Edited version of private advice

Authorisation Number: 1051957521420

Date of advice: 3 March 2022

Ruling

Subject: Employer deductions

Question

Is Company A as head company of the Company A tax consolidated group entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for redundancy contributions made by Company B, under the Company B Union Enterprise Agreement 2020 (UEA) to the Company B Group Employee Entitlement Trust (Fund)?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

13 March 2020

Relevant facts and circumstances

Company A is the head company of the Company A tax consolidated group (A Co Group).

In 20XX, Company A acquired all of the issued share capital in Company B and Company B became a member of the A Co Group.

Company B provides various contracting and engineering services to commercial clients and employs approximately XXX people.

Union Enterprise Agreement

Company B's employees have their employment conditions and arrangements governed by the UEA, or alternatively 'staff' whose employment arrangements are governed by individual contracts.

The UEA was approved by the Fair Work Commission pursuant to Division 4 of the Fair Work Act 2009. The UEA operates from March 20XX and has a nominal expiry date of February 20XX. The UEA applies to:

•         Company B (the Company)

•         the employees of Company B who are engaged to perform work described in the Appendices to the UEA and who are not engaged by Company B under any other agreement

•         the Communication, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia, Electrical Division, Queensland Branch, and

•         the Australian Manufacturing Workers Union (Queensland Branch).

Clause XX of the UEA requires the Company to make prescribed redundancy contributions to an approved worker entitlement fund nominated by the Company for all employees except apprentices, juniors or probationary employees (Redundancy Contributions). The Company makes the Redundancy Contributions to Trustee Pty Ltd as trustee for the Company B Group Employee Entitlement Trust (Company B Fund).

Clause XX provides that an employee who is entitled to have Redundancy Contributions made to the Employee Entitlement Fund under clause XX may elect by notice in writing to the Company to have all or part of such Redundancy Contribution in excess of $X per week paid to the employee's nominated complying Super Fund on their behalf.

Clause XX provides that when an employee's employment is terminated by the Company for prescribed reasons, the Company will pay to the employee (the entitled employee) a lump sum that equals the amount the Company is obliged to pay pursuant to the UEA in regard to redundancy less the aggregate of any balances in the employee's account in:

•         the Employee Entitlement Fund

•         any Redundancy Fund, and

•         any amounts paid into the employee's nominated complying superannuation fund pursuant to clause XX.

Clause XX provides that if the Company's obligation in relation to redundancy payments under the UEA is equal to or less than the aggregate of any balances in the employee's account in:

•         the Employee Entitlement Fund

•         any Redundancy Fund, and

•         any amounts paid into the employee's nominated complying superannuation fund pursuant to clause XX

then the Company shall not be liable for any further payments in relation to the redundancy payments pursuant to the UEA.

Company B Group Employee Entitlement Fund (Fund)

The Fund was established on XX June 20XX pursuant to the Deed by resolution of the board of Directors of Company B.

The Fund is an approved worker entitlement fund within the meaning of subsection 58PB(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and continues to be an approved worker entitlement fund. It is listed as an approved worker entitlement fund in Item 6 of Schedule 1 to the Fringe Benefits Tax Amendment Regulations 2004 (No.1).

The Deed

The Deed provides that the Trustee may accept from a Group Employer, subject to due compliance with any applicable Industrial Instrument and the terms of the Deed, contributions towards Worker Entitlements and the reasonable administrative costs for the Fund, and such contributions will be held by the Trustee as part of the Fund.

'Worker Entitlement' is defined in the Deed as 'a leave payment (or payment in lieu of leave) or a payment upon cessation of employment to which an Employee becomes entitled to receive in accordance with the terms of any applicable Industrial Instrument'.

Pursuant to the Deed, the Trustee is required to keep an account for each Employee in respect of whom a contribution has been made by a Group Employer. The account must be kept in a manner that allows for the calculation of that Employee's Worker Entitlements at any time, including adjustments for Worker Entitlements paid directly by the Group Employer.

Employees or Group Employers will only become entitled to be paid all or part of the capital or income of the Fund in accordance with a resolution of the Trustee to make such a payment in accordance with clauses 7 or 8 of the Deed.

Clause X provides that amounts shall only be paid from the capital contributions made to the Fund by the Trustee for one or more purposes including:

•         the payment of Worker Entitlements to Employees

•         to reimburse a Group Employer where the Group Employer has made a Worker Entitlement payment directly to an Employee, to the extent that a full or part contribution has previously been paid to the Fund towards that Worker Entitlement

•         investments for the purpose of generating income for the Fund.

