Edited version of your written advice

Authorisation Number: 5010055047800

Date of advice: 19 November 2018

Ruling

Subject: Fringe benefits tax - interpretation - employee, associate or other - withholding tax - payg - salaries/wages

Question 1

Whether, based on Government Department (Department)’s current employment arrangements, Pay As You Go (PAYG) withholding and payment summary reporting obligations will be satisfied if the Department pays all employees engaged within the governing Department and separate bodies (bodies) (collectively referred to as ‘The Body’)?

Answer:

Yes

Question 2

Whether, based on the Department’s current employment arrangements, the Department will be the employer for Fringe Benefits Tax (FBT) purposes and will be responsible for satisfying FBT obligations in relation to all employees engaged within The Body?

Answer:

Yes

Question 3

Whether, based on the Department’s current employment arrangements, the Department will be tax complaint for PAYG withholding and FBT purposes if the Department makes payments under a loan or recharge arrangement with any of the bodies?

Answer:

Yes

This ruling applies for the following periods:

From the year ended 30 June 2019 and ongoing until the arrangement ceases

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Overview

1. The Department is responsible for the management, administration and delivery of services. It is comprised of The Body (which, as noted above, includes the governing Department and each of the separate bodies). The Body is also the trading name of the Department.

2. The bodies were established by the enactment of the legislation in 20XX. The bodies are independent statutory bodies governed by their own boards and managed by an Executive with responsibility for the delivery of services in their local area.

3. The Department manages the overall systems in providing those services, including any workplace relations matters for the bodies.

4. When the bodies were established in 20XX, the Department acted as employer and payer for all employees engaged by the bodies.

5. Under the legislation enacted in 20XX, a body that is prescribed by regulation may apply to become a separate employing entity (employing body) of other service employees. Additionally, employees may be engaged under individual contracts with the bodies.

6. Since 20XX, some bodies have made submissions and been registered as prescribed employers of all staff working for the respective body (prescribed body).

7. The remaining bodies are non-prescribed employers (non-prescribed bodies) and the employment arrangements for the employees of these non-prescribed bodies are as follows:

● some of the services’ staff are employed by the non-prescribed bodies;

● all other employees are employed by the Department.

Current Arrangements

8. From 20XX to present, the Department has been the payer of all salary and wages for all employees engaged by the Department and all the bodies.

9. The bodies have control of the day-to-day management of all employees. However, they do not have the capability to administer the payroll function and related services for the employees they engage.

10. The bodies all have individual Australian Business Numbers (ABNs), while the Department is the only registered PAYG withholding and FBT reporting entity. All employees are provided with payment summaries under the name of The Body and its corresponding ABN.

11. The Department is the nominated State or Territory body (STB) for FBT purposes in accordance with Part XIC of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). As the payer and (in the case of non-prescribed bodies) the employer, the Department lodges a single FBT return.

12. As noted above, the Department centrally processes the payroll for the Department and the bodies and is expected to continue this function for the foreseeable future. This will not be changed unless there was a compelling reason to do so and either the centralised payroll and taxation systems and processes could facilitate separate reporting at employer level, or the relevant bodies have the capacity to administer the payroll function and a low risk transition can be facilitated. At this stage, any such change would constitute a very high risk to The Body.

13. The Department’s payroll system and business processes would need significant reconfiguration to enable each of the bodies obligations to be met individually to:

● accommodate separate PAYG withholding entities and remittances under each bodies’ ABN

● generate payment summaries under each PAYG withholding entity, and

● create separate payment files for each ABN; including a banking file (salaries), salary sacrifice, superannuation and taxation.

14. Due to the above circumstances, the Department continues to be responsible for all state-wide employment and industrial relations arrangement in the relevant system, despite some bodies becoming prescribed employers.

15. Therefore, the Department continues to:

● pay all employees via the current payroll process

● meet PAYG withholding (using its current PAYG withholding registration), ATO remittance and payment summary reporting obligations under the name of the Department and its ABN

● lodge a single FBT return and meet FBT payment obligations under the Department’s ABN

● meet superannuation guarantee obligations on behalf of the bodies, and

● facilitate superannuation guarantee reporting including Superannuation Guarantee Charge (SGC) shortfall statements (if required) on behalf of the bodies.

