Private ruling: Tax Implications of Remuneration Paid to Administrator of X Council
Date of advice: 19 October 2016
Published: January 2017
Ruling period: Years ended 30 June 20YY to 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are payments by the X Council to Administrators subject to Pay As You Go (PAYG) withholding? | A1: No. | Q2: Are benefits provided to Administrators subject to fringe benefits tax (FBT)? | A2: No. | Q3: Can remuneration for the services of the Administrator be paid to a family trust associated with the Administrator? | A3: Yes. However, the Administrator would still be assessable on the remuneration paid to a family trust under the Personal Services Income (PSI) rules. | Q4: If the answer to Question 3 is 'Yes', can remuneration paid to the Administrator to date be reversed and paid to the family trust? | A4: No.

Relevant facts and circumstances: The Administrator for the X Council was appointed by proclamation in accordance with the applicable relevant law. The Administrator holds, for a specified term, all of the statutory functions of the governing body and Mayor of the X Council. Administrator remuneration is paid out of council funds. The Council has not made a resolution pursuant to section 446-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Relevant legislative provisions: Taxation Administration Act 1953 Schedule 1 Section 12-45 | Taxation Administration Act 1953 Schedule 1 Section 446-5

Reasons for decision: Summary: The Council is not required to withhold an amount of tax from remuneration paid to its Administrator. | Detailed Reasoning - Detailed reasoning: Section 12-45 of Schedule 1 to the TAA provides that an entity must withhold an amount of tax from payments to an individual who is: (a) a member of an Australian legislature; or (b) a person who holds, or performs the duties of, an appointment, office or position under the Constitution or an Australian law; or (c) a member of the Defence Force, or of a police force of the Commonwealth, a State or a Territory; or (d) a person who is otherwise in the service of the Commonwealth, a State or a Territory; or (e) a member of a X governing body where there is in effect, in accordance with section 446-5, a unanimous resolution by the body that the remuneration of members of the body be subject to withholding under this Part. Councillors and Mayors are considered to be members of X governing bodies (X councils) and are excluded from the PAYG withholding system unless a resolution was made by the relevant council pursuant to section 446-5 of Schedule 1 to the TAA. Section 446-5 of Schedule 1 to the TAA provides the requirement for a unanimous resolution by X governing bodies. The Council has not made a unanimous resolution pursuant to this provision. The issue for consideration is whether or not the Administrator, appointed in the absence of Councillors and Mayors, is considered to be a member of the Council. A known office provides that Councillors or Administrator/s are the governing body of the Council. The Proclamation which governs the appointment of Administrators provides that the Administrator has the functions of the Council and the Mayor of the Council. It can be seen that the Administrator in this position is there to fulfil the role of all Councillors and also the Mayor, until such time as new Councillors are elected in forthcoming elections. Until that time, the Administrator is the sole member of the Council. Accordingly, the Commissioner accepts that the Administrator is a member of an X governing body for the purposes of section 12-45 of Schedule 1 to the TAA, and as no resolution has been made by the Council, there is no requirement to withhold tax on any remuneration paid to the Administrator. | Summary: Provisions of the Fringe Benefits Tax Assessment Act 1986 will only come into effect for benefits provided to the Administrator where the Council makes a resolution pursuant to section 446-5 of Schedule 1 to the TAA. As no such resolution has been made, benefits provided to the Administrator will not be subject to fringe benefits tax. | Summary: Remuneration for the services of the Administrator for the Council can be paid to a family trust associated with the Administrator. However, the Administrator would still be assessable on the remuneration paid to its family trust under the Personal Services Income rules. Detailed reasoning Under the Proclamation, it is an individual that is appointed as Administrator for the Council, and not a trust. Pursuant to section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997), income which is mainly a reward for an individual's personal efforts or skills is the individual's 'personal services income' (PSI) - regardless of whether it is income of another entity (such as a trust), whether it is for doing work or producing a result, or whether it is payable under a contract. Only individuals can have PSI. An interposed entity such as a company, partnership or trust cannot have PSI, even though it might contractually be entitled to receive the relevant payments. Paragraph 1.27 of the Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000 provides that examples of PSI include salary or wages, income payable under a contract which is wholly or principally for the labour or services of a person, and income derived by consultants from the exercise of personal expertise. In Taxation Ruling TR 2001/7 (TR 2001/7), the Commissioner discusses the meaning of PSI for the purposes of Part 2-42 of the ITAA 1997. In that ruling, the Commissioner considers that the characterisation of income as PSI is a question of fact depending on the circumstances of each case, including the substance of the agreement under which services are provided. The use of the word “mainly” in the definition of PSI in subsection 84-5(1) of the ITAA 1997 (“mainly a reward for your personal efforts or skills”) means more than half of the relevant amount of the ordinary or statutory income is a reward for the personal efforts or skills of the individual. This requires the exercise of practical judgment as to whether the value contributed by the efforts or skills of the individual exceeds the value of all other inputs, such as the efforts of other workers, and the use of plant and equipment, or intellectual or other property. A company, partnership or trust whose ordinary income or statutory income includes the PSI of one or more individuals is referred to as a 'personal services entity' (PSE). In the current circumstances, the family trust to which the Administrator is proposing its remuneration be paid into would be a PSE. Pursuant to section 86-15 of the ITAA 1997, the amount of PSI of an individual whose personal efforts or skills generated the income of a PSE is included in the assessable income of that individual. This is referred to as the 'alienation measure'. From the facts provided, none of the exceptions to this measure apply in respect of the family trust (the PSE) of the Administrator for the Council. Therefore, in the current circumstances, remuneration for the services of the Administrator for the Council can be paid to a family trust associated with the Administrator. However, the Administrator would still be individually assessable on the remuneration paid to its family trust under the PSI rules. | Summary: The Commissioner considers that once an amount of income has been derived, it is unable to be reversed. Therefore, remuneration paid to the Administrator to date cannot be reversed and paid to a family trust of the Administrator for the Council. As per the response to Question 3, under the PSI rules, remuneration paid to a family trust is assessable income of the Administrator and not the family trust.