Edited version of private advice

Authorisation Number: 1052211000963

Date of advice: 29 May 2024

Ruling

Subject: PAYG witholding

Question 1

Is a payment of a long service leave (LSL) benefit to an eligible Worker a payment of salary or wages for the purposes of section 12‐35 of Schedule 1 of the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

Question 2

Is a lump sum amount of portable LSL paid to an eligible Worker who leaves the industry a payment of unused LSL payment for the purposes of section 12-90 of Schedule 1 of the TAA 1953?

Answer

Yes.

Question 3

Is a lump sum amount of portable LSL paid to an eligible Worker who is currently unemployed (due to redundancy or otherwise) an 'unused LSL payment' for the purposes of section 12-90 of Schedule 1 of the TAA 1953?

Answer

Yes.

Question 4

If the answer to question 3 is yes, is the lump sum amount of portable unused LSL paid from the Fund to an eligible Worker who is made redundant at or near the time of receiving the payment considered a payment made in connection with or that includes, or consists of a 'genuine redundancy payment, early retirement scheme payment or an invalidity segment of an employment termination payment or a superannuation benefit' as per subsection 83‐85(2) of the ITAA 1997?

Answer

Yes.

Question 5

If the answer to Question 4 is yes, can the long service fund cap its withholding of tax on payments of unused LSL as per Schedule 7 of the Taxation Administration Withholding Schedules under section 15-25 in Schedule 1 to the TAA 1953?

Answer

Yes.

Question 6

Is the payment of portable long service leave from the Fund paid to an eligible Worker or their legal personal representative in circumstances of death or terminal illness a payment of salary for the purposes of section 12‐35 of Schedule 1 of the TAA 1953?

Answer

No.

Question 7

Is the Fund a closely held trust for the purposes of section 12‐175 of Schedule 1 of the TAA 1953?

Answer

Yes.

Question 8

Is the payment of a LSL benefit to an eligible Working Sub‐Contractor, from the Fund, a distribution from a closely held trust for the purposes of section 12‐175 of Schedule 1 of the TAA 1953?

Answer

Yes.

Question 9

Is a payment of money from the Fund to an eligible Worker under Rule 8.2.4(c), in circumstances where the Worker has no entitlement to a LSL benefit or payment in lieu, subject to a PAYG withholding obligation under section 12 of Schedule 1 to the TAA 1953?

Answer

Yes.

Question 10

Is a payment of money from the Fund to a Working Sub‐Contractor under Rule 8.2.4(c), in circumstances where the Working Sub‐Contractor has no entitlement to a LSL benefit or payment in lieu, subject to a PAYG withholding obligation under section 12 of Schedule 1 to the TAA 1953?

Answer

Yes.

Question 11

Is a payment of money from the Fund to a dependent or relative of a deceased Worker or Working Sub‐Contractor under Rule 8.2.4(c), in circumstances where the Worker or Working Sub‐Contractor had no entitlement to a LSL benefit or payment in lieu, subject to a PAYG withholding obligation under section 12 of Schedule 1 to the TAA 1953 by the Fund?

Answer

No.

This ruling applies for the following periods

Financial year ending 30 June 20YY

Financial year ending 30 June 20YY

Financial year ending 30 June 20YY

Financial year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Fund is the trustee of a portable long service leave fund.

Employers are required under industrial instruments to make contributions for employee entitlements to the Fund. The Fund will accept these contributions and hold them until they become payable under the terms of the Trust Deed.

The employee will claim their employee entitlements directly from the Fund on the termination of their employment.

The Rules of the Scheme are set out in the trust deed under which the Fund is appointed trustee.

The Rules can be amended by Special Resolution of the Board of the Fund, save that any amendment that enlarges the class of persons entitled to be paid a benefit from the Fund requires the prior approval of the Governor in Council.

The detail of the Scheme is set out in the Rules.

