Edited version of private advice

Authorisation Number: 1051735740461

Date of advice: 05 October 2020

Ruling

Subject: Income tax treatment of allowances paid to employees

Pay as You Go (PAYG) Withholding Tax

Question 1.

For expense allowances paid to employees:

(a)          Is pay as you go (PAYG) withholding tax required to be withheld on this allowance?

(b)          Is this allowance required to be included in each employee's payment summary?

Answers

(a)          Yes

(b)          Yes

Question 2

For expenditure allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is the general variation of the rate of withholding to nil appropriate for this allowance?

(c)          Is this allowance required to be included in each employee's payment summary?

Answers

(a)          Yes, unless special circumstances apply

(b)          Yes

(c)          Yes

Question 3

For motor vehicle allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is this allowance required to be included in each employee's payment summary?

Answers

(a)          Yes

(b)          Yes

Question 4

For accommodation allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is the general variation of the rate of withholding to nil appropriate for this allowance?

(c)          Is this allowance required to be included in each employee's payment summary?

Answers

(a)          Yes, unless special circumstances apply

(b)          Yes

(c)          Yes

Question 5

For travel allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is the general variation of the rate of withholding to nil appropriate for this allowance?

(c)          Is this allowance required to be included in each employee's payment summary?

Answers

(a)          No

(b)          Not applicable as PAYG withholding is not required

(c)          No

Question 6

For transport allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is this allowance required to be included in each employee's payment summary?

Answers

(a)          No

(b)          No

Question 7

For international travel allowance paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is the general variation of the rate of withholding to nil appropriate for this allowance?

(c)          Is this allowance required to be included in each employee's payment summary?

Answers

(a)          No

(b)          Not applicable as PAYG withholding is not required

(c)          No

Question 8

For exit payments paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this payment?

(b)          Is this payment required to be included in each employee's payment summary?

Answers

(a)          Yes

(b)          Yes

This ruling applies for the following period(s)

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 2019

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.            The employer provides different allowances to its employees as follows

·                     Expenses allowance

·                     Expenditure allowance

·                     Motor vehicle allowance

·                     Accommodation allowance

·                     Travel allowance

·                     Transport allowance

·                     International travel allowance

·                     Exit payment

Expense allowance

2.            The amount of each expense allowance has not been determined by reference to a methodology that considers the amount each particular employee is likely to expend in undertaking their duties. Therefore, the expense allowance has no direct relationship to the actual cost incurred, or likely to be incurred, by the employees.

Expenditure allowance

3.            The expenditure allowance is designed to cover incidental expenditure.

Motor vehicle

4.            The motor vehicle allowance per annum for an employee is based on the size of the region they service.

Accommodation allowance

5.            An allowance involving an overnight absence from the employee's ordinary place of residence.

Travel allowance

6.            The travel allowance is paid to employees as a reimbursement of actual expenses incurred for each overnight stay on business within Australia.

Transport allowance

7.            The transport allowance is intended to cover commercial transport costs incurred by employees who need to travel for business.

International travel allowance

8.            The international travel allowance is intended to cover travel and transport costs incurred by employees who travel for business outside Australia and is a reimbursement equal to the costs incurred by the employee.

Exit payment

9.            An exit allowance is made in consequence of the termination of employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 subparagraph 82-130(1)(a)(i)

Income Tax Assessment Act 1997 paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 section 82-135

Taxation Administration Act 1953 section 12-85 of Schedule 1

Taxation Administration Act 1953 section 12-35 of Schedule 1

Taxation Administration Act 1953 section 12-40 of Schedule 1

Taxation Administration Act 1953 section 12-45 of Schedule 1

Taxation Administration Act 1953 section 15-15

Reasons for decision

Question 1

For expense allowances paid to employees:

(a)          Is pay as you go (PAYG) withholding tax required to be withheld on this allowance?

(b)          Is this allowance required to be included in each employee's payment summary?

Summary

The expense allowance paid to employees will be subject to PAYG withholding tax requirements and is to be included in their payment summary.

Detailed reasoning

10.         Sections 12-35 to 12-45 of Schedule 1 to the TAA requires an entity to withhold an amount from allowances paid to employees.

11.         PAYG withholding tax is required to be withheld from the expense allowance paid to employees and reported on the employee's payment summary.

Question 2

For expenditure allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is the general variation of the rate of withholding to nil appropriate for this allowance?

(c)          Is this allowance required to be included in each employee's payment summary?

Summary

The expenditure allowance will ordinarily be subject to the PAYG withholding tax requirements. However, pursuant to section 15-15 of the TAA, the Commissioner considers it appropriate to vary the amount to be withheld to nil. The amount of the allowance is still required to be included in each employee's payment summary.

Detailed reasoning

12.         The expenditure allowance is paid to each employee to cover incidental expenditure incurred.

13.         Sections 12-35 to 12-45 of Schedule 1 to the TAA requires an entity to withhold an amount from allowances paid to employees.

14.         Section 15-15 of Schedule 1 to the TAA provides that the Commissioner may, for the purposes of meeting the special circumstances of a particular case or class of cases, vary the amount required to be withheld by an entity from a withholding payment and includes the Commissioner's power to reduce the amount to nil.

15.         The expenditure allowance will not be subject to PAYG withholding tax, as the Commissioner considers it appropriate to reduce the amount to be withheld to nil under section 15-15 of Schedule 1 of the TAA.

