Employment taxes essentials Updated as at September 2013 Employment taxes - essentials September 2013

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1 Employment taxes - essentials September 2013 Presented by: Institute of Chartered Accountants Australia

2 Disclaimer The Institute of Chartered Accountants in Australia owns the copyright in this document. The document must not be copied or made available to third parties, in whole or in part, in any form or by any means, without the prior written consent of The Institute. The contents are for general information only. They are not intended as professional advice - for that you should consult a Chartered Accountant or other suitably qualified professional. The Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information in these papers. Copyright 2013 The Institute of Chartered Accountants in Australia 2

3 Contents 1 Introduction Objectives Glossary Overview of employment taxes Introduction PAYG FBT Payroll tax WorkCover SG PAYG Overview Exceptions to PAYG withholding Payments to employees Voluntary agreements to withhold Labour hire arrangements Reportable benefits Reportable Employer Superannuation Employee Share Scheme reporting Compliance obligations Exemptions and extension of time Payment summary PAYG withholding records Registration - new employers Registration - new employees PAYG withholding tables & rates ETPs FBT Overview Copyright 2013 The Institute of Chartered Accountants in Australia 3

4 4.2 Rate and calculation of FBT The otherwise deductible rule Effect of employee s contribution What are the categories of fringe benefits? FBT payments and income tax deductions Scope of benefits Car fringe benefits Car parking fringe benefits Debt waiver fringe benefits Loan fringe benefits Expense payment fringe benefits Housing fringe benefits LAFHA Developments in Living Away From Home Concessions Airline transport fringe benefits Board meals Entertainment fringe benefits Property fringe benefits Residual fringe benefits FBT returns Instalments Notional tax amount Payroll tax Overview Is your business liable? Exemptions Grouping provisions Administration Workers compensation system Overview Copyright 2013 The Institute of Chartered Accountants in Australia 4

5 6.2 Employer obligations Superannuation Overview The superannuation guarantee system Increasing the rate of compulsory superannuation Who is covered? Notional earnings base Salary Sacrifice Arrangements (SSAs) SGC Choice of fund Copyright 2013 The Institute of Chartered Accountants in Australia 5

6 Copyright 2013 The Institute of Chartered Accountants in Australia 6

7 1 Introduction 1.1 Objectives This paper, aimed at a beginner audience level, focuses on the current status and a practical application of the various employment taxes. The paper is presented as part of the Institute of Chartered Accountants in Australia (the Institute) special topics program. Specifically, the paper will examine, through the use of practical examples, the main taxation systems affecting employment, from the perspective of both the employee and the employer. 1.2 Glossary The following abbreviations accord with common usage and are used throughout this paper: ABN ATO BAS FCT FBT Australian Business Number Australian Taxation Office Business Activity Statement Federal Commissioner of Taxation Fringe Benefits Tax FBT Act Fringe Benefits Tax Assessment Act 1986 GST Goods and Services Tax GST Act A New Tax System (Goods and Services Tax) Act 1999 HELP Higher Education Loan Program ITAA 1936 Income Tax Assessment Act 1936 ITAA 1997 Income Tax Assessment Act 1997 IAS OTE PAYG RBA Instalment Activity Statement ordinary time earnings Pay As You Go Running Balance Account Copyright 2013 The Institute of Chartered Accountants in Australia 7

8 SGAA Superannuation Guarantee (Administration) Act 1992 SGC Superannuation Guarantee Charge TAA Taxation Administration Act 1953 TFN SFSS Tax File Number Student Financial Supplement Scheme Copyright 2013 The Institute of Chartered Accountants in Australia 8

9 2 Overview of employment taxes 2.1 Introduction Of the 5 different regimes covered in this topic, only payroll tax can be said to be a true tax on employment. There is no economic (or socio-economic), rationale for the principles of taxing employment and, as far as the states and territories are concerned, its imposition is a revenueraising mechanism. The other taxing regimes covered are for a variety of purposes. Each taxing regime has its own rules, but there are crossovers at various points. We will now consider each of these 5 taxing regimes sequentially. 2.2 PAYG PAYG is a federal withholding system. It imposes obligations upon employers to withhold amounts from salary or wages paid to employees. Thus, PAYG is not a tax in a true sense Rather it is a method for collecting taxes in particular income tax. Thus, amounts are withheld and remitted to the ATO to the credit of the employee against the employee s income tax liability for the relevant income tax year. 2.3 FBT FBT is a federal tax, but in this instance it is imposed on employers. It applies to fringe benefits provided to employees and their families in lieu of salary and other monetary payments. The design of the FBT system is deliberately intended to discourage the achievement of an overall lower tax exposure for a particular employee and thus to maintain the integrity and revenue source of the income tax liabilities of employees. 2.4 Payroll tax As noted above, payroll tax is a tax on employment. It is levied on employers by each state and territory in accordance with the separate laws applying in each jurisdiction (with some attempt at harmonisation). High thresholds work to exclude many small businesses from any liability. Much of the precedents for determining whether an individual is an employee for payroll tax also operate for federal PAYG purposes. Copyright 2013 The Institute of Chartered Accountants in Australia 9

