Edited version of private advice

Authorisation Number: 1052023205510

Date of advice: 10 November 2022

Ruling

Subject: PAYG withholding

Question 1

Is Entity A required to withhold pay as you go (PAYG) withholding amounts under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from the Payment made to individuals who have ceased employment with - or were never employed by - Entity A?

Answer

No.

Question 2

Is Entity A required to withhold PAYG withholding amounts under section 12-190 of Schedule 1 to the TAA from the Payment made to individuals who have ceased employment with - or were never employed by - Entity A in circumstances where an Australian Business Number (ABN) is not quoted?

Answer

No.

Question 3

In circumstances where the Payment is made to individuals who have ceased employment with - or were never employed by - Entity A, is Entity A required to request a Tax File Number (TFN) from these individuals in accordance with section 202C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 4

In circumstances where the Payment is made to individuals who have ceased employment with - or were never employed by - Entity A, does the Payment constitute a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 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

Entity A is an Australian resident employer entity that provides professional services.

Entity A runs an employee referral program (the Program) to source high-quality employees, whereby individuals will receive a 'thank you' payment (the Payment) for every person that is successfully hired.

In additional to current employees, the Program is open to past employees as well as to individuals who were never employed by Entity A (including those who are a non-resident of Australia when the Payment occurs).

Receipt by former employees and other eligible individuals of the Payment would not create a contractual relationship.

The Applicant has sought a ruling only in respect of the Payment made to former employees of Entity A or to individuals who were never employed by Entity A. That is, this ruling is not in respect of the Payment made to individuals who are currently employed with Entity A.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 section 202A

Income Tax Assessment Act 1936 section 202C

Taxation Administration Act 1953 section 8WA

Taxation Administration Act 1953 section 8WB

Taxation Administration Act 1953 section 12-35 of Schedule 1

Taxation Administration Act 1953 section 12-190 of Schedule 1

Reasons for decision

Question 1

Summary

Entity A is not required to withhold pay as you go (PAYG) withholding amounts under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from the Payment made to individuals who have ceased employment with - or were never employed by - Entity A. This is because the Payment is not made in respect of any employment services performed by the recipient for Entity A.

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA requires an entity to 'withhold an amount from salary, wages, commission, bonuses or allowances it pays 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 Income tax: Pay As You Go - withholding from payments to employees (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.

Paragraph 14 of TR 2005/16 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'.

The term 'employee' is not defined in the TAA and for the purposes of withholding under section 12-35 of Schedule 1 to the TAA, the word 'employee' has its ordinary meaning.

As stated in paragraph 12 of TR 2005/16, a payment does not necessarily have to be between an employer and an employee for the payment to be covered by section 12-35 of Schedule 1 to the TAA. However, it is a requirement that the payment be made to the employee 'in their capacity as an employee', either of the payer or another entity.

Further, paragraph 12 of Taxation Ruling TR 2003/15 Income tax: Pay As You Go (PAYG) Withholding - Payments made by trustees under the Bankruptcy Act 1966 to former employees (TR 2003/15) states:

Section 12-35 in Schedule 1 to the TAA 1953 only applies to payments made to individuals in their capacity as an employee. For section 12-35 to apply, the individual does not have to be an employee of the entity making the payment, nor does the employment relationship necessarily have to exist at the time of payment. The essential element is the character of the payment and not the identity or capacity of the entity making the payment.

As per the Facts, recipients of the Payment are former employees of Entity A or were never employed by Entity A. The Payment is not made in respect of any employment services performed by the individual for Entity A.

On this basis, for the purposes of this ruling, the Payment is not paid to an individual (whether a resident or non-resident) in their capacity as an employee, as required by section 12-35 of Schedule 1 to the TAA. Therefore, the Commissioner considers that section 12-35 of Schedule 1 to the TAA does not apply in these circumstances. As such, there is no obligation for Entity A to withhold from such payments under this section nor under any other withholding provision that relates to payment for work or services.

Question 2

Summary

Entity A is not required to withhold an amount under section 12-190 of Schedule 1 to the TAA from the Payment made to individuals who have ceased employment with - or were never employed by - Entity A in circumstances where an Australian Business Number (ABN) is not quoted. This is because the Payment is not for a supply that recipients of the Payment have made, or propose to make, to Entity A in the course or furtherance of an enterprise carried on in Australia.

Detailed reasoning

Subsection 12-190(1) of Schedule 1 to the TAA outlines the withholding obligation where a recipient of a payment does not quote an ABN, and states that:

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.

Paragraph 149 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides that the term 'enterprise' is defined in section 41 of the A New Tax System (Australian Business Number) Act 1999 to have the meaning given by section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). 'Enterprise' is defined in section 9-20 of the GST Act to include, relevantly:

an activity, or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

'In the form of a business'

In order to determine whether an activity or series of activities amounts to a 'business', the activity needs to be considered against the indicators of carrying on a business as established by case law. Some of these indicators are listed in paragraph 178 of MT 2006/1, which are based on those discussed in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

The Commissioner considers that a recipient of the Payment would not be undertaking an activity or series of activities in the form of a business.

'In the form of an adventure or concern in the nature of trade'

The concept of an 'adventure or concern in the nature of trade' is considered in paragraphs 233 to 261 of MT 2006/1, with the characteristics of 'trade' including the subject matter of realisation, length of period of ownership, frequency or number of similar transactions, motive, supplementary work on or in connection with the property realised, and the circumstances responsible for the realisation.

