Private ruling: Employer deductions
Published: April 2012
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022 | This ruling has been issued for 10 years on the basis of the facts stated in the description of the scheme as set out below. The Commissioner has granted a 10 year ruling in this instance, to reduce administrative burden involved in reapplying for another ruling, as you have had two prior rulings on the same facts. However, there are risks to you in giving advice that applies for extended periods. These risks include the possibility of a change to the law; the likelihood of changes to the facts; and the risk that a subsequent public ruling might override this private ruling. Should any of these events happen, this private ruling will no longer apply, and you will no longer be protected.

Ruling: Q1: Are you entitled to deductions under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for annual leave, or long service leave contributions made under a workplace agreement (or other industrial instrument) to the Group Employee Entitlement Trust? | A1: Yes. | Q2: Are you entitled to a deduction under section 8-1 of the ITAA 1997 for redundancy contributions made under a workplace agreement (or other industrial instrument) to the Group Employee Entitlement Trust? | A2: Yes.

Relevant facts and circumstances: Your employees have their employment arrangements with you governed by a Workplace Agreement (WA) or alternatively, are 'staff' whose employment arrangements are defined by individual contracts of employment. The WA requires certain contributions to be made to an approved worker entitlement fund nominated by the employer, for all employees except apprentices, juniors or probationary employees. These contributions are made to Group Employee Entitlement Trust (the Fund). The Fund is an approved worker entitlement fund pursuant to subsection 58PB(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The Fund has been declared an approved worker entitlement fund by the Australian Taxation Office (ATO). As an approved worker entitlement fund, any contributions by you (and your associated entities) to the Fund that are required to be made under an 'industrial instrument' (within the meaning of the FBTAA) are exempt from fringe benefits tax.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1. | Income Tax Assessment Act 1997 Section 26-10.

Reasons for decision: Detailed Reasoning - Question 1 and Question 2: Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it was incurred in gaining or producing assessable income and is not: · capital, private or domestic in nature; · incurred in gaining or producing exempt income; or · prevented from being deductible by another provision of the ITAA 1997. | Detailed Reasoning - Positive limbs of section 8-1 of the ITAA 1997: In order for a loss or outgoing to be deductible it must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income. In carrying on your business you must meet your obligations to your employees as contained within any relevant industrial instruments in place. In your case you are legally required to make contributions to the Fund for employees' annual leave, long service leave and redundancy entitlements under the WA. It is the Commissioner's view that where you are required to make a contribution to a worker entitlement fund as a result of your legal obligations under an industrial instrument, there is a connection between the business activities being carried on by the taxpayer and the taxpayer's obligation to provide for worker entitlements. Further, under the worker entitlement fund deed, you may only obtain a reimbursement (up to the amount in the employee's member account) for a payment made to an entitled employee. You have no right to a refund of a payment into an employee members account, only a reimbursement. As the contributions to the worker entitlement fund are non refundable payments made directly to actual member accounts and you are required to make the contributions to meet your legal obligations in carrying on business activities, the contributions have been incurred by you and have a sufficient connection with the income producing activities to rise to a deduction. | Detailed Reasoning - Are the contributions revenue or capital in nature?: Under section 8-1 of the ITAA 1997, you cannot claim a deduction for an expense which is capital, private or domestic in nature. The view of the Commissioner is that whether a payment is revenue or capital in nature depends of the character of the payment made. This is supported by G.P. International Pipecoaters Pty Ltd v FCT (1990) ATC 4413 at 4419 where it is stated that: "The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd. V. F.C. of T. (1938) 61 CLR 337 at p.363" When you make the contributions to the Fund you are meeting your recurring legal obligations under the WA. This recurrence in your ordinary course of business indicates that the amounts in question are revenue in nature. This is supported by Hill J in Walstern v. Federal Commissioner of Taxation [2003] 2003 ATC 5076. As you are making repetitive contributions as required by the WA to discharge an immediate obligation, and the obligation is directly connected to the income earning capacity of the business and is part of the immediate ordinary flow of business expenditure, the payment of the contributions is revenue in nature. | Detailed Reasoning - Are the contributions precluded from deduction by section 26-10 of the ITAA 1997?: Section 26-10 of the ITAA 1997 provides that an outgoing for leave is not deductible except where the outgoing is an amount which is paid in the income year to the individual to whom the leave relates (or if the individual is deceased, to their dependant or legal representative), or it is an accrued leave transfer payment that is made in the income year. It is the Commissioner's view that the contributions you make to the Fund are contributions made to discharge your immediate legal obligations in respect to worker entitlements. While the contribution is calculated with reference to the worker's future leave entitlements, your immediate outgoing is not an outgoing for leave. As such your contribution to the Fund is not precluded from deduction by section 26-10 of the ITAA 1997. Therefore, you may claim a deduction for contributions to the Fund in respect of your employees annual leave, long service leave and redundancy entitlements, as required under the WA, under section 8-1 of the ITAA 1997.

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