10 2.5 WorkCover Each state and territory also imposes a workers compensation insurance premium on employers. The insurance premium is designed to fund each state and territory s obligations to pay workers compensation for injuries and accidents concerning employees. Rates of premium depend on the particular industry of the employer, with high risk industries having the highest premiums. 2.6 SG Employers are required to make minimum superannuation contributions in respect of eligible employees. Contributions are calculated at 9.25% (from 1 July 2013) based on an employee s earnings base. From 1 July 2008, the only earnings base is Ordinary Time Earnings (OTE). Prior to 1 July 2008 an employee s earnings base may have been a notional earnings base used in accordance with a pre-existing superannuation scheme, award, enterprise bargaining agreement or legislation. OTEs are the amount of salary wages paid for ordinary, required hours of work. It does not include lump sums paid for unused sick leave, unused annual leave or unused long service leave and does not include most overtime payments see section 6 Superannuation Guarantee (Administration) Act Copyright 2013 The Institute of Chartered Accountants in Australia 10

11 3 PAYG 3.1 Overview The PAYG system has 3 main elements: PAYG withholding; PAYG instalments; and Running Balance Accounts (RBAs). This paper only focuses on the PAYG withholding system. The relevant legislation is contained in Schedule 1 to the TAA. The aim of the PAYG withholding system is to facilitate the efficient and timely collection of income tax, Medicare levy, HELP debts, SFSS debts, withholding tax, mining withholding tax and certain social security liabilities. The system operates by requiring the registered paying entity (including an individual, body corporate, partnership, trust, superannuation fund, government body and any other unincorporated association or body of persons) to withhold tax from various specified payments and forward it to the ATO. People not in business may also need to withhold amounts in specific circumstances, e.g. payments to domestic staff and payments by landlords to tradespersons who do not quote an ABN. Alienated personal services payments and non-cash benefits may also be withholding payments in certain circumstances, although these items are subject to their own special rules. Where more than one provision requiring withholding potentially applies, the provision most specific to the circumstances of the payment prevails subject to exceptions listed in the table in subsection 12-5(2). Thus, only one amount is withheld. This is important if there are different withholding rates or different timing requirements. In the context of an employment arrangement, PAYG withholding applies to payments directly from an employer to the employee. PAYG withholding also applies in the context of constructive payments. A constructive payment rule applies to PAYG withholding such that an amount is taken to have been paid when it has been applied or dealt with on the payee's behalf or as directed: section For example, an amount will be taken to have been paid to an employee when the employer pays, at the employee's direction, an amount to a health fund. Copyright 2013 The Institute of Chartered Accountants in Australia 11

12 3.2 Exceptions to PAYG withholding The payments listed below are not subject to the PAYG withholding system (but reporting obligations may arise: Exempt income of the recipient: section (Note however that foreign employment income derived on or after 1 July 2009 that is no longer exempt under section 23AG of the ITAA 1936 may now be subject to the PAYG withholding system); Non-assessable non-exempt amounts: subsection 12-1(1A); A Living-Away-From-Home Allowance (LAFHA) under the FBT Act: subsection 12-1(2); An expense payment benefit under the FBT Act that is not an exempt car expense payment benefit under section 22 of the FBT Act: subsection 12-1(3); An alienated personal services payment unless it is caught by Division 13 (personal services income included in an individual's assessable income by Division 86 of the ITAA 1997): section 12-7; and A non-cash benefit unless it is caught by Division 14: section For residential property lettings, the main exemptions from PAYG withholding are where: The tenant is not carrying on an enterprise in that residence; The supply is wholly input taxed for GST purposes; and The managing agent's or landlord's ABN is quoted to the tenant. These conditions will usually be met for residential properties so the owner will not be required to get an ABN. However, if the owner has an ABN for other purposes, this must be quoted to the tenant but no withholding is required. This issue brings together GST and PAYG and is the subject of 2 rulings: GST Determination GSTD 2000/9 and Ruling MT 2000/2. Copyright 2013 The Institute of Chartered Accountants in Australia 12

13 3.3 Payments to employees The PAYG withholding rules are specified in Division 12 of Part 2-5 of Schedule 1 to the TAA. The system is designed as a table and it lists 26 withholding payments events. Below is a sample of those withholding payment events: Item Withholding payment Section 1 A payment of salary, etc to an employee A payment of remuneration to the director of a company A payment of salary, etc to an office holder (e.g. a member of the Defence Force) A A payment to a religious practitioner A return to work payment to an individual A payment that is covered by a voluntary agreement A payment under a labour hire arrangement or a payment specified by regulations A superannuation income stream or an annuity A superannuation lump sum or an employment termination payment An unused leave payment The system is designed to work such that later items take precedence over earlier items. For example, a religious practitioner may be an employee of the church; thus both Items 1 and 3A apply. As Item 3A is later than Item 1, the employer (the church) calculates the PAYG withholding based in section 12-47, rather than section Section requires an entity to withhold an amount from salary, wages, commission, bonuses or allowances paid to an employee (whether of that entity or another entity). The terms salary, wages and employee are not defined in the TAA and therefore they have their ordinary meaning. The relationship between employer and employee is often described as a contract of service, whereas the relationship between principal and independent contractor is a contract for services. Whether a person is an employee of another person or entity is a question of fact to be determined by examining the terms and circumstances of the contract, having regard to the key indicators (see below). No one indicator of itself is determinative of that relationship and the totality of the relationship between the parties must be considered. Note that the alienation Copyright 2013 The Institute of Chartered Accountants in Australia 13