Relevant legislative provisions

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997 subsection 960-100(1)

Income Tax Assessment Act 1997 paragraph 960-100(1)(c)

Taxation Administration Act 1953 Part 2-5 to Schedule 1

Taxation Administration Act 1953 subsection 10-5(1) to Schedule 1

Taxation Administration Act 1953 section 12-35 to Schedule 1

Taxation Administration Act 1953 sections 16-155 - 16-182 to Schedule 1

Fringe Benefits Tax Assessment Act 1986 section 5B

Fringe Benefits Tax Assessment Act 1986 section 22

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 Part XIC

Fringe Benefits Tax Assessment Act 1986 subsection 135S(6)

Fringe Benefits Tax Assessment Act 1986 paragraph 135T(1)(d)

Fringe Benefits Tax Assessment Act 1986 subsection 135T(2)

Fringe Benefits Tax Assessment Act 1986 section 136

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Question 1

Summary

The Department will be the ‘entity’ responsible for meeting the PAYG withholding and payment summary reporting obligations in respect of all employees engaged within The Body.

Detailed reasoning

PAYG withholding overview

1. Subsection 10-5(1) in Schedule 1 to the Taxation Administration Act 1953 (TAA) states that payments and other transactions covered by PAYG withholding are called withholding payments.

2. Item 1 in the table at subsection 10-5(1) in Schedule 1 to the TAA provides that ‘[a] payment of salary etc. to an employee’ is a withholding payment and refers to section 12-35 in Schedule 1 to the TAA.

3. Section 12-35 in Schedule 1 to the TAA provides that:

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

Entity definition

4. An ‘entity’ is defined in subsection 960-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to mean any of the following:

(a) an individual;

(b) a body corporate;

(c) a body politic;

(d) a partnership;

(e) any other unincorporated association or body of persons;

(f) a trust;

(g) a *superannuation fund;

(h) an *approved deposit fund.

Note:

The term entity is used in a number of different but related senses. It covers all kinds of legal person. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.

Body politic definition

5. The term ‘body politic’ in paragraph 960-100(1)(c) of the ITAA 1997 is not defined.

6. Taxation Determination TD 1999/77 Income tax: capital gains: is the Commonwealth or a State or Territory an entity for the purposes of Event Number D1 (about an entity creating contractual or other rights in you) in subsection 109-5(2) of the Income Tax Assessment Act 1997? (TD 1999/77) provides guidance as to whether the Commonwealth, or a State or Territory, falls within the definition of ‘entity’.

7. Paragraph 3 of TD 1999/77 states that:

The Commonwealth and each of the States and Territories is a body politic. They are entities which can create contractual or other rights in you for the purposes of Event Number D1 in subsection 109-5(2) [of ITAA 1997]. If they do, you acquire the rights when the Commonwealth, State or Territory enters into the contract or creates the rights.

Salary and wages definition

8. As the term ‘salary or wages’ is not defined in the PAYG withholding provisions at Part 2-5 in Schedule 1 of the TAA, it takes its ordinary meaning at common law.

9. Paragraph 22 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 that:

At common law, salary or wages denotes money payable to an individual for work or services.

Employee definition

10. The term 'employee' is not defined in the TAA and takes its ordinary meaning at common law.

11. In relation to the applicability of section 12-35 in Schedule 1 to the TAA, TR 2003/15 states that:

…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.

12. The Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16) provides further guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the TAA.

13. Paragraph 6 – 7 of TR 2005/16 states that:

6. …For the purposes of withholding under section 12-35 [in Schedule 1 to the TAA] the word 'employee' has its ordinary meaning.

7. Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

14. Paragraphs 9 - 12 of TR 2005/16 further states that:

9. A person who holds an Australian Business Number (ABN) may, depending on the circumstances, still be an employee for the purposes of section 12-35 of Schedule 1 to the TAA 1953.

10. Section 12-35 of Schedule 1 to the TAA 1953 applies to payments made to individuals in their capacity as employees. It does not apply to payments made to other entities - provided the arrangement is not a sham or a mere redirection of an employee's salary or wages.

11. The payer does not need to have regard to the operation of the personal services income measures in Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997) in determining whether an individual is an employee for the purposes of section 12-35.

