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

35 4.4 Effect of employee s contribution Any contribution made by an employee in respect of a fringe benefit supplied to them has 2 consequences: 1. The amount contributed by the employee reduces the taxable value of the fringe benefit. 2. The contribution, in principle, is consideration for a potential taxable supply made to the employee for GST purposes, thereby exposing the employer to a GST liability equal to 1/11 of that contribution. (Generally, the GST status of the thing supplied as a benefit dictates whether it is a taxable supply.) The GST consequences of contributions by an employee to the expense of a fringe benefit are discussed by the ATO in GST Ruling GSTR 2001/3. Example 4.4 Effect of employee s contribution Jill is provided with a car fringe benefit by her employer, Big Box Pty Ltd, which is registered for GST. In the current FBT year, Jill contributes $3,300 directly to Big Box towards the running costs of the car. Big Box will be liable to GST of $300 (1/11 of the $3,300). However, the full $3,300 is deductible when calculating the taxable value of the car fringe benefit provided to Jill. Jill also pays (in the current FBT year) $2,200 in fuel, oil and servicing. This amount was not paid to Big Box but to third parties for the supply of the goods and services and, accordingly, is not a payment for the supply of the benefit for GST purposes. Big Box will not have a GST liability in respect of these expenses but will still be able to deduct the full $2,200 as an employee contribution when calculating the taxable value of the car fringe benefit for FBT purposes. 4.5 What are the categories of fringe benefits? There are a number of distinct categories of fringe benefits, each with their own valuation rules and other compliance requirements (e.g. employee declarations). 4.6 FBT payments and income tax deductions FBT is payable in 4 instalments during the FBT year if an employer s liability meets the threshold, which is currently $3,000 (refer to section 4.22 Instalments of the paper for more information). The FBT instalment system is aligned with other business tax instalment Copyright 2013 The Institute of Chartered Accountants in Australia 35

36 obligations that are reportable and payable by way of the Business Activity Statement (BAS). Thus the 4 instalment due dates are normally 21 July, 21 October, 21 January, and 21 April. Tax deductions for FBT The ATO accepts that payments of FBT are deductible on an accruals basis, be it instalments or payment of final liability: Ruling TR 95/24. Thus for any given year of income (30 June year end), the following deduction is allowable for FBT: Total actual FBT liability in respect of the previous FBT year ending 31 March less FBT instalment referable to the quarter ending 30 June in the previous year plus FBT instalment referable to the quarter ending 30 June in the current year. 4.7 Scope of benefits Benefits provided to employees are subject to FBT. For this purpose: 1. An employee includes both a former employee and a future employee (but not deceased employees). 2. An employee includes an associate of the employee, e.g. spouse, child and other relatives. The definition of associate for this purpose is the same as used for income tax purposes: section 318 of the ITAA Further to this, the definition of associate is extended pursuant to Subsection 148(2) where a benefit is provided to another person (other than an employee or an associate) under an arrangement between the provider (eg the employer) and an employee. 4. To be taxable, a benefit must be provided to an identified/specified employee (FCT v Indooroopilly Children Services (Qld) Pty Ltd v FCT (2007) 65 ATR 369). 5. A fringe benefit will arise if an associate of the employer provides the benefit to the employee. It will also arise if a third party provides the benefit under an arrangement with the employer. Copyright 2013 The Institute of Chartered Accountants in Australia 36