The Rules set out to, amongst other things, prescribe the calculation amounts of LSL Charges which must be paid into the Fund, set out when a Worker or Working Sub‐Contractor becomes eligible to be paid LSL Benefits and the quantum of the Benefit payable, and set out where any unclaimed LSL Benefits may be paid out to Workers or Working Sub‐Contractors who have left the Construction Industry or are currently unemployed, or where they are deceased or have received a written diagnosis of a terminal illness.

The rules are structured to address two separate cohorts of persons engaged in Work in the Industry, which are referred to in the rules as Workers and Working Sub‐Contractors. For clarity, 'Workers' should be taken as common law employees of the Industry Employer, and 'Working Sub‐Contractors' as independent contractors.

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of Schedule 1

Taxation Administration Act 1953 section 12-90 of Schedule 1

Taxation Administration Act 1953 section 12-175 of Schedule 1

Taxation Administration Act 1953 section 15-25 of Schedule 1

Income Tax Assessment Act 1936 subsection 101A(2)

Income Tax Assessment Act 1936 subsection 102UC(1)

Income Tax Assessment Act 1936 subsection 272-5(1) of Schedule 2F

Income Tax Assessment Act 1997 section 83-70

Income Tax Assessment Act 1997 section 83-75

Income Tax Assessment Act 1997 subsection 83-85(2)

Income Tax Assessment Act 1997 section 83-175

Reasons for decision

Question 1

Is a payment of a long service leave (LSL) benefit to an eligible Worker a payment of salary or wages for the purposes of section 12‐35 of Schedule 1 of the TAA?

Summary

A payment of LSL entitlements by the Trustee to a continuing employee is a payment of ordinary income and is considered salary and wages. The Trustee has withholding obligations under section 12-35 of Schedule 1 of the TAA 1953.

Detailed reasoning

The character of the payment of an employment-related entitlement to a continuing employee is not changed by the fact that the Trustee, rather than the employer makes the payment.

Section 12-35 of Schedule 1 of 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).

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.

Paragraph 17 of Taxation Ruling 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) reiterates TR 2005/16 and states the following:

For an entity to be required to withhold an amount under section 12-35 in Schedule 1 to the TAA 1953, there must be:

•      a payment made by the 'entity';

•      the payment must be made to an individual as an employee (whether of the payer or another entity); and

•      the payment must be a payment of salary, wages, commission, bonus or allowance.

Payment to be made by an entity

Paragraph 18 of TR 2003/15 describes what is meant by the term entity.

For the purposes of the PAYG provisions, the definition of entity takes its meaning from section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Under that provision, an entity is defined by section 960-100 of the ITAA 1997 to mean an individual, body corporate, body politic, partnership, any other unincorporated association or body of persons, a trust and a superannuation fund. The trustee of a trust or superannuation fund is also taken to be an entity.

The payment is paid by the entity therefore this limb has been met.

Payment to an individual as an employee

As outlined in paragraph 20 of TR 2003/15, 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.

The fact that the company is not the employer of an eligible Worker does not have an impact on the withholding and reporting obligations.

Where the PAYG provisions refer to 'employees', the reference is to employees at common law.

As set out in the rules of the scheme Workers should be taken as common law employees of a XXXXX Industry Employer and Working Sub‐Contractors as independent contractors.

Therefore, where the eligible worker in considered a common law employee this limb is satisfied. However, if the eligible worker is considered an independent contractor this limb is not satisfied, as they are not considered a common law employee.

Payment of salary, wages, commission, bonuses or allowances.

Paragraph 22 of TR 2003/15 explains that as salary, wages, commission, bonuses or allowances are not defined terms in PAYG provisions they take their ordinary meaning. At common law, salary or wages denotes money payable to an individual for work or services.

As the payment is of a LSL benefit is directly linked to the performance of XXXX Work by the Worker for an Employer in the XXXX Industry whereby, they earn salary or wages and in respect of such work the Employer has an obligation to pay a LSL Charge to the Fund, it should correctly be characterised as a payment of salary or wages in respect of a LSL entitlement.

Conclusion

All three requirements as outlined in TR 2003/15 are fulfilled inrelation to payments for LSL benefits which are made to eligible workers in theXXXX industry. The Fund therefore has an obligation to withhold on these payments byoperation of section 12‐35 of Schedule 1 to the TAA 1953 for Workers considered employees.

Question 2

Is a lump sum amount of portable LSL paid by the Fund to an eligible Worker who leaves the industry a payment of salary and wages for the purposes of section 12-90 of Schedule 1 of the TAA 1953.

Summary

The payment is considered salary and wages. The Fund has withholding obligations under section 12-90 of Schedule 1 of the TAA 1953.

Detailed reasoning

Under the rules of the Fund, a lump sum payment of a LSL benefit to a Worker who has left the Industry can be made.

Payments are made upon application to the Fund by the eligible Worker and are dependent on the Worker having performed the requisite period of work for one or more businesses in the industry and are calculated by reference to the Worker's Ordinary Pay when working in the industry.

Subdivision 83-B of the ITAA 1997 provides details regarding the taxation treatment of unused LSL payments.

Section 83-70 states that this subdivision applies to leave (LSL) of the following types (whether it is made available as an entitlement or as a privilege), other than annual leave to which section 83-10 applies:

(a) leave ordinarily known as LSL, including long leave, furlough, and extended leave

(b) any other leave made available in circumstances similar to those in which the leave mentioned in paragraph (a) is ordinarily made available

(c) if your employer has entered into a scheme or arrangement for leave and, because of the existence and nature of the scheme or arrangement, the employer does not have to comply with the requirements of a law of the Commonwealth, or of a State or Territory, relating to leave mentioned in paragraph (a) or (b) - leave made available under the scheme or arrangement.

Pursuant to section 83-75 of the ITAA 1997 a payment that you receive in consequence of the termination of your employment is an unused LSL payment if:

(a) it is for long service leave you have not used; or

(b) it is for long service leave to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

In this situation a payment is made for unused LSL to an eligible worker who is leaving the construction industry.

The Fund is obligated under rule 31.1.1 to make a payment in lieu to a Worker in the following circumstances:

The Trustee must make a Payment in Lieu to a Worker if the Worker has carried out sufficient

Continuous Service such that the Worker would have been entitled to receive payment from the

Trustee of a Long Service Leave Benefit and:

(a) the Worker leaves the industry (otherwise than by death) before such

Long Service Leave Benefit has been paid; or

(b) the Worker is currently unemployed; and

(c) the Worker has made a written request for a payment In Lieu.

Applying these rules for the Fund to make the payment two things must occur, being the eligible Worker must eave the industry and they must make a written request to the fund to release the payment.

The question that needs to be considered is the payment made as a consequence of the eligible Worker leaving the industry or because the eligible worker has made a written request for the fund to release the payment.

Paid as a consequence of the termination of your employment

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test is set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraphs 5 and 6 of TR 2003/13 the Commissioner states:

5. ... a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this question provided the employee chooses to terminate their employment and leave the industry. As a result of the voluntary termination, the eligible worker makes a written application to the Fund for the release of unused LSL. The Fund is obliged under rule 31.1.1 to release the funds to the eligible Worker if they meet all the criteria.

The payment from the fund is a direct cause of the eligible Worker making an application to the Fund for the release of the unused LSL. This process is initiated by the eligible Worker upon leaving the industry and terminating their employment. As such, there was a sequence of events following the termination which had a relationship and connection which ultimately lead to the payment. That is, but for the termination and choice to leave the industry, there would have been no application to the fund and no payment to the worker.

As there is undeniably a causal connection between the termination (upon leaving the industry) and the payment, it is considered that the eligible Worker would be receiving a payment from the Fund as a consequence of them terminating their employment with their employer.