12. Payment does not necessarily have to be between employer and employee for the payment to be covered by section 12-35 of Schedule 1 to the TAA 1953. However, the payment made to the individual must be in their capacity as an employee, either of the payer or another entity.

‘Whether of that or another entity’ definition

15. The term ‘whether of that or another entity’ in section 12-35 in Schedule 1 to the TAA is not defined.

16. Paragraph 64 - 66 of TR 2005/16 states that:

64. The employment relationship does not necessarily have to be between the entity making the payment and the individual. …The essential element is the nature of any connection between the payment and the individual's employment with the payer or any other entity.

65. If the payment is in respect of the employment of the individual, it is not relevant who actually made the payment. Federal Commissioner of Taxation v. Dixon [(1952) 86 CLR 540; 26 ALJ 505; 10 ATD 82] discusses whether a payment is in respect of a person's employment. In that case, Dixon CJ and Williams J stated [at 556]:

Indeed, it is clear that if payments are really incidental to an employment, it is unimportant whether they come from the employer or from somebody else and are obtained as of right or merely as a recognized incident of the employment or work.

66. Where the payment is a reward for services provided by the employee to the employer in the capacity of employee, the payment would be incidental to the employment regardless of whether the payment is made by the employer or another entity. If the payment is a payment of salary, wages, commission, bonus or allowance then the entity that made the payment will be required to withhold under section 12-35 of Schedule 1 to the TAA 1953.

Exceptions to section 12-35 in Schedule 1 of the TAA

17. Section 12-1 in Schedule 1 to the TAA outlines the following exceptions to section 12-35 in Schedule 1 to the TAA:

● an entity need not withhold an amount under section 12-35 where the whole of the payment is exempt income of the entity receiving the payment;

● an entity need not withhold an amount under section 12-35 where the whole of the payment is not assessable income and is not exempt income of the entity receiving the payment;

● in working out how much to withhold, the payer may disregard so much of the payment as is a living-away-from-home allowance benefit as defined by section 136 of the FBTAA;

● in working out how much to withhold, the payer may disregard so much of the payment as is an expense payment benefit as defined by section 136 of the FBTAA and is not an exempt benefit by virtue of the operation of section 22 of that Act which relates to cents per kilometre payments for motor vehicles;

● section 12-1 in Schedule 1 to the TAA does not apply in relation to a payment if the whole of the payment is a superannuation income stream benefit that is paid from a capped defined benefit income stream.

Payment summary reporting obligations overview

18. Under PAYG withholding, a payer must give a payment summary to the payee if, during the year, the payer made a withholding payment (but not a superannuation lump sum or an employment termination payment) to the payee according to sections 16-155 to 16-182 of Schedule 1 of the TAA.

19. Where the payments are covered by single touch payroll reporting, there is no longer an obligation to issue a payment summary or part-year payment summary.

Applying the law to your circumstances

20. It must be determined whether the Department:

a) falls within the definition of ‘entity’ in section 12-35 in Schedule 1 to the TAA;

b) in paying salary or wages, falls within the definition of the term ‘whether of that or another entity’ in section 12-35 in Schedule 1 to the TAA;

c) is liable to discharge PAYG withholding and payment summary reporting obligations.

Is the Department an entity?

21. As the Department is a ‘body politic’, it falls within the definition of ‘entity’ at subsection 960-100(1) of ITAA 1997.

22. Therefore, as the Department falls within the ambit of section 12-35 in Schedule 1 to the TAA, it may be liable as the payer for the purposes of discharging PAYG withholding and payment summary reporting obligations (provided that it meets the other criteria outlined below).

Does the Department fall within the definition of ‘that or another entity’?

23. The key features that need to be present for section 12-35 of Schedule 1 to the TAA 1953 to apply are that:

a) a payment of salary or wages must be made to an individual in their capacity as an employee; and

b) for the payment of salary or wages to be made by either their employer or another entity who is not the employer.

24. Paragraph 12 of TR 2005/16 provides that the payment of salary or wages to an individual ‘must be in their capacity as an employee, whether of the payer or another entity’. Further, paragraph 65 of TR 2005/16 states that ‘[i]f the payment is in respect of the employment of the individual, it is not relevant who actually made the payment’.