The Commissioner considers that a recipient of the Payment would not be undertaking an activity or series of activities in the form of an adventure or concern in the nature of trade.

'In the form of a lease, licence or other grant of an interest in property'

A recipient of the Payment will not be providing any lease, licence or other grant of an interest in property.

Therefore, the Commissioner is of the view that recipients of the Payment - who have ceased employment with, or were never employed by, Entity A in circumstances where an ABN is not quoted - will not be making a supply in the course or furtherance of an enterprise carried on in Australia such that paragraph 12-190(1)(a) of Schedule 1 to the TAA would not be satisfied. As such, Entity A is not required to withhold an amount under section 12-190 of Schedule 1 to the TAA from payments made to these individuals.

Question 3

Summary

In circumstances where the Payment is made to individuals who have ceased employment with - or were never employed by - Entity A, Entity A is not required to request a Tax File Number (TFN) from these individuals in accordance with section 202C of the Income Tax Assessment Act 1936 (ITAA 1936). This is because Entity A has no withholding obligation in respect of the Payment.

Detailed reasoning

Section 202C of the ITAA 1936 provides that a recipient of an eligible PAYG payment, or those who expect to become a recipient of an eligible PAYG payment, may make a TFN declaration in relation to the payer. 'Eligible PAYG payment' is defined in section 202A of the ITAA 1936 to include a payment from which an amount must be withheld (even if that amount is nil) under Subdivision 12-B (other than section 12-55), Subdivision 12-C or Subdivision 12-D in Schedule 1 to the TAA.

As stated in the response to Question 1, there is no withholding obligation on the Payments made to individuals, whether resident or non-resident. As there is no 'eligible PAYG payment' being made, there is no requirement for Entity A to obtain a TFN from these individuals by completing a TFN declaration (or other on-boarding forms) under Section 202C of the ITAA 1936.

As Entity A has no withholding obligation in respect of the Payment, Entity A is not entitled to request these individuals' TFNs. To do so would risk the application of sections 8WA and 8WB of the TAA, which makes it an offence to require, request, record, use or divulge another person's TFN, other than as permitted by these sections.

Question 4

Summary

In circumstances where the Payment is made to individuals who have ceased employment with - or were never employed by - Entity A, these Payments do not constitute a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

In general terms, the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA provides that a fringe benefit will arise if:

•         a benefit is provided to an employee, or an associate of an employee by an employer, an associate of the employer or another person under an arrangement involving the employer or an associate

•         the benefit is provided in respect of the employment of the employee, and

•         it is not excluded from being a fringe benefit.

Miscellaneous Taxation Ruling MT 2016 Fringe benefits tax: benefits not taxable unless provided in respect of employment (MT 2016) further states at paragraph 8 that:

To be subject to fringe benefits tax two essential requirements must be satisfied. First, the benefit must be provided to an employee (or associate) and, second, the benefit must be provided in respect of the employment of the employee.

These two requirements are considered below.

'Employee'

An 'employee' is defined in subsection 136(1) of the FBTAA to include a current, future and former employee. Subsection 136(1) of the FBTAA defines a 'current employee' to mean 'a person who receives, or is entitled to receive, salary or wages'. 'Salary or wages', as defined in subsection 136(1) of the FBTAA, means payments from which an amount must be withheld under section 12-35 of Schedule 1 to the TAA.

As per the Facts, the Payment may be made to former employees of Entity A, which constitutes an 'employee' as defined in subsection 136(1) of the FBTAA. However, in some cases, the Payment will be made to individuals who were never employees of Entity A (and thus not an 'employee' pursuant to the subsection 136(1) definition).

'In respect of employment'

As per subsection 136(1) of the FBTAA, the term 'in respect of' in relation to the employment of an employee includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

Paragraphs 9 and 10 of MT 2016 provide the following:

9. The reference in the law to future or former employees does not curtail the requirement that the benefit also be provided in respect of the employment of the employee. In the context of "future" or "former" employees the reference to employment is, by virtue of the definitions of those terms and the definition of "current employee", a reference to the employment activities ultimately undertaken in the case of a future employee or formerly undertaken in the case of a former employee.

10. Seen in context, therefore, the reference to future and former employees ensures only that a benefit provided in respect of employment activities does not escape fringe benefits tax merely by virtue of the fact that it is given in advance of the employment commencing or after the employment ceases. For example, the inclusion of former employees ensures that a benefit (e.g., a low interest loan) that continues to be provided to a former employee by virtue of his or her former employment remains subject to fringe benefits tax.

Further, the full Federal Court in J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 - in examining the meaning of 'in respect of' an employee's employment - held that the phrase required a 'nexus, some discernible and rational link, between the benefit and employment', though noted that 'what must be established is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment'.

Based on the response to Question 1, the Payment to an individual (whether a resident or non-resident) - who is a former employee of Entity A or who has never been employed by Entity A - is not made in respect of any employment services performed by the individual for Entity A. With particular regard to recipients of the Payment who are former employees of Entity A, the Commissioner considers that there is no sufficient or material nexus between the benefit (the Payment) and their former employment with Entity A as the Payment is also offered to individuals who were never employees of Entity A (including individuals who have never been to Australia).

Therefore, the Payment made to former employees of Entity A or to individuals who were never employees of Entity A is not considered to be 'in respect of employment'.

On this basis, the Commissioner considers that the Payment made to individuals who have ceased employment with - or were never employed by - Entity A does not constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA.