Edited version of private advice

Authorisation Number: 1051777277921

Date of advice: 10 November 2020

Ruling

Subject: Fringe benefits tax - employees

Question

Will the board members of a charity be employees under the proposed remuneration increases for the purposes of fringe benefits?

Answer

Yes

This ruling applies for the following periods

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

A charity is an Australian Charities and Not-for-profit Commission (ACNC) registered charity with Fringe Benefit Exemption status as a Public Benevolent Institution.

The charity is governed by a Board of Directors, who in the past have been paid a small meeting allowance to cover out-of-pocket expenses. Board meetings are held monthly. The Board has this year updated and endorsed a Board Director Role Description and Board Director Remuneration policy.

It is proposed to increase annual payments to the chairman, a lesser amount to each of the deputy chairmen and treasurer, and a further lesser amount to the other four board members.

Each Director supports and works with the Chairperson and other Directors to oversee and direct the organisation to thrive whilst adhering to the charity mission, goals, values, policies and objectives. Every Director plays an active part in the strategic direction and planning of the charity covering a range of duties and responsibilities, skills and experience.

The constitution of the charity allows for payment to board members in the ordinary course of business.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Taxation Administration Act 1953 Section 12-40

Reasons for decision

Will the board members of a charity be employees under the proposed remuneration increases for the purposes of fringe benefits?

For the purposes of fringe benefits tax, the term 'employee' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to mean:

(a)  a current employee;

(b)  a future employee; or

(c)   a former employee.

The term 'current employee' is defined in subsection 136(1) of the FBTAA to mean a person who receives, or is entitled to receive, salary or wages.

The term 'salary or wages' is defined in subsection 136(1) of the FBTAA to mean:

(a)  A payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income;

Section 12-40 of the Taxation Administration Act 1953 (TAA) states the following:

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.

The term 'remuneration' is not defined in any Income Tax acts and therefore takes on its ordinary meaning being 'money paid for work or a service'.

Whether payments to the Board of Directors are considered to be remuneration, the payments will need to be ordinary income in accordance with subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), or statutory income in section 6-10 of the ITAA 1997.

Taxation Ruling IT 2639 Income tax: personal services income (IT 2639) defines personal services income at paragraph 3:

"Income from personal services" is income that an individual taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour.

The nexus between services rendered and receipt of a payment was confirmed in the findings in Case Z16 92 ATC 183, (Case Z16) as follows:

3. The payment did not bear any relationship to the time and energy the taxpayer expended on voluntary work for the society or to the quantum of her expenses and was not motivated by genuine commercial considerations.

Case Z 16 related to the payment of an honorarium which 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 or bona fide (or true) honorarium.

It is proposed to increase annual payments to the chairman, a lesser amount for the deputy chairman and treasurer, and a further lesser amount for the other four board members. The proposed increased payments are more than nominal out-of-pocket expenses, and are paid at different levels reflecting responsibilities and performance of duties. The proposed payments can be considered to be salary and wages.

The board members will therefore be employees for the purposes of fringe benefits.