Edited version of private advice

Authorisation Number: 1052195297151

Date of advice: 6 March 2024

Ruling

Subject: Assessable income

Question 1

Is Entity A required to withhold a Pay As You Go (PAYG) withholding amount from the payment made to the Employee in accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes

Question 2

Does the payment by Entity A to the Employee constitute a 'fringe benefit' as per the definition of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

This ruling applies for the following period:

Income tax year ending 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Entity A employed the Employee on a part time fixed term contract coaching role.

The contract expired on XX 20XX and a new contract of employment was entered into on XX 20XX.

The Employee took unpaid leave for the first 13 weeks of the contract in order to coach an Australian team overseas.

The crews coached by the Employee were particularly successful in the 20XX-XX season and on XX 20XX, Entity A's Committee voted to provide the Employee with an ex-gratia payment in recognition of the Employee's success. This was for the amount of $XX and was paid to the Employee via bank transfer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Fringe Benefits Tax Assessment Act 1986 subsection 136 (1)

Taxation Administration Act 1953 section 12-35 to Schedule 1

Reasons for decision

Question 1

Is Entity A required to withhold a Pay As You Go (PAYG) withholding amount from the payment made to the Employee in accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Summary

Entity A is required to withhold a PAYG withholding amount from the payment made to the Employee in accordance with section 12-35 of Schedule 1 to the TAA.

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'.

The nature and character of a payment must be determined first to ascertain whether a withholding obligation arises under section 12-35 of Schedule 1 to the TAA (that is, whether the payment is in the nature of salary, wages or bonus income which are remuneration in nature, as opposed to a provision of fringe benefits).

The nature and character of a payment

The nature of a payment must be determined in the hands of the employee. It is irrelevant whether it is paid in advance of the services to be performed, or after, or is paid by another entity.

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called 'ordinary income'. Ordinary income has generally been held to include three categories: namely, income from rendering personal services, income from property and income from carrying on a business.

Ordinary income is not clearly defined in the legislation and therefore the courts have identified a number of factors that indicate whether an amount has the character of income according to ordinary concepts.

It has been determined that a frequent characteristic of income receipts is an element of periodicity, recurrence or regularity.

Other characteristics of income that have evolved from case law also include receipts that:

•         are earned,

•         are expected and

•         are relied upon

In this case the payment is earned (it relates to the Employee's high level of performance in their employment) and is relied upon (it came immediately before the Employee took a period of unpaid leave).

However, it is not considered to be a payment that is expected, nor is it a periodic payment. However, periodicity, recurrence or regularity are not always essential for an amount to be income. For example, the proceeds of an isolated transaction, even if received as a lump sum, may be income (FC of T v Myer Emporium Ltd 87 ATC 4363), while instalments of a capital sum, even though received regularly from one source, are not income. Equally, an unsolicited lump sum payment which is unlikely to be repeated may not be income according to ordinary concepts (FC of T v Harris 80 ATC 4238), while lump sum damages will nevertheless be assessable where they are compensation for losses of an income nature only.

Furthermore, earnings from the performance of services, whether as an employee or otherwise, are generally ordinary assessable income even if the services are performed, and/or the rewards received, irregularly. That is, a receipt will constitute income according to ordinary concepts if it is a receipt arising out of a taxpayer's employment or business activities. This will be so even if the receipt is not directly related to any service provided by the recipient to the donor (FC of T v. Dixon (1952) 86 CLR 540; 5 AITR 443; 10 ATD 82).

Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? considers situations where a gift may be considered assessable income and states:

•         If a church worker receives a gift because of, in respect of, for, or in relation to any income-producing activity of the church worker, the gift is assessable income. The income-producing activity can arise from the church worker's office or occupation or some service rendered or to be rendered by the church worker. In other words, a gift (even if it is a receipt of a one-off nature) is assessable income if it is possible to:

(a) relate the receipt of the gift by the church worker to any income-producing activity on his or her part; or

(b) point to any employment, personal exertion or other income-earning activity by the church worker of which the receipt of the gift is in a relevant sense a product or incident.

In this case, the payment was a recognition of the Employee's success. The payment was essentially a bonus for performing the duties of their paid position in an exemplary manner.

On balance, the fact that the payment was earned is the overriding consideration and means that the payment has the character of ordinary income in the Employee's hands under section 6-5 of the ITAA 1997.

Pay As You Go Withholding Implications

Based on the outcome stated above that the payment is essentially a bonus, it will follow that there are PAYGW implications to consider. Where an employee has been paid a bonus, an amount must be withheld under section 12-35 of Schedule 1 to the TAA.

Question 2

Does the payment by Entity A to the Employee constitute a 'fringe benefit' as per the definition of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Summary

The payment by Entity A to the Employee does not constitute a 'fringe benefit' as per the definition of that term in subsection 136(1) of the FBTAA.

Detailed reasoning

The payment is not considered to be a 'fringe benefit' under the definition in subsection 136(1) of the Fringe Benefits Tax Administration Act 1986. Paragraph (f) of the definition of a 'fringe benefit' provides that a fringe benefit is a benefit that does not include a payment of salary and wages. 'Salary and wages' is defined in subsection 136(1) of the FBTAA to mean 'a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the TAA listed in the table, to the extent that the payment is assessable income'.

Therefore, as the payment to the Employee is one from which an amount must be withheld under section 12-35 of Schedule 1 to the TAA, the payment is 'salary and wages' and therefore excluded from the definition of a 'fringe benefit' (such that FBT is not applicable).