Private ruling: Pay As You Go (PAYG) and Fringe Benefits Tax
Published: April 2013
Ruling period: Period ending 31 March 2013 | Year ended 30 June 2013.
Date scheme commenced: 1 July 2012.

Ruling: Q1: Is the Appointed Commissioner an 'office holder' for the purposes of section 12-45 of the Taxation Administration Act 1953 (TAA)? | A1: Yes. Issue 2 - Fringe Benefits Tax | Q2: Is the Appointed Commissioner an 'employee' within the meaning of section 136 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A2: Yes. | Q3: Where the Appointed Commissioner directs the council to make a payment to a complying superannuation fund, is that payment a 'fringe benefit' within the meaning of section 136 of the FBTAA? | A3: No. | Q4: Can the council enter into an 'effective salary sacrifice arrangement' with the Appointed Commissioner to salary sacrifice certain payments received in conjunction with their role, for the purpose of working out the council's fringe benefits taxable amount under Section 5B of the FBTAA? | A4: No.

Relevant facts and circumstances: The Council is a local government established under the Local Government Act (LGA) of an Australian State. The Council was suspended and a Commissioner appointed (the Appointed Commissioner). A letter of appointment from the relevant State Minister set out the applicable provision of the LGA of that State and determined the amount of remuneration to be paid by the council to the Appointed Commissioner. The Council proposes to make payments to the Appointed Commissioner in the following manner: · cash (or its equivalent) in remuneration · contribution to a complying superannuation fund nominated by the Appointed Commissioner · provision of certain non-cash benefits including: · the use of a motor vehicle · meals · expense payment. The Council has not previously made an election by unanimous resolution that the remuneration of its members are subject to Pay As You Go withholding (PAYGW) under Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA), and that would satisfy the requirements under section 446-5 of Schedule 1 to the TAA. The members of the Council are not treated as employees. Detailed reasoning Issue 1 - PAYG withholding Question 1 General discussion of taxation law Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) deals with the collection of amounts in respect of particular types of payments. Division 12 of Schedule 1 to the TAA deals with payments from which amounts must be withheld, which are referred to as Pay As You Go (PAYG) withholding amounts. Subdivision 12-B of Schedule 1 to the TAA deals with payment made for work and services. In particular, section 12-45 of the TAA provides: 12-45(1) An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as: (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 *local 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. For exceptions, see section 12-1. 12-45(2) This section does not require an amount to be withheld from a payment to an individual as a member of a *local governing body unless it is one to which paragraph (1)(e) applies. Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines the term 'Australian law' means a Commonwealth, a State or a Territory law. Further, that subsection defines that a 'State law' means a law of a State. Taxation Ruling TR 2002/21 sets out the Commissioner's view on the circumstances in which a person holds an appointment, office or position under the Constitution or an Australian law or whether a person is otherwise in the service of the Commonwealth, a State or a Territory for the purposes of section 12-45 in Schedule 1 to the TAA. TR 2002/21, among other things, states: Appointment, office or position under the Constitution or an Australian law (paragraph 12-45(1)(b)) 13. An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as a person who holds, or performs the duties of an appointment, office or position under the Constitution or a statutory instrument of the Commonwealth, a State or a Territory. 14. An individual is considered to be appointed or engaged under an Act where you can identify either: · the particular office, position or appointment; or · the constitution of the relevant body (such as a panel, board committee or tribunal) to which the individual has been appointed, in the relevant legislation or statutory instrument. 15. To be covered by paragraph 12-45(1)(b) in Schedule 1 to the TAA, the appointment, office or position must also exhibit the following characteristics of an office holder: · Independent existence: The office must exist regardless of the individual who occupies the office from time to time - that is, if the individual currently occupying the office vacates that office, the office must continue to exist to be filled by another individual; · Duties, functions, responsibilities or powers: The office must have identifiable duties, functions, and responsibilities or powers other than a mere advisory function. These features of the office (or of the panel, board, committee or tribunal to which the individual has been appointed) would usually be specified in the relevant legislation or statutory instrument; and · The relevant duties, functions, responsibilities or powers must attach to the office itself, rather than the individual who occupies the office. 