The payment for unused LSL satisfies all the conditions set out in section 83-75 of the ITAA 1997. This payment is assessable income to the employee in the year it is received.

Section 12-90 of Schedule 1 of the TAA requires an entity to withhold an amount from any of the following payments it makes to an individual:

•        an unused annual leave payment

•        an unused long service leave payment, to the extent that the payment is included in the individual's assessable income

Therefore, this is a payment from which an amount of tax must be withheld. The Trustee who makes this payment to the eligible worker will withhold an amount of tax as required by section 12-90 of Schedule 1 to the TAA.

The timing of the payment does not change its character. If there is a delay between the actual termination and applying for the release of funds from the portable LSL provider, the tax treatment remains the same.

Conclusion

As the LSL payment made to a eligible worker who is leaving the industry is considered assessable income to the employee, withholding tax is required to be withheld according to section 12-90 of the Schedule 1 of the TAA.

Question 3

Is a lump sum amount of portable LSL paid by the LSL Fund to an eligible Worker who is currently unemployed (due to redundancy or otherwise) an 'unused LSL payment' under section 83‐75 of the Income Tax Assessment Act 1997 (ITAA1997)?

Summary

The payment is considered unused LSL payment as per section 12-90 of Schedule 1 of the TAA 1953.

Detailed reasoning

Using the same reasoning as provided in Question 2 the payments for unused LSL made to eligible workers would satisfy the requirements of section 83-75 of the ITAA 1997.

It is considered that the payments made for redundancy or otherwise are paid as a consequence of the termination of employment.

As a result of the termination, the eligible worker makes a written application to the Fund for the release of unused LSL. The Fund is obliged under rule 31.1.1 to release the funds to the eligible Worker if they meet all the criteria.

The payment from the fund is a direct cause of the eligible Worker making an application to the Fund for the release of the unused LSL. This process is initiated by the eligible Worker as a result of the termination of their employment. As such, there was a sequence of events following the termination which had a relationship and connection which ultimately lead to the payment. That is, but for the termination, there would have been no application to the Fund and no payment to the worker.

As there is undeniably a causal connection between the termination and the payment, it is considered that the eligible Worker would be receiving a payment from the Fund as a consequence of the termination of their employment with their employer.

The timing of the payment does not change its character. If there is a delay between the actual termination and applying for the release of funds from the portable LSL provider, the tax treatment remains the same.

Conclusion

As the LSL payment made to a eligible worker who is either unemployed due to redundancy or otherwise is considered exactly that under section 12-90 of Schedule 1 of the TAA 1953.

Question 4 & Question 5

Question 4

If the answer to question 3 is yes, is the lump sum amount of portable unused LSL paid from the Entity to an eligible Worker who is made redundant at or near the time of receiving the payment considered a payment made in connection with or that includes, or consists of a 'genuine redundancy payment, early retirement scheme payment or an invalidity segment of an employment termination payment or a superannuation benefit' as per section 83‐85(2) of the ITAA 1997?

Question 5

If the answer to Question 4 is yes, can the long service fund cap its withholding of tax on payments of unused LSL to 30% as per section 83‐85 of the ITAA1997?

Summary

Unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997. However, if this payment is made in connection with a genuine redundancy payment, early retirement scheme payment or an invalidity segment of an employment termination payment or superannuation benefit section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30% (32% including Medicare levy).

Detailed reasoning

A payment made to an employee is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is so much of a payment received by an employee, who is dismissed from employment because the employee's position is genuinely redundant, as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

For the purposes of answering this question, the Commissioner will make the assumption that a genuine redundancy payment has been made.

In accordance with subsection 83-85(1) of the ITAA 1997, where a person receives a lump sum payment for unused long service leave, the person is entitled to a tax offset on the amount of payment included in the person's assessable income that ensures that the rate of income tax on the amount of payment mentioned in subsection 83-85(2) does not exceed 30%.

