Edited version of private advice

Authorisation Number: 1051531951446

Date of advice: 20 June 2019

Ruling

Subject: PAYG withholding

Question and Answer

Do you have an obligation to withhold amounts from the payments made directly to recipients under Division 12 of Schedule 1 to the Tax Administration Act 1953 (TAA)?

Yes

This ruling applies for the following periods

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

The scheme commences on

1 July 2018

Relevant facts and circumstances

You place individuals in other organisations to gain experience that they can use in their professional life.

The organisations are required to provide mentor(s), and co-ordinators to assist and report on the individual's progress throughout the placement.

The number of placements and length of the placement varies depending on a number of factors.

You provide a payment to co-ordinators and mentors a per day per individual amount. The rate is based on an Award. The award is applicable to employees of the organisations only but is used as a de facto rate payable to those who act as mentors teachers and co-ordinators.

Payment is by completion of a claim form. This occurs at the end of each placement period.

All recipients are residents of Australia for tax purposes.

Relevant legislative provisions

The Taxation Administration Act 1953 Schedule 1 Section 12-35,

The Taxation Administration Act 1953 Schedule 1 Subsection 12-1(1)

Income Tax Assessment Act 1997 Subsection 6-5(2).

Reasons for decision

To help taxpayers meet their annual income tax liability, they are required to pay amounts of their income at regular intervals as it is earned during the year. They system for collecting these amounts is called Pay As You Go (PAYG).

Division 6 of Schedule 1 to the Taxation Administration Act 1953 (TAA) contains the rules for PAYG, which has two components: PAYG withholding and PAYG instalments. Subsection 6-5(2) of Schedule 1 to the TAA states that:

Under PAYG withholding, amounts are collected in respect of particular kinds of payments or transactions. Usually, someone who makes a payment to you is required to withhold an amount from the payment, and then to pay the amount to the Commissioner.

Section 10-5 of Schedule 1 to the TAA lists a summary of the different kinds of payments that are subject to PAYG withholding.

Section 12-35 of Schedule 1 to the TAA states that you must withhold an amount from salary, wages, commission, bonuses or allowances you pay to an individual as an employee (whether of you or another entity).

Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16) provides the Commissioner's view on whether an individual is paid as an employee for the purposes of section 12-35 of the TAA and whether the paying entity has an obligation to withhold an amount from the relevant payment.

Paragraph 12 of TR 2005/16 states that payment does not necessarily have to be between employer and employee for the payment to be covered by Section 12-35 of Schedule 1 to the TAA. The payment made to the individual must be in their capacity as an employee, either of the payer or another entity. The essential element is the nature of any connection between the payment and the individual's employment with the payer or any other entity.

However, Subsection 12-1(1) of Schedule 1 to the TAA provides you with an exception that in working out the amount to be withheld under Section 12-35, you should disregard so much of the payment as is exempt income of the individuals receiving the payment.

Therefore, we need to first examine the assessability of the payments made to mentors and co-ordinators.

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts (that is, ordinary income). There is no specific guidance or legislative definition of what is meant by income according to 'ordinary concepts'. Typical examples of ordinary income include salaries, wages, proceeds of carrying on a business, rent, interest and dividends. Examples of items which are not generally income include lottery prizes, proceeds from a mere hobby, loans and gifts. Profits from the sale of a capital asset are generally not income, although they may be assessable as statutory income (for example, under the capital gains provisions).

Payment for mentor teachers and co-ordinators occurs at the end of each placement, it cannot be said that the payment is ordinary income.

Statutory income

Subsection 6-10(2) of the ITAA 1997 provides that an amount which is not ordinary income but which is included in assessable income by a statutory provision is 'statutory income'.

Section 15-2 of the ITAA 1997 provides that:

Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

This is so whether the things were provided in money or in any other form.

It can be said that there is a relationship between the payments to the mentors and co-ordinators and their employment as they would not receive the payment unless they were employed in particular positions within the organisation.

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. 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 Taxation Administration Act 1953 (TAA). It is likely that 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.

A true honorarium is typified by the following:

·  the payment is received for personal reasons;

·  the payment has no connection to the recipient's income producing activities or services rendered;

·  the payment is not received as remuneration or a consequence of employment;

·  the payment is not relied upon or expected by the recipient for day-to-day living;

·  the payment is not legally required or expected;

·  there is no obligation on the part of the payer to make the payment; and

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

Merely referring to a payment as an honorarium, however, does not mean that the payment is exempt from PAYG provisions. TR 2002/21, at paragraph 28, discusses the notion of officer holder's 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...

For the mentors and co-ordinators the payments are received in recognition of their efforts in supporting program. Mentors are required to guide the individuals and prepare reports on the pre-individuals to assess them against criteria.

As the mentor and co-ordinator can only be employed in particular roles there is a direct connection between their income earning activities and the payment.

While there may be no requirement to make the payment, nor would the payment be relied upon for day-to-day living expenses, there is a direct relationship between the reasons the payments are made to mentors and coordinators and their employment. Accordingly, the payments are not true honorariums and are assessable income of the mentors and coordinators.

As the payments are assessable income, the payer is obliged to withhold from each payment.