Edited version of private advice

Authorisation Number: 1051971197464

Date of advice: 24 June 2022

Ruling

Subject: PAYG withholding

Question 1

Is X Pty Limited required to withhold pay as you go (PAYG) withholding amounts from the payment made to individuals, whether residents or non-residents, to defer the employment commencement date in accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No.

Question 2

Is X Pty Limited required to withhold an amount from the payment made to individuals to defer employment commencement date when an Australian Business Number (ABN) is not quoted?

Answer

No.

Question 3

Is X Pty Limited required to request a "Tax File Number" from individuals who receive the payment to defer the employment commencement date with them in accordance with section 202C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

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 commences on:

1 July 20XX

Relevant facts and circumstances

X Pty Limited is an Australian resident employer entity that is a member of the XYZ global network of members firm that provides professional services.

Every year X Pty Limited hires a number of graduates as direct entrants who have not worked for X Pty Limited before. A contract of employment is offered to the direct entrant graduates many months prior to the commencement date of employment. An example is the contract is offered in May of a year and the start date is March in the following year.

The individual is not considered an employee until employment has commenced with X Pty Limited and benefits of employment including salary, access to other tools of trade such as laptops and system access relevant to their position will then be provided.

In some circumstances, a payment is made to the direct entrant graduates to defer the employment commencement date with X Pty Limited. The payment can also be made to individuals who have signed a contract of employment prior to the employment commencement date in situations where the individual is in a foreign country when the contract was issued and require additional time to make arrangements for returning to Australia for commencement of employment.

It is possible the recipient of the payment is non-resident of Australia when the payment occurs.

It is a regular occurrence for individuals who sign the employment contract and renege on the agreement and accept employment elsewhere. There is a possibility that the individual may never commence employment with X Pty Limited after the payment is made.

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of schedule 1

Taxation Administration Act 1953 section 12-190 of schedule 1

Taxation Administration Act 1953 sections 8WA and 8WB, Division 2. Part III Prosecutions and Offences

Income Tax Assessment Act 1936 section 202C Division 3 Part VA Tax File Numbers

Reasons for decision

Question 1

Summary

X Pty Limited is not required to withhold PAYG withholding amounts from the payment made to individuals, whether residents or non-residents, to defer employment commencement date with them under section 12-35 of Schedule 1 to the TAA 1953.

Detailed reasoning

The information and documentation you provided indicates that the payment is paid upon the individual agreeing to accept the variation of the employment contract, that is defer the employment commencement date with X Pty Limited and all other terms and conditions of the contract remain unchanged.

According to contract law, a contract variation occurs when the parties agree to do something differently from the way they originally agreed, whilst the remainder of the contract remain unchanged.

The payment is not considered a payment in respect of employment but is a consideration to vary the employment contract X Pty Limited offers to future employees.

Section 12-35 of Schedule 1 to the TAA 1953 requires an entity to withhold from salary, wages, commission, bonuses or allowances that is paid to an individual as an employee (whether of that or another entity). The withheld amount is referred to as PAYG withholding.

Taxation Ruling TR 2005/16 discusses the Commissioner's view on whether an individual is paid as an employee for the purposes of section 12-35 to the TAA 1953.

The term 'employee' is not defined in the TAA 1953 and the purposes of withholding under section 12-35 the word 'employee' has its ordinary meaning.

The ruling states that there must be an employee, a payment of salary, wages etc to an employee as a consequence of his/her employment and finally, the payment must be made by an 'entity'.

In relation to the consideration of 'employee', you have advised that:

•         the purpose of the payment is to defer employment commencement date with X Pty Limited

•         the individual recipients of the payment are not an employee of X Pty Limited until employment has commenced

Based on the information and documentation you provided, the individual recipients of the payment whether residents or non-residents, are not employees for the purpose of section 12-35 of Schedule 1 to the TAA 1953. Therefore, there is no obligation for X Pty Limited to withhold from such payments under this section nor any of the other withholding provisions that relate to payment for work or services, as they are not applicable.

Description of payment as a bonus

Information and documentation you provided characterised the payment as 'One-off bonus' payment offered to individuals who agrees to defer the employment commencement date with X Pty Limited.

"Bonus" is defined in the Macquarie Dictionary as "a sum of money paid to a shareholder, partner, employee, or agent of a company, a returned soldier, etc., over and above the regular dividend or pay".

The ATO's view of what constitute a bonus is:

•         a bonus is usually made to an employee in recognition of performance or services and may be calculated as a percentage of the proceeds from a particular business transaction. These payments may not necessarily be related to a particular period of work.

•         a payment will be treated as similar to a bonus if it is of a one-off nature that does not relate to work performed in a particular period such as:

o   a once-only payment made to a payee as compensation for a changed work location

o   an amount paid as a sign-on bonus to a payee entering a workplace agreement

o   any lump sum allowance.

Although the payment is characterised as 'One-off bonus', the payment is not a payment of salary, wages, commission or bonuses for the purposes of section 12-35 of Schedule 1 to the TAA 1953.

Question 2

Summary

X Pty Limited is not required to withhold an amount from the payment made to individuals to defer employment commencement date with them when an ABN is not quoted.

Detailed reasoning

Subdivision 12-E section 12-190 of Schedule 1 to the TAA 1953 outlines the withholding obligation where a recipient of payment does not quote an ABN.

An entity (the payer) must withhold an amount from a payment it makes to another entity if:

(a) the payment is for a supply that the other entity has made, or proposes to make, to the payer in the course or furtherance of an enterprise carried on in Australia by the other entity; and

(b) none of the exceptions in this section applies

There is no information or documentation to suggest that the individual recipients of the payment have supplied any goods or services, nor are they entitled to an ABN because they are not carrying on or starting an enterprise in Australia.

Therefore, an amount is not required to be withheld from the payment when an ABN is not quoted by an individual recipient as the payment made is not being made for a supply.

Question 3

Summary

X Pty Limited is not required to request a Tax File Number (TFN) (on a TFN declaration or other on-boarding forms) from individuals who receive the payment to defer the employment commencement date with them.

Detailed reasoning

As stated at Question 1, there is no withholding obligation on the payments made to an individual for the deferral of their employment commencement date. As there is no "eligible PAYG payment" being made, there is no requirement for X Pty Limited to obtain a TFN from the recipient by completing a TFN declaration (or other on-boarding forms) under section 202C of the ITAA 1936.

As X Pty Limited has no withholding obligation in respect to the payment, X Pty Limited is not entitled to request the individual's TFN. To do so, X Pty Limited does risk the application of sections 8WA and 8WB of the TAA 1953.

Sections 8WA and 8WB of the TAA 1953 make it an offence to request, record, use or disclose TFN, other than as permitted by these sections. The maximum penalty that applies to offenders is a fine of 100 penalty units or two years imprisonment or both.