16. It should be noted that the duties of an office holder are independent duties deriving from a source other than the orders of the payer or a contract with the payer (see paragraph 87 of this Ruling). Therefore, where the document that sets out the office holder's duties and responsibilities is a contract with the payer, it is more likely that the individual would be an employee or independent contractor (rather than an office holder). In TR 2002/21 the Commissioner explains that the terms 'salary', 'wages', 'commissions' and 'bonuses' are not defined terms, therefore each carries its ordinary meaning as interpreted by the courts. In relation to office holders, the Commissioner explains in TR 2002/21 that: 28. The notion of office holder's remuneration being a 'salary' is affirmed in Halsbury's Law, Volume 16 at paragraph 7: Office-holders. The categorisation of an individual as an office-holder tends to be of more significance in the law relating to income taxation than in employment law. While it is true that in the case of certain major offices the individual's status as an office-holder may mean that he is not an employee, in most cases this will not be so and there will be nothing to prevent the ordinary definition of 'employee' from being satisfied. Even if the office-holder does not qualify as an employee, there may still be aspects of employment law applicable to him, particularly in relation to the payment of wages, since the remuneration of a modern office-holder is likely to be construed as an ordinary salary for performing the duties of the office, not as the archaic form of an honorarium for filling an office... 29. A true honorarium paid to an office holder would not be salary, wages, commission, bonuses or allowances that would be subject to withholding under section 12-45 in Schedule 1 to the TAA. However, as indicated in the above paragraph, it is likely that the remuneration paid to a modern office holder would be ordinary salary for performing the duties of the office rather than an honorarium for filling an office. Application of the law As the Council is established under a State law, it is a local governing body within the meaning of subsection 995-1(1) of the ITAA 1997. The Council has not made a resolution under section 446-5 of the TAA. Therefore paragraph 12-45(1)(e) of Schedule 1 to the TAA does not apply. To determine whether a payment to the Appointed Commissioner is a payment of salary, wages, commissions or bonuses from which an amount must be withheld, it is necessary to determine whether the Appointed Commissioner is an 'office holder' for the purposes of section 12-45 of the TAA. This is a question of fact. The LGA is a State law, which is an Australian law within the meaning defined under subsection 995-1(1) of the ITAA 1997. As outlined in the letters of appointment from the Minister, in the circumstances where a council is suspended, the particular office of the Appointed Commissioner is identifiable in the LGA. Also, the LGA states that if the position of commissioner becomes vacant another person may be appointed to fill the position, which indicates the position is independent of the person appointed. Further, the Appointed Commissioner's duties are identifiable in the LGA and includes to 'exercise the powers and perform the duties of the council of the local government and its mayor or president', which are more than a mere advisory function and attach to the office itself under the LGA, rather than the individual who occupies the office. In addition, the duties of the Appointed Commissioner are independent duties derived from a source other than the orders of the payer or a contract with the payer. In your circumstances, it is considered that the Appointed Commissioner has been appointed to hold an office and perform duties of that office under the LGA, which is an Australian law. Therefore, it is considered that the Appointed Commissioner is an 'office holder' for the purposes of section 12-45 of the TAA. Issue 2 - Fringe benefits tax Question 1 General discussion of the law The term 'employer', among other things, includes a 'current employer', which is defined in section 136 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to mean 'a person (including a government body) who pays, or is liable to pay, salary or wages'. The term employee is defined in section 136 of the FBTAA to, among other things, include a 'current employee', which is defined in section 136 of the FBTAA to mean a 'person who receives, or is entitled to receive, salary or wages'. The term 'salary or wages' is defined in section 136 of the FBTAA and, among other things, includes a payment from which an amount must be withheld (even if the amount is not withheld) under section 12-45 of the TAA. Application of the law For the purposes of the FBTAA, an employee includes a person who receives, or is entitled to receive, salary or wages. As it has been determined at Question 1 of Issue 1 that the Appointed Commissioner is an office holder for the purposes of section 12-45 of Schedule 1 to the TAA, which requires the Council to withhold an amount, it is considered that the Appointed Commissioner will receive, or will be entitled to receive, salary and wages within the meaning of section 136 of the FBTAA. Therefore, as the Appointed Commissioner is a person who receives, or is entitled to receive salary or wages, the Appointed Commissioner is an employee within the meaning of section 136 of the FBTAA. Question 2 General discussion of the law The term 'benefit' is