislation which places the tax obligations (if any) on the employer and not the employee. However, there are some reimbursed car expenses which are exempt from fringe benefits tax under section 22 of the FBTAA 1986. Where this is the case paragraph 26(eaa) of the ITAA 1936 specifically includes the reimbursement amount in the employee's assessable income.

TR 1999/10 states that where a Member receives a payment in respect of motor vehicle expenses that is based on cents per kilometre, the Member should include the amount received as assessable income under paragraph 26(eaa) of the ITAA 1936.

Paragraph 26(eaa) of the ITAA 1936 has been replaced by section 15-70 of the ITAA 1997. As the new provision expresses the same ideas as the previous provision, TR 1999/10 also applies to the new provision.

A reimbursement is compensation of exact costs incurred by an employee. It cannot be calculated on a set formula. The Members are paid an amount to cover the costs incurred for the use of their own motor vehicle. The payment is calculated on a set rate for the number of kilometres travelled, not on the basis of exact expenses incurred. As such the payments are considered to be an allowance.

Therefore the payments form part of an allowance and the amount paid to the Members is included in their assessable income.

Legislative instrument F2015L01047 states that there is no requirement to withhold on a cents per kilometre car expense allowance payment up to a maximum of 5,000 business kilometres where the allowance is calculated using the approved (or a lower) cents per kilometre rate (the approved rate for the 2018-19 income year was 68 cents per kilometre).

In your case, the payments to the Members who use their own motor vehicle to travel are allowances. Therefore they are subject to PAYG withholding tax under section 12-45 of Schedule 1 of the TAA once the business kilometres travelled exceeds 5,000 kilometres.