Subsection 83-85(2) of the ITAA 1997 sets out the amounts on which a person is entitled to an offset and, as far as relevant, states:

The amount is the part of the *unused long service leave payment included in your assessable income under subsection 83-80(1):

(a) to the extent that it is attributable to the *pre-18/8/93 period; and

(b) to the extent that it is attributable to the *post-17/8/93 period, if the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a *genuine redundancy payment; or

(ii)a *early retirement scheme payment or

(iii)a * invalidity segment of an *employment termination payment or a *superannuation benefit

Based on the above, the eligible Worker will be entitled to a tax offset limiting the rate of tax to 30% on the amount of unused LSL attributable to the payment. This is based on the question telling us the payment is part of a genuine redundancy, early retirement scheme or invalidity segment of an employment termination payment. The Entity would have to be satisfied the payment meets the requirements of the law if it is to treat the payment as genuine redundancy, early retirement scheme or invalidity segment of an employment termination payment when withholding PAYG.

The Australian Taxation Office (ATO) produces a range of tax tables or withholding schedules to assist payers in working out how much to withhold from payments they make to their employees or other payees:

•         Schedule 7 - Tax table for unused leave payments on termination of employment is used if a payer pays an amount to an employee for unused leave on the termination of their employment. Unused leave payments on termination of employment includes, amongst others, annual leave and long service leave. It does not, however, include personal (sick) leave.

When using the relevant withholding schedule, the rate of tax will be limited to 32% as this figure includes the Medicare levy.

It is worth noting that the greater the length of time between the termination of employment and the payment, the more likely that the causal connection between the termination and the payment will be too remote for a conclusion that a payment was made in connection with the redundancy payment. In these circumstances further guidance from the ATO would be advised where the employee's individual facts and circumstances can be considered.

Conclusion

As the payment of unused LSL is considered a payment made in connection with a genuine redundancy, early retirement scheme or invalidity segment of an employment termination payment the Worker is entitled to the tax offset limiting the rate of tax to a total of 32%.

Question 6

Is a payment of portable LSL paid to an eligible Worker or their legal personal representative in circumstances of a terminal illness or death, a payment required to have PAYG withheld from it under section 12‐90 of Schedule 1 of the TAA 1953?

Summary

No. A payment of LSL from the Fund to an eligible worker or their legal personal representative in the event of terminal illness or death is not a payment of salary and wages and no withholding is applicable.

Detailed reasoning

When an eligible Worker terminates their employment due to a terminal illness or in the event of their death the Trustee may pay an employee entitlement directly to the employee (terminal illness) or to the employee's legal representative in the event of death.

A payment of unused LSL by the Trustee to the eligible Worker or their legal representative is treated in the same way as a payment of unused LSL made by the employer to the eligible worker or the employee's legal representative.

Subsection 101A(2) of the ITAA 1936 ensures that if an employee dies, any amount which would have been included in the assessable income of the deceased under sections 83-10 and 83-80 of the ITAA 1997 had it been received during their lifetime, will not form part of the assessable income of the deceased's estate.

If the employee has provided two medical certificates to confirm their resignation due to ill-health, they will be entitled to tax concessions for the payment of their unused leave on termination. Payments on termination must be made when an employee leaves.

A payment of employee entitlements by the Trustee to the legal personal representative of a deceased employee will receive the same taxation treatment, including concessional treatment, which would have been applicable had the payment been made directly by the employer.

Conclusion

The payment of portable LSL to an eligible Worker or their representative in the event of terminal illness or death is not considered a payment of salary and wages and no withholding is applicable.

Question 7

Is the Fund a closely held trust for the purposes of section 12‐175 of Schedule 1 of the TAA 1953?

Summary

Yes, the Fund is considered a closely held trust for the purposes of section 12-175 of Schedule 1 of the TAA 1953.