defined in section 136 of the FBTAA, which, among other things, includes: benefit includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under: (a) an arrangement for or in relation to: (i) the performance of work (including work of a professional nature), whether with or without the provision of property; (ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or (iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; (b) a contract of insurance; or (c) an arrangement for or in relation to the lending of money. The term 'fringe benefit' is defined in section 136 of the FBTAA, which broadly means a benefit provided by an employer to an employee because of their employment during, or in respect of, a tax year. However, the definition provides that a fringe benefit, among other things does not include: …(f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936 ; or (g) a benefit that is an exempt benefit in relation to the year of tax; or (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997 ) to which Subdivision 83A-B or 83A-C of that Act applies; or (ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997 ); or (hd) a benefit: (i) constituted by the making of a contribution to an FHSA (within the meaning of the First Home Saver Accounts Act 2008 ); or (ii) that is an expense payment benefit in relation to a contribution to an FHSA (within the meaning of the First Home Saver Accounts Act 2008 ); or (j) a benefit constituted by: (i) the making of a contribution to a superannuation fund (as defined by the Income Tax Assessment Act 1997 ) that the person making the contribution had reasonable grounds for believing was a complying superannuation fund (as defined by that Act) for the purpose of making provision for superannuation benefits for the employee (whether or not the benefits are payable to a dependant of the employee if the employee dies before or after becoming entitled to receive the benefits); or (ii) the making of a contribution to a foreign superannuation fund (within the meaning of the Income Tax Assessment Act 1997 ) where: (A) the contribution is for the purpose of making provision for superannuation benefits for the employee (whether or not the benefits are payable to a dependant of the employee if the employee dies before or after becoming entitled to receive the benefits); and (B) the employee is a temporary resident (within the meaning of the Income Tax Assessment Act 1997 ) when the contribution is made; or (iii) the making of a payment of money to an RSA (within the meaning of the Retirement Savings Accounts Act 1997 ) that is held by the employee; or (k) a superannuation benefit (within the meaning of the Income Tax Assessment Act 1997 )… Application of the law Section 136 of the FBTAA defines that a fringe benefit does not include a contribution to a complying superannuation fund. Therefore, where the Appointed Commissioner directs the Council to pay an amount to a complying superannuation fund, that amount is not a fringe benefit within the meaning of section 136 of the FBTAA. Question 3 General discussion of the law Section 5B of the FBTAA sets out the method to work out an employer's fringe benefits taxable amount for a year of tax, which requires an employer to identify the aggregate amount of benefits provided to all employees. To work out the aggregate amount, an employer must work out the employee's 'individual fringe benefits amount' under Division 3 of the FBTAA. This also includes determining the nature of the benefit and whether that benefit is a fringe benefit or an exempt benefit. Certain benefits may be provided to an employee under a salary sacrifice arrangement (SSA), which is an arrangement by which an employee agrees to forego part of their future salary or wages in return for their employer providing benefits of a similar value. A legitimate salary sacrifice arrangement cannot be made retrospectively for salary or wages which have already been earned. Subject to agreement, an employee can sacrifice their salary or wages into a variety of benefits including: · super · car fringe benefits · expense payment fringe benefits, such as school fees, child care costs or loan repayments. Salary sacrifice arrangements involving payments to a complying superannuation fund Generally, superannuation contributions made under an 'ineffective SSA' are considered a payment of salary and wages. The super contributions will be included in the employee's assessable income and will be subject to PAYG withholding tax. Any amount contributed to an employee's fund will be considered a personal contribution rather than an employer contribution and the employer will not be entitled to a tax deduction for the sacrificed amount. However, benefits provided under an 'effective SSA' are generally not included in an employee's assessable income for an income year. Also, certain benefits may be exempt benefits or excluded from an employee's individual fringe benefits amount. The taxation treatment of superannuation contributions made by an employer under a salary sacrifice agreement to a complying superannuation fund is considered in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements . The general rule as to the assessability of an employer's contributions to a superannuation fund is set out in paragraph 31 of TR 2001/10 which states: An employer's contributions under an effective SSA to a superannuation fund on behalf of an employee is not assessable income of the employee under paragraph 26(e). The sums contributed have not been allowed, given or granted to the employee, but are paid to the administrators of the fund. Also, the scheme of superannuation and taxation law is such that the contributions are not assessable income of the employee. The difference between an effective and ineffective SSA is explained in paragraphs 21 and 22 of TR 2001/10 which state: 21. ' Effective SSA' - an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages. 22. ' Ineffective SSA' - an ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned (see paragraph 23 of this Ruling) is to be paid in a form other than as salary or wages. 