14 of personal services income rules in Part 2-42 of the ITAA 1997 are not relevant in this context. In most cases, it is self-evident whether there is an employer/employee relationship or a principal/independent contractor relationship. In certain cases, however, it can be difficult to discern the true character of the contract. A clause in the contract purporting to characterise the relationship between the parties as one of principal and independent contractor is not of itself determinative of the matter and must be considered with all the other terms of the contract. It may be that an employer/employee relationship has been created instead. Ruling TR 2005/16 provides guidance as to whether an individual is an employee or an independent contractor for the purposes of the PAYG withholding provisions Indicators of employment vs contract The key indicators as expressed in case law and in ATO Ruling TR 2005/16 are as follows. Control - The degree of control that a person engaging another person to perform work can exercise over that person is an important factor. In an employer/employee relationship, the employer has the right to tell the employee not only what work is to be done but how and where it is done. Given result - Where the substance of a contract is to produce a given result, this is a strong indication that the contract is one for services (i.e. a contractor). As a result, the work can be done by anyone (e.g. third party labour) by any means using the contractor's plant and equipment to achieve the specified outcome. Payment is often a lump sum payable on completion of the particular job, whereas an employee is usually paid by reference to hours worked. Integration or organisation - If a person has to personally perform the work, this is an indication of an employee (integrated into the fabric of the organisation). In contrast, unless the contract provides otherwise, an independent contractor is free to arrange others (their employees or subcontractors) to perform some or all of the work. An employee's power to delegate in a managerial or supervisory role is fundamentally different to delegation by a contractor. The latter must pay the alternative worker. Risk - An independent contractor, but not an employee, bears the commercial risk and responsibility for any substandard work or injury sustained in performing the work and will usually take out the appropriate insurance. Copyright 2013 The Institute of Chartered Accountants in Australia 14

15 Provision of assets, equipment and tools - The provision of assets, etc, by an individual, and the incurring of expenses and other overheads, indicate an independent contractor although this is not necessarily inconsistent with some employment relationships. Other indicators suggesting an employment relationship include the employer's right to suspend or dismiss the person engaged, the right to the exclusive services of the person engaged, provision of employee benefits such as annual, sick and long service leave and other benefits prescribed under an award for employees, and the wearing of the firm uniform (although independent contractors may also wear a uniform). A person who holds an ABN may still be an employee. The employment relationship does not necessarily have to be between the entity making the payment and the individual for example, a parent company may pay key personnel of a subsidiary provided the payment is made to the individual in her or his capacity as an employee, either of the payer or the subsidiary. As benefits paid or provided under effective salary sacrifice arrangements are not salary and wages, there are no PAYG withholding obligations: Ruling TR 2001/10. Conversely, benefits under an ineffective salary sacrifice arrangement are salary and wages from which PAYG should be withheld, provided the other conditions of Part 2-5 in Schedule 1 to the TAA are satisfied. In the recent case On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366, the Federal Court confirmed that, when looking at the issue of employee/contractor, all of the above factors are to be considered when determining whether there is an employment relationship (known as the multi-factorial totality test) Example of the significance of the distinction In Trylow Pty Ltd v FCT (2004) 55 ATR 408, the applicant company allegedly arranged for labour hire companies to provide labourers to various contractors in the building industry. However, the applicant failed to prove that the labourers were not its employees and, as a result, the fees paid to the labour hire companies were treated as the labourers' wages from which the applicant should have withheld amounts under the PAYG withholding system. If an arrangement between parties is structured in a way that does not give rise to a payment for services rendered but rather a payment for something entirely different, such as a lease or a bailment, there is no employer/employee relationship and consequently no withholding under the PAYG withholding system. Copyright 2013 The Institute of Chartered Accountants in Australia 15