Detailed reasoning

For these purposes, a 'closely held trust' is a trust that meets the definition of a closely held trust in section 102UC of the ITAA 1936 but also includes trusts that have made a family trust election or are covered by an interposed entity election. Unless the trust is an excluded trust, a closely held trust is:

•  a trust where an individual or up to 20 individuals have between them - directly or indirectly, and for their own benefit - fixed entitlements to a 75% or greater share of the income or a 75% or greater share of the capital of the trust; or

•  a discretionary trust.

The following trusts are excluded from the definition of a closely held trust for these rules:

•  a complying superannuation fund, complying approved deposit fund or a pooled superannuation trust

•  a trust of a deceased estate until the end of the year of income in which the fifth anniversary of the individual's death occurred

•  a fixed trust that is a unit trust where exempt entities have fixed entitlements to all the income and capital of the trust

•  a unit trust whose units are listed on the stock market operated by ASX Limited.

The regulations also exclude the following types of trusts:

•  a trust that is a discretionary mutual fund according to the meaning in subsections 5(5) and 5(6) of the Financial Sector (Collection of Data) Act 2001

•  an employee share trust for an employee share scheme that meets the definition under subsection 130-85(4) of the Income Tax Assessment Act 1997 (ITAA 1997)

•  a law practice trust, which is a trust regulated by a state or territory law for the regulation of legal practices or legal services.

Subsection 102UC(4) of the ITAA 1936 defines discretionary trust as a trust that is not a fixed trust within the meaning of section 272-65 of Schedule 2F of the ITAA 1936. A trust will be a fixed trust if persons have fixed entitlements to all the income and capital of the trust.

Subsection 272-5(1) of Schedule 2F of the ITAA 1936 defines fixed entitlement:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

Further, subsection 272-5(3) of Schedule 2F of the ITAA 1936 contains a discretion, whereby in cases where beneficiaries do not have a fixed entitlement, the Commissioner may, for the purposes of the Act, treat such cases as having fixed entitlement.

The Commissioner may treat a beneficiary as having fixed entitlement on a case-by-case basis.

Where, persons have fixed entitlements under subsection 272-5(1) or 272-5(3) of Schedule 2F of the ITAA 1936 the trust will be a fixed trust.

The beneficiaries of the Trust (eligible workers and sub-contractors) do not have any fixed entitlement to the income or capital of the Fund. Their entitlement is limited to the payment of LSL benefits calculated at the time in accordance with the Fund rules. The trustee has full discretion over the income and capital distributions of the Trust. Therefore, as the Fund is not a fixed trust it is a discretionary trust that is closely held for the purposes of section 12-175 of Schedule 1 to the TAA.

Conclusion

The fund is considered a closely held trust.

Question 8

Is the payment of a LSL benefit to an eligible Working Sub‐Contractor, a distribution from a closely held trust for the purposes of section 12‐175 of Schedule 1 of the TAA 1953?

Summary

Yes, the payment of a LSL benefit to an eligible Working Sub-Contractor is considered a distribution from the trust and withholding is applicable if the beneficiary's Tax File Number (TFN) has not been provided prior to the distribution.

Detailed reasoning

Subsection 12-175(2) to Schedule 1 of the TAA 1953 requires a trustee of a closely held trust to withhold amounts distributions to beneficiaries if that beneficiary does not quote their TFN during the distribution time.

As outlined in question 7 subsection 102UC(1) of the ITAA 1936 defines a 'closely held trust'. The Commissioner considers the Fund to be a closely held discretionary trust.

The trustee is therefore required to withhold an amount from payments made to beneficiaries of the LSL Fund Trust where the relevant beneficiaries have not provided their TFN to the trustee pursuant to subsection 12-175(2) of Schedule 1 to the TAA 1953.

The amount required to be withheld from the payments equals the highest marginal tax rate plus the Medicare levy.