37 6. To be taxable, a fringe benefit must have been provided in respect of the recipient s employment. For this test to be met, there must be a sufficient or material link between the benefit and the employment of the employee: J&G Knowles & Associates Pty Ltd v FCT (2000) 44 ATR 22; Slade Bloodstock v FCT [2007] FCAFC 173. This is not always easy to discern, particularly if there is an existing relationship between the employee and the employer, such as husband and wife. 4.8 Car fringe benefits Car fringe benefits are one of the most common types of fringe benefits. A car fringe benefit arises if a car (as defined) is made available to an employee (or an associate) for private use and the car is owned or leased by the employer (or otherwise made available to the employer by another person), an associate of the employer, or by a third party pursuant to an agreement with the employer: sections 7, 162. A car is defined by section of the ITAA 1997 and means any motor-powered road vehicle (including a 4-wheel drive) designed to carry a load of less than 1 tonne and fewer than 9 passengers. Motorcycles and similar vehicles are not cars. However, for example, the right to use an employer s motorcycle may be a residual benefit Private use Private use is defined by subsection 136(1) of the FBT Act to mean any use that is not exclusively in the course of producing assessable income of the employee. Home-to-work travel is normally regarded as private use, while use by a salesman in the course of her or his selling activities would not be for private purposes. For the FCT s views on specific questions of private use, see Ruling MT A vehicle is also deemed to be available for private use if: (a) It is garaged or kept at or near the residence of the employee or an associate, regardless of any prohibition on the use of the car: subsection 7(2); or (b) It is not at the employer s or an associate s premises and the employee is entitled to use the car for private purposes or, if not performing employment duties, has custody or control of the car: subsection 7(3) Valuation methods There are two alternate methods of valuing car fringe benefits: the statutory formula method (section 9) and the operating costs method (section 10). Copyright 2013 The Institute of Chartered Accountants in Australia 37

38 The statutory formula method applies by default if the employer hasn t made an election to adopt the operating costs method. Even if such an election has been made, the statutory formula method will still apply if it results in a lower taxable value: subsection 10(5). It is permissible to switch year by year from one basis of calculation to the other in respect of the same car. However, whenever a switch from the statutory method to the operating costs method is made, the log book maintenance rules will recommence, regardless of whether or not the operating costs method has previously been used in respect of that vehicle Statutory formula method The statutory formula method is basically applying an arbitrary percentage to the base value of the car, depending on how much private travel is done in the car during the FBT year. The formula which determines the taxable value of the benefit is: ABC - E D where: A B C D E is the base value of the car (see below) is the relevant statutory fraction (see below) is the number of days in the FBT the car was privately used or available for private usage is the number of days in the FBT year is the amount (if any) of the recipient s contribution (see above) Base value The general rule is that the base value of a car is its cost price: subsection 9(2). Cost price is defined by subsection 136(1) to be the amount of expenditure incurred in acquiring the car, including delivery costs, GST and Luxury Car Tax (if paid), but not including registration and stamp duty. Non-business accessories, such as air-conditioning, fitted at the time of purchase or afterwards are included in the base value. (However, air-conditioning is now more commonly a standard feature in any event.) Statutory fractions Tax Laws Amendment (2011 Measures No. 5) Act 2011 amended the FBTAA to reform the statutory formula method for determining the taxable value of car fringe benefits by replacing Copyright 2013 The Institute of Chartered Accountants in Australia 38

39 the previous statutory rates with a single statutory rate of 20 per cent, regardless of kilometres travelled. The change will apply to all car fringe benefits after 7:30 pm, AEST on 10 May 2011, except where an employee, employer or their associate has committed to the acquisition of the car that will be the subject of a car benefit (for a specified period of time) prior to 7:30 pm, AEST on 10 May The following table shows the applicable statutory fraction to be applied to a car s base value. The applicable rate will firstly depend on whether a new commitment is entered into after 7:30pm (AEST) on 10 May 2011 and secondly according to the distance travelled by the car during the year. (Part-year travel needs to be annualised.) The new rules will be phased in over four years per the below. A commitment is considered entered into at the point that there is commitment to the transaction, and it cannot be backed out of. The commitment needs to be financially binding on one or more of the parties. Examples that will be considered new commitments include refinancing a car, altering the duration of an existing contract or changing employers. Pre 10/05/11 contracts Post 10/05/2011 contracts Kilometres All later FBT 2012 FBT 2013 FBT 2014 FBT 2015 FBT returns Return Return Return Return To 15,000 26% 20% 20% 20% 20% 15,001 to 25,000 20% 20% 20% 20% 20% 25,001 to 40,000 11% 14% 17% 20% 20% 40,000+ 7% 10% 13% 17% 20% Copyright 2013 The Institute of Chartered Accountants in Australia 39