16 3.3.3 Use of interposed entities Where the contract is between the payer and a company or other interposed entity, the relationship between the payer and the entity will not be one of employment. Therefore, payments to the entity will not be subject to withholding under section as payments to an employee. The ATO confirm this in TR 2005/16 at paragraph 57 provided that the arrangement is not a sham or a mere re-direction of an employee s payments. 3.4 Voluntary agreements to withhold If an individual is not seen to be an employee, they may be a contractor. However, the payer (i.e. the entity benefiting from the service provided) may still have a PAYG withholding obligation. This is usually where the payer and the contractor have entered into a voluntary agreement to withhold. Where payments for work or services are made by an entity to an individual, the parties may enter into a voluntary agreement for amounts to be withheld: section This does not apply unless the recipient individual has an ABN and quotes it in the agreement. The agreement, which must be in an approved form, has to be retained until 5 years after the making of the last payment covered by the agreement: subsection 12-55(2). A party to the voluntary agreement may terminate it at any time by notifying the other party in writing. The payments must not be subject to any other withholding. Payments covered by voluntary agreements under section will generally be excluded from GST as there is no taxable supply: section of the GST Act. 3.5 Labour hire arrangements Payers frequently obtain the services of individual contractors through labour hire firms. For example, many hospitals engaging nursing contractors through labour hire firms; similarly again with contractors in the IT industry. The key point to note here is that the payer is engaging the labour hire firm to provide services. The payer is paying the labour hire firm and the labour hire firm is responsible for remunerating the individual contractor 1. 1 In the interests of simplicity, this discussion assumes that the contractor is an individual. If that individual provided their services to the labour hire firm through an interposed entity, Personal Services Income issues would arise for that interposed entity. Copyright 2013 The Institute of Chartered Accountants in Australia 16

17 Example 3.5 Labour hire firm Company Payment Withholding obligations Labour hire firm Services Salary/Wages WORKER The company who receives the services of the worker has no obligation to withhold or pay super guarantee on behalf of the work these obligation rest with the labour hire firm. A labour hire business must withhold from a payment made to an individual under a labour hire arrangement, being an arrangement that, wholly or partly, involves the performance of work or services by the individual directly for a client of the entity, or directly for a client of another entity: subsection 12-60(1). These commonly involve at least 2 contracts. PAYG withholding only applies if the payment is made in the course or furtherance of the entity's enterprise (defined in section 9-20 of the GST Act). No withholding applies if the hire of labour is only incidental to another business activity of the entity, e.g. where a solicitor engages a barrister to represent the solicitor's client. A labour hire worker cannot enter into a voluntary agreement as withholding under the labour hire rules takes priority over withholding under a voluntary agreement. GST Determination GSTD 2000/12 concludes that the provision of labour hire services is typically a taxable supply for GST purposes. On 2 March 2011, the ATO issued Taxpayer Alert TA 2011/2 warning taxpayers against an arrangement where a labour hire firm utilises a discretionary trust for the purpose of alienating Copyright 2013 The Institute of Chartered Accountants in Australia 17

18 income from personal services and splitting it between the individual taxpayers who perform the services and their associates (eg a spouse or partner). 3.6 Reportable benefits Subject to a threshold of $2,000, the grossed-up taxable value of fringe benefits must be recorded on an employee s payment summary: sections and in Schedule 1 to the TAA. Certain fringe benefits are "excluded fringe benefits" for these purposes and do not have to be reported on an employee s payment summary. The exclusions are listed in section 5E of the FBT Act and Regulations 3B to 3E of the Fringe Benefits Tax Regulations and, amongst others include car parking and meal entertainment benefits. Payment summaries issued for an income year will include the employee s reportable fringe benefits amount for the year ended the previous 31 March. These reportable amounts have no bearing on the employee s income tax liability, but are used for other purposes including determining liability for the Medicare levy, HELP repayments, child support obligations, various other Centrelink eligibility test and the availability of deductions for personal superannuation contributions. 3.7 Reportable Employer Superannuation From 1 July 2009, employers must report certain additional superannuation contributions it makes on behalf of an employee on their payment summary. These contributions are called Reportable Employer Superannuation Contributions (RESC) and are defined as: Any contribution where an employee influenced or could have influenced the amount of contribution; and The contributions are additional to the compulsory contributions the employer must make under either: The SGAA (i.e. 9.25%); An industrial agreement; The trust deed or governing rules of a super fund; or A federal, state or territory law. What is reportable? If an employee enters into an arrangement with their employer to contribute more superannuation contributions than the applicable minimum compulsory contribution, this employee is considered to have a capacity to influence. An employee will have a capacity to influence where they can directly negotiate, or have an option to negotiate, an additional Copyright 2013 The Institute of Chartered Accountants in Australia 18

19 superannuation contribution. Salary sacrifice arrangements to make extra contributions on behalf of your employee are reportable. What is not reportable? If an employee did not and could not influence the amount of superannuation their employer contributed for them, they are not reportable employer superannuation contributions. Any contributions that are compulsory contributions the employer must make for their employees are not reportable. Example 3.7 Reportable super contributions A client starts a new job with a State Government department. Under the industry award that governs full time employment in that particular Government sector, employees receive super payments of 12% of their total remuneration as superannuation contributions. Employees can sacrifice above this 12% but not below. You client decides to sacrifice 15% of their total remuneration into super. Of this 15% paid into super, only the 3% (above the amount required under the industry award) will be a reportable super contribution. Amendments included in Tax Laws Amendment (2011 Measures No. 4) Act 2011 Amendments to the definition of RESC have been made by the above Act. Firstly, the definition will now expressly exclude contributions made under an industrial instrument to the extent there is no capacity to influence the requirement to make the contribution or its size. An industrial instrument is defined as an Australian law or an award, order, determination or industrial agreement in force under an Australian law. Secondly, the amendments will ensure that contributions that are reportable will be included in RESC for the year to which they relate. The intention here is to ensure that the RESC is included in Adjusted Taxable Income for the same year to which they are attributable. Copyright 2013 The Institute of Chartered Accountants in Australia 19