23. ' Entitlement to receive salary or wages that have been earned ' - personal services remuneration arrangements usually provide that the employee is entitled to be paid salary or wages at fixed intervals when he or she has performed services for the employer over a fixed period. To the extent that services for that period have been performed, everything has been done by the employee in earning the entitlement to salary or wages. Personal services remuneration arrangements may also provide that the employee may become entitled to be paid salary or wages such as bonuses or commissions if particular events occur or conditions are satisfied. The condition precedent to earning such variable salary or wages is met when those events occur or those conditions are satisfied. An entitlement to be paid has been earned even if the employee will not be paid until a later time. For annual and long service leave, an entitlement to be paid salary or wages is earned as the leave accrues, being when the relevant qualifying period of service is completed. Paragraphs 27 and 28 of TR 2001/10 further explain: Ineffective SSA 27. Payments made under an ineffective SSA to, or on account of, an employee are ordinary or statutory income derived by the employee at the time of payment for the reasons stated in paragraph 25 above. Benefits provided under an ineffective SSA are assessable income of the employee under section 6-5 or 6-10 of the ITAA 1997 and they are not exempt income under section 23L of the ITAA 1936. To deal with an entitlement to take leave that has already accrued will be an ineffective SSA. The exchange of an entitlement to take leave for another benefit will cause the entitlement to be paid as salary or wage and to be derived as ordinary income. Effective SSA 28. Benefits provided to or on behalf of an employee under an effective SSA may be derived as ordinary or statutory income by the employee. Any such benefits that are convertible to money are derived by the employee as ordinary or statutory income. However, these benefits are not assessable income of the employee under section 6-5 or 6-10 of the ITAA 1997 because they are exempt income under section 23L of the ITAA 1936. Leave that will accrue from the provision of future services may be the subject of an effective SSA. Similarly, the taking of leave that accrued prior to the commencement of the SSA in the ordinary course of employment will not cause the SSA to be ineffective. In relation to office holders, the Commissioner explains in TR 2001/10 that: 55. An office may be created under the Constitution or a law of the Commonwealth, a State or a Territory. The duties of the office may be set out in the instrument that creates the office or may be determined by the entity to whom the office holder reports. 56. However appointed, terms of remuneration that an office holder is to receive will usually be set out in either the instrument that creates the office or more likely in a written agreement between the office holder and the entity to whom the office holder reports. 57. If the terms of remuneration for the office holder are set out in the instrument that creates the office, it may not be possible for the office holder to enter into an effective SSA. Where the instrument permits the relevant entity to enter into a remuneration agreement with the office holder, the agreement may be amended during the period that the office holder occupies the office to reflect changes made to responsibilities and remuneration arrangements, such as by a SSA. Application of the law The 'remuneration and allowances, and reimbursed for expenses' of the Appointed Commissioner is set out under the LGA to be 'in accordance with determinations made by the Minister from time to time'. In your circumstances, it is the Minister who must determine the nature and composition of the remuneration of the Appointed Commissioner. In the Minister's letter to the Appointed Commissioner, the Minister determined the value of remuneration. The Minister also determined a period of tenure. In review of the facts, the LGA does not specify that the Appointed Commissioner may enter into a SSA with the Minister. Also, the Minister has not determined that remuneration is to be paid in a manner consistent with an effective SSA. In addition, the Minister has not determined that the Appointed Commissioner may enter into a SSA with the Council in respect of his remuneration. Therefore, in your circumstances, the Council can not enter into an effective SSA with the Appointed Commissioner to salary sacrifice certain payments received in conjunction with their role, for the purpose of working out the Council's fringe benefits taxable amount under Section 5B of the FBTAA.