Conclusion

As the Fund is considered a closely held trust any payments made to an eligible Worker who has not provided their TFN at the time of distribution will be subject to withholding.

Question 9

Is a payment of money from the LSL Fund to a Worker under Rule 8.2.4(c), in circumstances where the Worker has no entitlement to a LSL benefit or payment in lieu, subject to a PAYG withholding obligation under section 12 of Schedule 1 to the TAA 1953 by the Fund?

Summary

Yes, the payment will be subject to PAYG withholding obligations.

Detailed reasoning

Rule 8.2.4(c) of the fund states the following:

(c) where the Trustee, in its discretion, has determined that, although an entitlement to a Long Service Leave Benefit or a Payment in Lieu in accordance with the Act and the Rules does not exist, money from the Fund should be paid to a Worker or Working Sub-Contractor or to another person on the merits of the case, or in order to preserve the Fund.

Section 12-35 of Schedule 1 of 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).

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.

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'.

As Workers are defined in the Fund rules as being individuals who perform work under contracts of employment, a payment made to a Worker within the bounds of Rule 8.2.4(c) is necessarily made to an employee. As the payment is intrinsically linked to the individual's employment and work performed withing the construction industry by the nature of its payment by the Fund, the payment is viewed as being a payment to an individual as an employee.

The second criterion requires that the payment is made in respect of the employee's service in their capacity as an employee and must form part of the employees' salary and wages, including by way of being a commission, bonus or allowance. Based on the discretionary nature of the payment and the connection to the Workers employment, the character of the payment would be akin to a bonus and therefore would form part of the Workers salary and wages for the purposes of section 12-35 of Schedule 1 of the TAA.

The final criterion is that the payment must be made by an entity. As the payment is made by the Fund this criterion is satisfied and the withholding obligation in respect of the payment, where applicable will remain with the Fund as the payer entity.

Conclusion

The discretionary payments made to the Workers under Ruler 8.2.4(c) are subject to PAYG withholding obligations.

Question 10

Is a payment of money from the LSL Fund to a Working Sub‐Contractor under Rule 8.2.4(c), in circumstances where the Working Sub‐Contractor has no entitlement to a LSL benefit or payment in lieu, subject to a PAYG withholding obligation under section 12 of Schedule 1 to the TAA 1953 by the Fund?

Summary

Yes, if the beneficiary's TFN is not provided prior to the payment being made then the payment will be subject to the PAYG withholding obligations.

Detailed reasoning

Please refer to the detailed reasoning in questions 8 and 9.

Question 11

Is a payment of money from the LSL Fund to a dependent or relative of a deceased Worker or Working Sub‐Contractor under Rule 8.2.4(c), in circumstances where the Worker or Working Sub‐Contractor had no entitlement to a LSL benefit or payment in lieu, subject to a PAYG withholding obligation under section 12 of Schedule 1 to the TAA 1953 by the Fund?

Summary

No, the payment will not be subject to PAYG withholding obligations for the Worker but will be subject to PAYG withholding obligations for the sub-contractor where the TFN has not been provided prior to the payment being made.

Detailed reasoning

Worker

Following the advice as outlined in question 9 the discretionary payment in recognition for the service of a deceased employee to their dependents or legal representative will be viewed as salary or wages, like the same payment being made to a living employee. The treatment of these payments was discussed above at question 6. In line with that advice the discretionary payment made under Rule 8.2.4(c) to a deceased Worker will not be subject to withholding by the Fund.

Worker Sub-Contractor

The same treatment of the discretionary payment is required where the payment is made for a deceased Worker-Contractor to their dependents or legal representative. That is, no PAYG withholding obligations are applicable unless the Worker-Contractor's TFN has not been provided prior to the payment being made.

Conclusion

No PAYG withholding obligations are applicable to the deceased Worker or Worker-Contractors where a discretionary payment has been made under Rule 8.2.4(c) unless the deceased Worker-Contractor's TFN has not been provided prior to the payment being made.