20 3.8 Employee Share Scheme reporting An employer that provides interests under an Employee Share Scheme (ESS interests) covered by Division 83A may also have to provide one or more employees with an ESS Statement. An ESS interest includes shares, stapled securities (provided at least one of the stapled interests is a share in a company) or rights to acquire shares or stapled securities to employees or to their associates This is issued to the employee who receives the interests. An ESS Statement is required if An employee (or their associate) has acquired ESS interests under a taxed-upfront Employee share scheme at a discount during the financial year A deferred taxing point for ESS interests acquired under a tax-deferred ESS (or a cessation time for shares and rights acquired before 1 July 2009) has arisen or could have arisen in the financial year. If the employee has not provided a TFN, amounts must be withheld by the employer and these are also reported on the employee share scheme statement. 3.9 Compliance obligations All amounts that must be paid under the PAYG withholding system must be notified to the FCT on or before the day on which the amount is due to be paid: section An entity required to withhold an amount under Division 12, or pay an amount under Division 13 (alienated personal services payments) or Division 14 (non-cash benefits), or which employs a person that has a reportable fringe benefit amount, must give the FCT an annual report in the approved form about those amounts. From , the annual report must also cover reportable employer superannuation contributions: section The report must be lodged by 14 August for payers who withhold under Subdivision 12-B, Subdivision 12-C or Subdivision 12-D and for all large withholders. Certain employers who only employ non-arm s length employees, e.g. family members, may be able to defer lodging the report until the due date for lodging their income tax return). A tax agent must notify the ATO of clients requiring this concession by 15 September, or penalties may apply if the summary is outstanding at 30 September. A maker of a payment must give a payment summary to the recipient of a payment from which tax has been withheld within 14 days after the end of a financial year: subsection (1). If Copyright 2013 The Institute of Chartered Accountants in Australia 20

21 the amount is withheld under a voluntary agreement, or if the payment is made under a labour hire arrangement or if the payment is for work or services and is of a prescribed kind, the payer must also provide a copy of the payment summary. A payer may be required to give a recipient a part-year payment summary in circumstances similar to those for annual payment summaries, if so requested in writing by the recipient not later than 21 days before the end of the financial year: section The request must be complied with within 14 days after receiving it. A part-year payment summary need not be given if the recipient has a reportable fringe benefits amount for the year. Within 14 days after paying a superannuation lump sum or an employment termination payment (other than a directed termination payment) to a recipient that is not entirely rolled over, the payer must give the recipient a payment summary covering only that payment and give a copy to the FCT: section A payer that makes a withholding payment covered by section (failure to quote an ABN) to a recipient must give the recipient a payment summary when making the payment, or as soon as practicable afterwards: section The penalty for failing to give a payment summary is 20 penalty units: section This is a strict liability offence. Failing to give an annual report attracts only an administrative penalty under Division 286 of Schedule 1 to the TAA. The machinery provisions in Division 298 apply to these penalties Exemptions and extension of time The FCT has the power to exempt an entity from giving a payment summary and/or a copy of a payment summary: section Exemptions include: Entities need not provide a copy of a payment summary where they withhold an amount from a payment for works and services (except where there is a voluntary agreement to withhold, the payment is made under a labour hire arrangement or the payment is specified by regulation), a retirement payment or annuity (except for an eligible termination payment) or a benefit or compensation payment: TD 2001/10; Entities that withhold an amount from a dividend, interest or royalty paid to an overseas person or foreign resident, because the recipient did not quote their TFN in respect of an investment and did not quote their ABN, are not required to provide a copy of a payment summary: TD 2001/10; Copyright 2013 The Institute of Chartered Accountants in Australia 21

22 Payers of superannuation lump sums, Employment Termination Payments (ETPs) and departing Australia superannuation payments are not required to give copies of payment summaries to the FCT where amounts have been withheld in accordance with sections and respectively; and Where a prescribed payment is made to a performing artist participating in a promotional activity, the payer need not give the artist an annual payment summary if a payment summary is given to the artist when the payment is made Payment summary A payment summary must specify the following (section ): The payer and recipient s name; The recipient s TFN or ABN if quoted; The total of the withholding payments that the statement covers and the total amount withheld by the payer from those withholding payments; The financial year in which the withholding payments were made (or, if the payment summary relates to Subdivision 12-H, the income year of the relevant managed investment trust); The reportable fringe benefits amount (the grossed-up taxable value) that the payment summary covers (if relevant); and From , the total of the reportable employer superannuation contributions made in respect of the recipient s employment (that have not been covered by a previous payment summary). The summary must be in the approved form. Note that a payment summary may consist of multiple statements covering different types of withholding payments (e.g. salary and wages and a payment under a labour hire arrangement): subsection (3). A payment summary may not be altered without the ATO s approval (e.g. an overpayment in one year and a corresponding repayment in a subsequent year) PAYG withholding records Records must explain all PAYG withholding transactions. They must be in English (or in a form that can be converted into English). Non-written records must be in a form that is readily accessible. Records must be kept for at least 5 years. The records to be kept include: Copyright 2013 The Institute of Chartered Accountants in Australia 22

