Private ruling: PAYG Withholding and FBT obligations
Published: September 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Under the proposed arrangements, will PAYG withholding obligations be satisfied if entity 1 continues to pay, and withhold from those payments, under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) for all employees whether employed by the entity or other entities? | A1: Yes | Q2: Under the proposed arrangements, will the payment summary reporting obligations under section 16-155 of the TAA be satisfied if entity 1 continues to pay all employees engaged by entity 1 or other entities and provides them with annual payment summaries? | A2: Yes | Q3: Under the proposed arrangements, will entity 1 be tax compliant for PAYG Withholding purposes if it makes PAYG withholding payments under a loan/recharge arrangement with the other entities and uses its own ABN in any reporting obligations? | A3: Yes | Q4: Under the proposed arrangements, will entity 1 be accepted as being the employer for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) it makes the PAYG withholding payments under a loan/recharge arrangement with the other entities and uses its own ABN in any reporting obligations? | A4: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 960-100(1) | Taxation Administration Act 1953 Schedule 1 Subsection 10-5(1) | Taxation Administration Act 1953 Schedule 1 Section 12-1 | Taxation Administration Act 1953 Schedule 1 Section 12-35 | Taxation Administration Act 1953 Schedule 1 Section 16-5 | Taxation Administration Act 1953 Schedule 1 Subsection 16-70(1) | Taxation Administration Act 1953 Schedule 1 Section 16-75 | Taxation Administration Act 1953 Schedule 1 Section 16-85 | Taxation Administration Act 1953 Schedule 1 Section 16-140 | Taxation Administration Act 1953 Schedule 1 Section 16-150 | Taxation Administration Act 1953 Schedule 1 Section 16-153 | Taxation Administration Act 1953 Schedule 1 Section 16-155 | Taxation Administration Act 1953 Schedule 1 Subsection 16-155(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 66(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 135S(6) | Fringe Benefits Tax Assessment Act 1986 Subsection 135U(5)

Reasons for decision: Summary: PAYG Withholding Obligations Subsection 6-5(2) of Schedule 1 to the Taxation Administration Act 1953 (TAA) states under PAYG withholding, amounts are collected in respect of particular kinds of payments or transactions. Usually, someone who makes a payment to a payee is required to withhold an amount from the payment, and then pay the amount to the Commissioner. Item 1 of the table under subsection 10-5(1) of Schedule 1 to the TAA states a payment of salary etc. to an employee is covered under section 12-35. Section 12-35 of Schedule 1 to the TAA states 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), however there are exceptions outlined under section 12-1 of Schedule 1 to the TAA. Section 12-1 of Schedule 1 to the TAA states an entity need not withhold an amount under section 12-35 from a payment if the whole of the payment is exempt income of the recipient receiving the payment. There are items under this section which outline other exceptions such as, non-assessable non-exempt income of the recipient, living away from home allowance benefit and an expense benefit payment. Paragraph 12 of Taxation Ruling TR 2003/15 states section 12-35 in Schedule 1 to the TAA 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. In this case it is proposed that entity 1 will continue 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 its name and its ABN • Meet superannuation guarantee obligations on behalf of the newly formed entities; and • Facilitate superannuation guarantee reporting including SGC shortfall statements (if required) on behalf of the newly formed entities. It is proposed that entity 1 will continue to pay all employees of itself and the newly formed entities, despite the fact that the newly formed entities have the legal capacity to employ employees. As entity 1 will be paying all employees via the current payroll process under the proposed arrangements it is responsible for withholding an amount from salary, wages, commission, bonuses or allowances which it pays to employees whether they are considered employees of entity 1 or of the newly formed entities. Subsection 16-155(1) of Schedule 1 to the TAA states in part that within 14 days after the end of a financial year, an entity (the payer) must give a payment summary (and a copy of it) to another entity (the recipient) if during the year the payer made one or more withholding payments to the recipient or the recipient is an individual and has a reportable fringe benefits amount, for the income year ending at the end of that financial year, in respect of his or her employment (within the meaning of the Fringe Benefits Tax Assessment Act 1986 ) by the payer; or the recipient is an individual and reportable employer superannuation contributions have been made by the payer, in respect of the individual's employment, during the year. In this case entity 1 is the payer entity therefore it is obligated to give a payment summary (and a copy of it) to the recipient within 14 days of the payment whether that entity is a recipient of a payment of salary, wages, commission, bonuses or allowances. Provided entity 1 meets all the conditions under Part 2-5 of the TAA it is not a concern of the Commissioner what loan/recharge arrangements entity 1 has in place with the newly formed entities. Under subsection 66(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) the fringe benefits tax obligations are imposed upon the employer. Subsection 136(1) of the FBTAA defines 'employer' to mean: (a) a current employer; (b) a future employer; (c) a former employer; … Each of these terms is defined in subsection 136(1) of the FBTAA. For the purpose of this ruling, the relevant definition is 'current employer' which is defined to mean: … a person (including a government body) who pays, or is liable to pay, salary or wages, … Subsection 136(1) defines 'salary or wages' 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 As discussed above, entity 1 under the proposed arrangements will continue to pay the salary to all employees of itself and of the newly formed entities. As it will be responsible for withholding an amount from these payments under section 12-35 of schedule 1 to the Taxation Administration Act 1953 (TAA), entity 1 will be the employer for the purposes of the FBTAA.

Current Arrangements: The entity is currently the employer of all employees engaged by the newly formed entities. Whilst the other entities have control of the day-to-day management of these employees, entity 1 provides the employees to perform work in each respective entity under a service arrangement. The arrangement operates similarly to a supply and contract arrangement. | Entity 1 is currently the payer and employer of all employees and processes the payroll centrally for itself and all other newly formed entities. The other entities all have Australian Business Numbers (ABN) but entity 1 is the only registered Pay As You Go (PAYG) withholding and Fringe Benefits Tax (FBT) reporting entity. All employees are provided with payment summaries under entity 1's name and ABN. | As the payer and employer, entity 1 lodges a single FBT return. | As part of recent changes the newly formed entities may become separate employing entities. Additionally employees may be engaged under individual contracts with the newly formed entities. | Further, entity 1 is proposing to introduce individual contracts of employment whereby the newly formed entities will directly engage staff. | The newly formed entities are unlikely to have the capability to administer the payroll function and related services for the employees they engage in the short to medium term, even if it was desired that they should do so. | Under the proposed arrangement, entity 1 will continue to be responsible for all employment and industrial relations arrangements despite the newly formed entities being able to directly employ employees. Entity 1 will set the terms and conditions of employment. | Entity 1 will continue as the payer of salary and wages to all employees for the foreseeable future. This will not be changed unless either the centralised payroll and taxation systems and processes could facilitate separate reporting at employer level, or the newly formed entities have the capacity to administer the payroll function and a low risk transition can be facilitated. | Accordingly, under the proposed arrangement, entity 1 would continue to: | • Meet superannuation guarantee obligations on behalf of all the newly formed entities; and