Private ruling: Withholding tax - Payment of compensation for sickness or accident
Date of advice: 9 April 2019
Published: May 2019
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: X July 20XX

Ruling: Q1: Is there an obligation on the Trust under section 12-120 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) to withhold from a payment made to an insured member in respect of one of the conditions suffered in accordance to the ‘Early Cash Benefits’ under the Standard Income Protection Insurance plan taken out by the Trust? | A1: Yes.

Relevant facts and circumstances: Overview 1. This description of facts is based on the following documents. The documents form part of and are to be read with this description. The relevant documents are: (a) the private ruling application ( the application ); (b) the Insurance Policy ( the Policy ); (c) the Schedule; (d) the relevant Product Disclosure Statement ( the PDS ); (e) the Guidance Note; and, (f) emails to the ATO from the Trust on XX March 20XX. 2. The Trust employs over X,000 individuals across Australia. 3. Company A ( the Trustee ) is an Australian private company and the trustee for Trust. 4. The Trustee is the policy owner of the Policy. The Policy 5. The terms of the Policy include the terms outlined in the Schedule. 6. The Schedule states that the Policy commences on X July 20XX. 7. Under the Schedule, permanent employees or contractors of the Trust who work at least XX hours per week and are members of the Standard Income Protection Insurance Plan ( the Plan ) may be ‘insured members’ under the Policy. ‘Early Cash Benefits’ 8. Clause X of the Policy states that: The [Benefit] will be payable monthly in advance from the date the insured member suffers an [Eligible condition] if an [eligible condition] happens to the insured member while the Policy in respect of that insured member is in force. The duration of the period for which [the Policy pays] a [Benefit] is determined by the payment period that is applicable to the waiting period that applies to [the] plan, as set out [in the Policy]. 9. ‘Eligible conditions’ are further outlined in clause X of the Policy. These include: (a) cancer, (b) chronic kidney failure, (c) coronary artery by-pass surgery, (d) heart attack, (e) heart valve surgery, major organ transplant, (f) severe burns, and (g) stroke. 10. The Trust elected for a waiting period of 90 days, which means that the payment period for the Benefit will be three months. 11. In your email to the ATO dated XX March 20XX, you submitted that the Benefit is generally paid to the Trust in one or two payments. The Trust then pays this amount on to the relevant employee in one lump sum payment. The value of the lump sum payment is calculated by reference to the employee’s usual monthly salary: $[monthly salary] x 75% x 3 months 12. According to the Schedule, the Benefit amount is capped at $X0,000 per month. However, under the Policy (at clause X) and the Schedule, an insured member who is covered by the automatic acceptance ( AA ) is entitled to a maximum Benefit amount of $X0,000 per month.

Relevant legislative provisions: Taxation Administration Act 1953 , section 12-120 to Schedule 1

Reasons for decision: Summary: 1. Section 12-120 of Schedule 1 to the TAA 1953 states that: An entity must withhold an amount from a payment of compensation, or of sickness or accident pay, it makes to an individual if the payment: (a) is made because of that or another individual’s incapacity for work; and (b) is calculated at a periodical rate; and (c) is not a payment made under an insurance policy to the policy owner. Payment in relation to incapacity to work 2. As highlighted above, the Benefit is payable to an insured member who suffers from an ‘Eligible condition’. These conditions are outlined in clauses X and X of the Policy. 3. The Commissioner is satisfied in the circumstances which give rise to an ‘Eligible condition’ that the payment is a payment because of an insured member’s incapacity to work. Payment is calculated at a periodical rate 4. The Benefit is paid to Trust in one or two payments based on the following formula: $[monthly salary] x 75% x 3 months 5. The Commissioner notes that this amount is capped at $X0,000 per month (or $X0,000 for insured members that also qualify AA). 6. The Trust then pays the insured member that amount as a lump sum. However, the payment itself is still an amount calculated at a periodical rate being 75% of the insured member’s monthly salary and paid for a period of 3 months. 7. You submitted in your application that the payment by the Trust to the insured member is not calculated at a periodical rate because there is a lack of recurrence (citing Case 9/2006 [2006] AATA 614). 8. The Commissioner notes that paragraph 12-120(b) of Schedule 1 to the TAA 1953 refers to ‘if the payment is calculated at a periodical rate’ and not recurrence or periodicity of the payment. In order for the provision to apply, the payment must be a payment the amount of which is determined as a rate based on some period. In this case, the payment is calculated at a monthly rate based on a proportion of the insured member’s monthly salary. 9. Therefore, the Commissioner is satisfied that the payment by the Trust to the insured member is calculated at a periodical rate. Payment is not a payment made under the insurance policy to the policy owner 10. As highlighted ab ove, the Trust is the policy owner of the Policy. 11. The insured members are not policy owners of the Policy. 12. The Trust pays the Benefit payment as a lump sum to the insured member. 13. Therefore, the payment is not a payment made under an insurance policy to the policy owner. Conclusion 14. The Commissioner is satisfied that the payment by the Trust of the lump sum payment to insured members pursuant to clause 4.6 of the Policy meets the conditions of section 12-120 of Schedule 1 to the TAA 1953. 15. As a result, the Trust is required to withhold amounts from payments as outlined above.