23 Wages records including payment records; Voluntary agreements; Current employment declarations, TFN declarations and withholding declarations; Copies of payment summaries and payment summary statements or electronic annual reports (if applicable); ETP records; Statements by a supplier where no ABN quoted; Records of amounts withheld where no ABN was quoted; and Annual report of PAYG withholding where no ABN quoted Registration - new employers If a client becomes a new employer, the ATO expects that the client will register as a PAYG withholding remitter. The client must apply to register for PAYG withholding by the day on which they are first required to withhold an amount from a payment to an employee. A client can register for PAYG withholding by either completing a form which is then sent to the ATO or by contacting the ATO. If the client is also applying for an ABN, the client can use the same form to register for PAYG withholding Registration - new employees When a client engages a new employee, they have the following obligations: Provide a TFN declaration to new employees for them to complete and return to the client; The client will then forward the completed original of the TFN declaration to the ATO within 14 days of the employee's start date; and Keep the necessary PAYG withholding records PAYG withholding tables & rates Salary or wages Most salary or wage calculations are straight forward. It is often a question of identifying the client s payroll cycle and the gross amount paid to the employee. The ATO provides a number of PAYG withholding tables to use to different pay cycles. Copyright 2013 The Institute of Chartered Accountants in Australia 23

24 However, the amount of PAYG withholding is also influenced if the employee has HECS or HELP repayment obligations, child support obligations or Medicare levy adjustments. There are special tax tables for different types of payments (and certain industries), including; Back payments; Lump sum payments in arrears; Bonuses; Commission payments; and Return to work payments Reimbursements A payment will be a reimbursement where the employee is being compensated for an actual expense already incurred. Such a reimbursement will be considered under the FBT regime. If a payment is received for an estimated expense, the amount received by the payee is not likely to be a reimbursement; and as such usually it will be treated as an allowance considered under the PAYG withholding rules Allowances Allowances are separate payments an employer makes to employees for: Working conditions (for example, danger, dirt, height, shift or travelling time); Qualifications or special duties (for example, trade, first aid certificate or safety officer); Expenses they cannot claim as a tax deduction (for example, normal travel between home and work); and Work-related expenses they may be able to claim as a tax deduction (for example, tools, compulsory uniform, and dry cleaning). The following considers the PAYG withholding issues at the employer level. In PAYG Bulletin No.1, the ATO makes a distinction between allowances that are covered in Table 1 and allowances that are covered in table 2. These tables can be described as follows: Table 1 lists the various types of allowances that an employee might receive and how these allowances must be treated by the employer. Table 2 lists those allowances for which the ATO has approved a variation of the amount required to be withheld and their reporting on the Payment Summary Copyright 2013 The Institute of Chartered Accountants in Australia 24

25 Table 1 Allowances subject to PAYG withholding Allowance type Allowances paid for working conditions, qualifications or special duties For example, crib, danger, dirt, height, site, shift or travelling time trade, first aid certificate or safety officer. Allowances for non-deductible expenses For example: Part-day travel (no overnight absence from payee's ordinary place of residence) Meals (not award overtime meal allowance or overnight travel allowance) Motor vehicle for non-deductible travel for example, home to work, including cents per kilometre payments. Allowances for expected deductible expenses For example: Tools Compulsory uniform, dry cleaning Motor vehicle for work related travel, including cents per kilometre payments in excess of ATO rate Overseas accommodation for deductible travel. Withhold PAYG? Yes Yes Yes Show on Payment summary? Yes (include total allowance in gross payment) Yes (include total allowance in gross payment) Yes (show total allowance separately in the allowance box with an explanation) Copyright 2013 The Institute of Chartered Accountants in Australia 25

26 Table 2 The ATO has approved PAYG withholding variations or allowances as shown in this table, provided: The employee is expected to incur expenses that may be claimed as a tax deduction of an amount at least equal to the amount of the allowance; and The amount and nature of the allowance is shown separately in the accounting records of the client. Allowance type Cents per kilometre car expense payments using ATO rates For payments made up to 5,000 business kilometres by applying the ATO rate to the number of kilometres travelled. For payments made in excess of 5,000 business kilometres by applying the ATO rate to the number of kilometres travelled. Award transport payments Withhold PAYG? No Yes (from the payment for the excess over 5,000 kms) Show on Payment summary? Yes (show total allowance separately in allowance box) Yes (show total allowance separately in allowance box) For deductible transport expenses No Yes (show total allowance separately in allowance box) For non-deductible transport expenses Yes (from total payment) Yes (show total allowance in gross payment) Copyright 2013 The Institute of Chartered Accountants in Australia 26