16.         The expenditure allowance is required to be shown on the employee's payment summary.

Question 3

For motor vehicle allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is this allowance required to be included in each employee's payment summary?

Summary

The motor vehicle allowance will be subject to PAYG withholding tax requirements and is to be included in each employee's payment summary.

Detailed reasoning

17.         The motor vehicle allowance paid per annum is based on the size of the region the employee services.

18.         Sections 12-35 to 12-45 of Schedule 1 to the TAA requires an entity to withhold an amount from allowances.

19.         As such, PAYG withholding is required to be withheld from the motor vehicle allowance and is to be included in the employee's payment summary.

Question 4

For accommodation allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is the general variation of the rate of withholding to nil appropriate for this allowance?

(c)          Is this allowance required to be included in each employee's payment summary?

Summary

The accommodation allowance will ordinarily be subject to the PAYG withholding tax requirements. However, pursuant to section 15-15 of the TAA, the Commissioner considers it appropriate to vary the amount to be withheld to nil. The amount of the allowance is still required to be included in each employee's payment summary.

Detailed reasoning

20.         Sections 12-35 to 12-45 of Schedule 1 to the TAA requires an entity to withhold an amount from allowances. Therefore, payment of an accommodation allowance would normally be subject to PAYG withholding tax.

21.         Section 15-15 of Schedule 1 to the TAA provides that the Commissioner may, for the purposes of meeting the special circumstances of a particular case or class of cases, vary the amount required to be withheld by an entity from a withholding payment and includes the Commissioner's power to reduce the amount to nil.

22.         Payment of the accommodation allowance in this instance will not be subject to PAYG withholding tax, as the Commissioner considers it appropriate to reduce the amount to be withheld to nil under section 15-15 of Schedule 1 of the TAA.

23.         The accommodation allowance is required to be reported in the employee's payment summary.

Question 5

For travel allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is the general variation of the rate of withholding to nil appropriate for this allowance?

(c)          Is this allowance required to be included in each employee's payment summary?

Summary

On the basis the travel allowance paid is a reimbursement of costs incurred and is within the reasonable allowances amount it will not be subject to PAYG withholding tax requirements, nor required to be included in the payment summary.

Detailed reasoning

24.         The travel allowance is provided as a reimbursement to cover the costs incurred (up to the reasonable allowances amount) for transport, accommodation and meals equal to the costs actually incurred by the employee for business in Australia.

25.         As the travel allowance is a reimbursement[1] (up to the reasonable allowances amount) it will not be subject to PAYG withholding tax or required to be shown on the employee's payment summary. As this allowance is not subject to PAYG withholding tax, it is not necessary to answer Question 5(b).

Question 6

For transport allowances paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is this allowance required to be included in each employee's payment summary?

Summary

The transport allowance will not be subject to PAYG withholding tax requirements, nor required to be included in any Member's payment summary.

Detailed reasoning

26.         The transport allowance is provided as a reimbursement equal to the costs incurred by employees, up to a capped amount, undertaking transport for business in Australia.

27.         As the transport allowance is a reimbursement20 (up to a capped amount) it will not be subject to PAYG withholding tax or required to be shown on the employee's payment summary.

Question 7

For international travel allowance paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this allowance?

(b)          Is the general variation of the rate of withholding to nil appropriate for this allowance?

(c)          Is this allowance required to be included in each employee's payment summary?

Summary

The international travel allowance will not be subject to PAYG withholding tax requirements, nor required to be included in the employee's payment summary.

Detailed reasoning

28.         The international travel allowance is provided as a reimbursement equal to the costs incurred up to the reasonable allowances amount by employees undertaking travel outside Australia for business purposes.

29.         As the international travel allowance is a reimbursement20 (up to the reasonable allowances amount) it will not be subject to PAYG withholding tax or required to be shown on the employee's payment summary. As this allowance is not subject to PAYG withholding tax, it is not necessary to answer Question 7(b).

Question 8

For exit payments paid to employees:

(a)          Is PAYG withholding tax required to be withheld on this payment?

(b)          Is this payment required to be included in each employee's payment summary?

Summary

The exit payment is considered to be an eligible termination payment and therefore subject to the PAYG withholding tax requirements and included in each employee's payment summary.

Detailed reasoning

30.         The exit payment is a one-time lump sum payment based on the employee's annual salary and is considered to be an employment termination payment as discussed below.

Employment termination payment

31.         An employee termination payment is described in section 82-130 of the ITAA 1997 and states:

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[2].

32.         Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment and 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

33.         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' (TR 2003/13) the Commissioner has considered the meaning of the phrase 'in consequence of'.

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

...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.

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

...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.

36.         It is accepted that an exit payment is 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

37.         The second condition requires that 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.

38.         If the exit payment is paid to an employee 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

39.         Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997.

40.         The exit payment does not fall within any of the exclusions contained in section

41.         82-135 of the ITAA 1997 and therefore the exit payment is an employment termination payment under section 82-130 of the ITAA 1997.

PAYG Withholding

42.         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.

43.         As discussed above, the exit payment paid to employees is an employment termination payment and PAYG withholding must be withheld.

44.         The exit payment is required to be reported on the employee's payment summary.

ATO view documents

Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement

[1] TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement

[2] 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.