25. In the current situation, the Department makes all payments of salary and wages for The Body. The Department makes these salary and wage payments to an employee it directly employs (such as those employed by the governing Department or non-prescribed bodies) or an employee engaged directly by prescribed bodies. Therefore, the Department pays its own employees as well as those of ‘another entity’.

26. Therefore, the Department meets the definition in section 12-35 of Schedule 1 to the TAA of making a salary or wage payment to an employee of ‘that or another entity’.

Question 2

Summary

The Department will be the ‘employer’ of employees engaged within The Body for the purposes meeting its FBT obligations under the FBTAA.

Detailed reasoning

Fringe Benefits Tax overview

27. Subsection 66 of the FBTAA gives effect to this employer’s liability to pay tax on the value of certain fringe benefits which they have provided to their employees by providing that:

…tax imposed in respect of the fringe benefits taxable amount of an employer of a year of tax is payable by the employer.

Definition of ‘employer’

28. Subsection 136(1) of the FBTAA defines ‘employer’ to mean:

(a) a current employer;

(b) a future employer; or

(c) a former employer;

but does not include:

(d) the Commonwealth; or

(e) an authority of the Commonwealth that cannot, by a law of the Commonwealth, be made liable to taxation by the Commonwealth.

29. Subsection 136(1) of the FBTAA defines ‘current employer’ to mean:

a person (including a government body) who pays, or is liable to pay, salary or wages, and includes:

(a) in the case of a partnership - each partner; and

(b) in the case of any other unincorporated association or body of persons - its manager or other principal officer.

30. Subsection 136(1) of the FBTAA defines ‘future employer’ to mean:

a person who will become a current employer.

31. Subsection 136(1) of the FBTAA defines ‘former employer’ to mean:

former employer means a person who has been a current employer.

Definition of ‘salary or wages’

32. The term ‘salary or wages’ is defined in subsection 136(1) of the FBTAA 1986 to mean:

(a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; and

…

Withholding payments covered
Item	Provision	Subject matter
1	Section 12-35	Payment to employee
2	Section 12-40	Payment to company director
3	Section 12-45	Payment to office holder
4	Section 12-115	Commonwealth education or training payment
5	Section 12-120	Compensation, sickness or accident payment

33. Therefore, the term ‘salary or wages’ includes a payment from which an amount must be withheld under section 12-35 in Schedule 1 to the TAA (to the extent that the payment is assessable income).

Nominated state or territory body

34. From the FBT year commencing 1 April 2001, Part XIC of the FBTAA allows the States and Territories to delegate the administration and payment of FBT to nominated STBs.

Applying the law to your circumstances

35. It must be determined whether the Department will be the ‘employer’ for FBT purposes and therefore satisfy FBT obligations in relation to all employees engaged by The Body.

Is the Department the ‘employer’ for FBT purposes?

36. As noted above, the Department meets the definition in section 12-35 of Schedule 1 to the TAA 1953 of making a salary or wage payment to an employee of ‘that or another entity’.

37. According to the definition in subsection 136(1) of the FBTAA, the Department is a ‘current employer’ as it is the ‘government body who pays, or is liable to pay, salary or wages’.

38. You have advised that the Department is also the nominated STB for FBT purposes in accordance with Part XIC of the FBTAA.

39. Therefore, the Department falls within the definition of ‘employer’ in subsection 136(1) of the FBTAA.

Will the Department be responsible for satisfying FBT obligations for all employees?

40. As noted above, the Department meets the definition of ‘employer’ in subsection 136(1) of the FBTAA. Therefore, as the ‘employer’, the Department is liable to pay tax on the fringe benefits taxable amount under subsection 66(1) of the FBTAA.

Question 3

Summary

Provided that the Department is complying with its PAYG withholding and FBT obligations, the Department will be tax compliant in relation to the payments it makes under a loan or recharge arrangement with any of the bodies.

Detailed reasoning

41. When the Department makes payments under a loan or recharge arrangement, this would be reflected in the accounting entries of the Department and the respective bodies. As the payment terms for this type of loan or recharge arrangement is an internal matter for the Department and the bodies, the ATO cannot provide advice on this matter.

42. However, provided that the Department is compliant with its PAYG withholding and FBT obligations, the Department will be tax complaint in relation to the payments it makes under a loan or recharge arrangement with any of the bodies.