27 Laundry (not dry cleaning) allowance for deductible clothing Up to the threshold amount Over the threshold amount No Yes (from excess over the threshold amount) Yes (show total allowance separately in allowance box) Yes (show total allowance separately in allowance box) Award overtime meal allowances Up to reasonable allowances amount No No Over reasonable allowances amount The allowance must be paid under an industrial instrument in connection with overtime worked Yes (from excess over reasonable allowances amount) Yes (show total allowance separately in allowance box) Domestic or overseas travel allowance involving an overnight absence from payee's ordinary place of residence Up to reasonable allowances amount Over reasonable allowances amount An allowance for overseas accommodation must be subject to PAYG and be shown in the allowance box on the Payment summary No Yes (from excess over reasonable allowances amount) No Yes (show total allowance separately in allowance box) Copyright 2013 The Institute of Chartered Accountants in Australia 27

28 3.16 ETPs An ETP is a form of lump sum payment paid by an entity as the result of the termination of an individual s employment, i.e. paid upon resignation, retirement or death. A payment from a superannuation fund is not an ETP. The types of ETPs subject to withholding include: Payment in lieu of notice; Payment for unused sick leave; Payment for unused rostered days off; Golden handshakes whether paid under contract, industrial award obligation or the employer s desire to recognise past service; Compensation for loss of job; Compensation for wrongful dismissal (provided it is paid within 12 months of the actual termination of employment); Redundancy payment that exceeds the tax free limit (only the amount in excess of the limit is an ETP); Payments because of the employee s permanent disability (other than a compensation payment for personal injury) Payment under an early retirement scheme that exceeds the tax free limit* (only the amount in excess of the limit is an ETP); and Lump sum payments paid on the death of an employee. The concessional tax treatment for ETPs is limited by the ETP cap amount. Amounts paid in excess of the ETP cap amount are taxed at the top marginal rate (plus Medicare Levy). Example 3.16 ETPs Your client ceased employment in May 2013 and received a total termination payment of $250,000. Of this, $100,000 was for un-used annual and long service leave, $100,000 was a genuine redundancy payment and $50,000 was an ETP. These three components of the total termination payment can give rise to different taxation liabilities (or they may be, in fact, tax-free). Each component will need to be assessed for its tax liability and tax withheld accordingly. Copyright 2013 The Institute of Chartered Accountants in Australia 28

29 Transitional termination payments Transitional arrangements may apply to payments made between 1 July 2007 and 30 June 2012 if the employee was entitled, as at 9 May 2006, to such a payment specified under: A written contract An Australian or foreign law (or an instrument under such a law), or A workplace arrangement under the Workplace Relations Act Transitional termination payments are taxed concessionally on amounts up to the upper cap amount. Further concessions apply for employees over their preservation age at the end of the income year in which the payment is made such that amounts up to the lower cap amount are taxed at no more than 15% (plus Medicare levy) How to work out withholding amounts If a payee receiving an ETP has provided their TFN, the employer must calculate the amount to be withheld by applying the rates set out in Table A, below. An ETP is made up of the tax-free component and taxable component. The employer must withhold an amount from the taxable component, including death benefit ETPs, according to Table A. However, the employer does not withhold from the tax free component of the ETP. Income component Age of person at the end of the income year Component subject to PAYG withholding Rate of withholding Life benefit ETP taxable component Transitional ETP taxable component Under preservation age Preservation age and over All ages Under preservation age Preservation age and over Up to the ETP cap amount % Up to the ETP cap amount % Amount above the ETP cap amount % Up to the lower cap amount % Up to the lower cap amount % Amount above the lower cap amount % 2 The ETP cap amount for the income year will be $180,000. The ETP cap amount for 2012/13 is $175,000 3 The lower cap amount is the same as the ETP cap amount for the income year. That is, for the income year it is $175,000 and is indexed in line with the ETP cap amount. Copyright 2013 The Institute of Chartered Accountants in Australia 29

30 All ages Up to the upper cap amount 4 Amount above the upper cap amount % Death benefit ETP paid to non-dependants taxable component Death benefit ETP paid to dependants taxable component All ages All ages Up to the ETP cap amount % Amount above the ETP cap amount % Up to the ETP cap amount 6 Nil Amount above the ETP cap amount % In most cases, the employee may also have unused leave amounts. The PAYG withholding must be considered separately. Unused leave payments on termination of employment or office include payments for unused annual leave, holiday pay, leave loading, leave bonuses and unused long service leave. Before calculating the amount to be withheld, the employer must determine if the payments are being made as a result of a genuine redundancy, invalidity or an early retirement scheme Employer obligations As the employer, your client has other tax administration obligations when an employee s employment is terminated. In summary, these obligations include: PAYG: Calculate any final PAYG withholding payments on employee s behalf; Forward payment summary to the employee by 14 July, or earlier if requested; Retain employee s TFN declaration; and Include the details of any final payments made to the employee in your PAYG payment summary statement. ETPs: Determine if any part of the payment is an ETP; Calculate the amount to be withheld from the ETP; and Provide a completed PAYG payment summary ETP to the employee within 14 days of the ETP being paid to the employee. 4 The upper cap amount for is $1,000,000. The upper cap amount is reduced by the amount of all previous transitional termination payments and the taxable component of any directed termination payments. Copyright 2013 The Institute of Chartered Accountants in Australia 30

