Edited version of private advice

Authorisation Number: 1052239014527

Date of advice: 8 April 2024

Ruling

Subject: Treatment of cash payment

Question

Will the payment of cash made to the former employees constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986?

Answer

No

Question

Will the payment of cash made to the former employees be subject to Pay As You Go withholding (PAYGW) in accordance with section 12-35 of the Taxation Administration Act 1953?

Answer

No

Question

Will the payment of cash to the former employees present any tax avoidance risks under Part IVA?

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

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You owned and operated a business (Business).

You entered into a sale agreement to sell the Business to a buyer.

You paid tax on the proceeds received from the gain.

You would like to make a payment of cash to two key employees as a gift to thank them for their friendship and support over many years.

There are no requirements or agreements to pay the amount of cash.

No deductions will be made in relation to the payment of cash.

You and your wife have formed very close and personal relationships with the two key employees. You have attended numerous family and social events together over the years, including weddings and funerals.

Relevant legislative provisions

Fringe Benefit Tax Assessment Act 1986 subsection 136(1)

Taxation Administration Act 1953 section 12-35

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 Part IVA

Reasons for decision

Question 1

Summary

No, the payment of cash to the former employee will not constitute a fringe benefit as it is a gift.

Detailed reasoning

What is a gift?

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift provides principles relevant to the determination of whether a transfer of money or property constitutes a gift.

The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning.

Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:

• there is a transfer of the beneficial interest in property
• the transfer is made voluntarily
• the transfer arises by way of benefaction, and
• no material benefit or advantage is received by the giver by way of return.

Fringe Benefits Tax

In order for the distributions to be subject to FBT, they must satisfy the definition of a 'fringe benefit' under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Broadly, a 'fringe benefit' arises when the following conditions are satisfied:

•         a benefit is provided at any time during the year of tax

•         the benefit is provided to an employee or an associate of the employee

•         the benefit is provided by:

(i)               the employer; or

(ii) an associate of the employer; or

(iii) a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party; or

(iv) a third party other than the employer or an associate of the employer, if the employer or an associate of the employer:

(A) participates in or facilitates the provision or receipt of the benefit; or

(B) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

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

•         the benefit is not one that is specifically excluded as per paragraphs (f) to (s) of the definition of 'fringe benefit' in subsection 136(1).

Conclusion

You are proposing to make a distribution of cash to former employees in his capacity as an individual. You are making this distribution from the proceeds he received from the sale of his business. Tax has been paid on these capital gains and you are not claiming any deduction for making these distributions.

These distributions are being made to former employees as a result of the strong personal relationships formed with the individuals. The distributions are not under an arrangement in relation to the performance of work. The intended recipients would not receive any distribution had they not formed these strong personal relationships with you. These personal relationships have developed over many years, with you and the individuals becoming involved in their respective personal lives. You continue to have strong personal relationships with the individuals since selling the business. You will not receive any material benefit or advantage by way of return from making the payment of cash.

This is supported in J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151;(2000) 44 ATR 22, where the Full Federal Court, 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'

As the payment is being made as a result of the strong personal relationship formed, the payment does not satisfy the requirements to be a 'fringe benefit' under subsection 136(1) of the FBTAA.

Question 2

Summary

No, the payment of cash to the former employee will not be subject to PAYGW as it is a gift.

Detailed reasoning

What is a gift?

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift provides principles relevant to the determination of whether a transfer of money or property constitutes a gift.

The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning.

Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:

• there is a transfer of the beneficial interest in property
• the transfer is made voluntarily
• the transfer arises by way of benefaction, and
• no material benefit or advantage is received by the giver by way of return.

Pay as you go withholding

Section 12-35 of Division 12 of the Taxation Administration Act 1953 (TAA 1953) states the following:

• An entity must withhold an amount from salary, wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Taxation Ruling TR 2023/4 Income tax: pay as you go withholding - who is an employee? provides:

6. The term 'employee' is not defined in the TAA. For the purposes of section 12-35, the term 'employee' has its ordinary meaning.

7. Whether a person (that is, a worker) is an employee of an entity (referred to in this Ruling as the 'engaging entity') under the term's ordinary meaning is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.

Conclusion

The payment of cash is being made by you in your capacity as an individual to former employees based on your strong personal relationship with them. The payment is not in connection to any employment, or their function as a former employee of your business. The intended recipients would not receive any distribution had they not formed these strong personal relationships with you. These personal relationships have developed over many years, with you and the individuals becoming involved in their respective personal lives. You continue to have strong personal relationships with the individuals since selling the business. You will not receive any material benefit or advantage by way of return from making the payment of cash.

As the distributions are a gift that is not being made to an individual as an employee, you are not required to withhold an amount under section 12-35 of the TAA 1953.

Question 3

Summary

No, as you have already paid tax on the distributions and are not claiming any deduction in relation to them, there is no tax benefit pursuant to 177C(1) of the ITAA 1936.

Detailed reasoning

Section 177C(1) of the ITAA 1936 provides what constitutes a tax benefit for the purposes of Part IVA. As you are not claiming any deduction for the distribution, and tax has already been paid on these amounts, there is no tax benefit under section 177C(1).

Therefore, Part IVA will not apply to the payments of cash to the former employees.