Clause X provides that amounts may only be paid from the income earned on the Fund property by the Trustee for one or more of the following purposes, including:

•         to reimburse a Group Employer, where the Group Employer has made a Worker Entitlement payment directly to an Employee, to the extent that a full or part contribution has previously been paid to the Fund towards that Worker Entitlement.

Other

Clause XX of the UEA provides that at the termination of an employee who has completed more than 1 years' service, due to retirement, voluntary resignation, death or permanent disability the employee's total credit balance in an approved Employee Entitlement Fund as nominated by the Company, will be paid by the Company into a complying superannuation fund of the Employee's choice.

You have advised that when an employee resigns in the circumstances set out in clause XX of the UEA, Company B must pay the amount equal to the employee's 'redundancy balance'(i.e. the amount credited to that employee in the Fund) directly to a complying superannuation fund of the employee's choice and then seek reimbursement from the Fund.

Company B has limited rights to only access the amounts out of the Fund as a reimbursement to the extent the Redundancy Contribution has previously been paid to the Fund towards the employee's entitlement to Redundancy Contributions under the UEA. Company B has no right to a refund of a payment made into the Fund.

Reasons for decision

Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it was incurred in gaining or producing assessable income and is not:

•         Capital, private or domestic in nature

•         Incurred in gaining or producing exempt income, or

•         Prevented from being deductible by another provision of the ITAA 1997.

Positive limbs of section 8-1 of the ITAA 1997

Was the outgoing necessarily incurred in gaining or producing assessable income?

For a loss or outgoing to be deductible, it must have been incurred in gaining or producing assessable income or necessarily incurred in carrying a business for the purposes of gaining or producing assessable income.

In carrying on business, an employing entity must satisfy the obligations to its employees which are contained in any industrial instrument in place. In the present case, Company B is bound by the UEA which governs the terms and conditions of employment for many of its employees and Company B therefore has a legal obligation to make contributions to the Fund in respect of its employees' redundancy entitlements.

It is the Commissioner's view that where a taxpayer is required to make a contribution to a worker entitlement fund as a result of its legal obligations under an industrial instrument, there is a connection between the business activities being carried on by the taxpayer and the taxpayer's obligation to provide for worker entitlements.

Under the Deed, Company B may only obtain a reimbursement (up to the amount in the employee's member account) for a payment made directly by it to an entitled employee. Company B has no right to a refund of payment into an employee members account.

As the Redundancy Contributions made by Company B to the Fund are:

•         non-refundable

•         made directly to actual member accounts

•         required to be made by Company B to satisfy its legal obligations under an industrial instrument (namely, the UEA)

the Redundancy Contributions are taken to have been incurred by Company A (as head company of the A Co Group of which Company B is a member), and have a sufficient connection to the income producing activities of Company A to give rise to a deduction.

Negative limbs of section 8-1 of the ITAA 1997

Are the contributions revenue or capital in nature?

Under section 8-1, a taxpayer cannot claim a deduction for an expense which is capital, private or domestic in nature. The view of the Commissioner is that whether a payment is revenue or capital in nature depends on the character of the payment made. This is supported by G.P International Pipecoaters Pty Ltd v FCT (1990) ATC 4413 at 4419 where it is stated that:

'The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd. v F.C. of T. (1938) 61 CLR 337 at p.363'

Determining the nature of the Redundancy Contributions to the Fund, 'primarily depends on what the outgoing is calculated to effect from a practical and business point of view.' In Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 34 the Full Court said at 18:

'Identification of the advantage sought to be obtained ordinarily involves consideration of the manner in which it is to be used and whether the means of acquisition is a once-and-for-all outgoing for the acquisition of something of enduring advantage or a periodical outlay to cover the use and enjoyment of something for periods commensurate with those payments.'

When Company B makes the Redundancy Contributions to the Fund, Company B is meeting its recurring legal obligations to its employees under the UEA and the obligation is directly connected to the income earning capacity of Company B's business. The payment of Redundancy Contributions are part of the immediate ordinary flow of business expenditure and as such can be considered revenue in nature.

Where:

•         Company B pays an amount directly to an employee in respect of that employee's redundancy

•         the employee is entitled to receive the payment in accordance with the terms of the UEA

•         Company B previously paid to the Fund to satisfy that employee's entitlement to Redundancy Contributions under the UEA, and

•         Company B later receives a reimbursement from the Trustee in respect of the amount it has paid directly to the employee

the reimbursement will be assessable income to Company A under section 6-5 at the time the amount is derived.