31 FBT: Include reportable fringe benefits on an employee s final payment summary; and Keep the necessary FBT records. Superannuation: Calculate and pay any final superannuation contributions by the quarterly cut-off date; Ensure the client meets the requirements to report superannuation contributions to their employees; and Keep the necessary superannuation guarantee and superannuation choice records. Copyright 2013 The Institute of Chartered Accountants in Australia 31

32 PAYG - Reference table Key legislative references: Withholding obligations are set-out in the Tax Administration Act of 1953 Schedule 1 Tax cases: Employee or contractor?- On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366 ACE Insurance Ltd v Trifunovski [2013] FCAFC 3 ATO releases: Employee or contractor TR 2005/16 ITR, BAS or Schedule reference: Withholding amounts are typically disclosed in the employer s BAS and will be disclosed on the employee s Payment Summary Copyright 2013 The Institute of Chartered Accountants in Australia 32

33 4 FBT 4.1 Overview FBT is a federal tax imposed on employers in respect of certain benefits provided to employees. It was introduced in 1986 via the FBT Act to counter the growing tendency of employers to package the salaries of employees to include non-cash (and non-taxable) items. Employees remain non-taxable on the value of benefits provided by employers, FBT is payable by the employers of the recipient employee and FBT is an allowable deduction for income tax purposes. Some specific types of fringe benefits are exempt from FBT, e.g. work-related relocation expenses, and food consumed on a work day on the employer s premises. The FBT year commences on 1 April and ends on the following 31 March. FBT is a selfassessed tax and employers must lodge an annual FBT return, along with making payments of FBT instalments. 4.2 Rate and calculation of FBT The rate of FBT is equivalent to a resident individual s highest marginal income tax rate, including Medicare levy, and is hence currently 46.5%. This rate is applied to the grossed-up taxable value of benefits supplied. The taxable value of a benefit depends on the category of the benefit. The gross-up is a factor by which the taxable value is increased to approximate the amount a recipient of a fringe benefit would have had to earn before tax in order to pay for the benefit themselves based on the highest marginal income tax rate. The gross-up therefore removes any financial advantage in providing a fringe benefit. There are 2 alternative gross-up factors. One is applied to Type 1 aggregate fringe benefits amounts, the other is applied to Type 2 aggregate fringe benefits amounts. The simple difference between the 2 types is that Type 1 benefits are those in respect of which the employer is entitled to claim a GST ITC, whereas Type 2 benefits are those for which no there is no such entitlement: section 149A of the FBT Act. The gross-up factor is thus higher for Type 1 than it is for Type 2, the aim being to neutralise the GST input tax credit, claimed by the employer. Copyright 2013 The Institute of Chartered Accountants in Australia 33

34 The effect of the gross-up method is to treat the employee as receiving both the value of the benefit and the value of the FBT paid by the employer, allow the employer an income tax deduction for both (as would be the case if they were paid as salary to the employee taxed at the highest marginal income tax rate in order to pay for the benefit themselves) The current gross-up rate for Type 1 benefit amounts is The current gross-up rate for Type 2 benefits is (The gross-up system is explained by the ATO in Ruling TR 2001/2.) Example 4.2 Calculation of FBT During the FBT year, Big Box Pty Ltd provided Type 1 fringe benefits (car benefits) with a total taxable value of $150,000 and Type 2 fringe benefits (loan benefits) with a total value of $10,000. The loan benefits are Type 2 because the interest expense incurred by Big Box was consideration for an input taxed supply and hence no GST input tax credits are available. Big Box s total fringe benefits taxable amount would be $328,397, being ($150,000 x ) plus ($10,000 x ). It s FBT liability is thus $152,704.60, being ($328,397 x 46.5%). This is the same result that would follow if a gross cash salary of $328,397 were paid by Big Box Pty Ltd and the employee paid tax at the top marginal tax rate (ie 46.5%) 4.3 The otherwise deductible rule With the exception of car fringe benefits, the taxable value of certain benefits can be reduced by the extent the recipient employee would have been entitled to a one-off income tax deduction had he or she incurred the expenditure themselves. This reduction is available to loan fringe benefits, expense payment fringe benefits, airline transport fringe benefits, property fringe benefits ad residual fringe benefits. Example 4.3 Otherwise deductible rule 100% reduction Big Box Pty Ltd supplies Jim, a new employee, with a pair of custom-fitted safety shoes and safety gloves for use on the factory floor. As Jim would otherwise have been entitled to a full income tax deduction for the expenditure, the taxable value of the benefit is reduced to nil. Copyright 2013 The Institute of Chartered Accountants in Australia 34