40 This would mean, for example, that if an employee entered into a new commitment for a new company car on 12 May 2011 and: Drove it 26,000 km in the FBT year to 31 March 2012, the FBT statutory rate would be 14%; Drove it 26,000 km in the FBT year to 31 March 2013, the FBT statutory rate would be 17%; Drove it 26,000 km in the FBT year to 31 March 2014, the FBT statutory rate would be 20%. Also, people who use their vehicle for a significant amount of work-related travel will still be able to use the operating cost (or log book ) method to ensure their car fringe benefit excludes any business use of the vehicle. Example Statutory formula method Big Box Pty Ltd purchases a car for $32,000 on 1 January For the period 1 January to 31 March 2013 (i.e. 91 days) the car is available for private use by an employee and travels 7,145 km (i.e. projected annual kilometres for the first full FBT year is 28,659. The relevant statutory fraction is therefore 17% on the basis the car is considered a new commitment and caught under the new regime. The employee paid for all fuel and oil ($865) used during the period 1 January to 31 March, but was reimbursed to the extent of business purposes ($540), resulting in a recipient's contribution of $325. The taxable value of the car fringe benefit for the FBT year is $1,031.27, as follows: ABC - E D 32,000 x 0.17 x 91 - $ where: A is the base value of the car - $32,000 B is the relevant statutory fraction of 17% C is the number of days in the FBT the car was privately used or available for private Copyright 2013 The Institute of Chartered Accountants in Australia 40

41 usage - 91 D is the number of days in the FBT year E is the amount (if any) of the recipient s contribution (see above) - $ Operating costs method Taxable value under the operating costs method is determined by ascertaining the total operating costs (including those expenses incurred by someone else other than the employer, eg the employee notwithstanding such costs may be considered recipient contributions) of the car during the FBT year and reducing the total to the proportion of private kilometres travelled during the year to total kilometres travelled: subsection 10(2). This proportion, known as the business-use percentage, is based on the number of business kilometres travelled as established by a log book during a particular limited period. (Log books must be kept for a continuous period of 12 weeks: sections 162C to 162N.) The logbook period may straddle two FBT years and be applied to the first, provided the 12 week period ends before the lodgement date of the FBT return. From that amount, any payment of operating costs or consideration for use of the car by an employee, i.e. the recipient s payment, is deducted to arrive at the taxable value of the car fringe benefit. An election to adopt the operating costs method must be in writing and must be made before the date of lodgment of the FBT return: subsection 10(4). The election does not need to be actually lodged with the FBT return. In subsequent years, an employer is entitled to use either the statutory formula or operating costs method in calculating the taxable value of the car fringe benefit. This option is available in respect of each car held by the employer and is unaffected by the method used in earlier years. Operating costs are defined by subsection 10(3) and include normal operating expenses, registration and insurance, depreciation, and deemed interest for owned cars (or those deemed to be owned such as those under hire purchase) and lease expense for those under lease. The formula for determining the value of a car fringe benefit under the operating costs method is: C x (100% - BP) - R where: C is the operating cost of the car during the holding period Copyright 2013 The Institute of Chartered Accountants in Australia 41

42 BP is the business percentage applicable to the car. This is determined by dividing the number of business kilometres travelled by the car by the total kilometres travelled R is the amount of the recipient s payment - this has the same meaning as for the purposes of the statutory formula method. Example Operating costs method Big Box Pty purchases a car for $30,000 on 1 April For the whole period 1 April 2012 to 31 March 2013 the car is available for private use by an employee. Operating costs applicable to that period (registration, insurance, fuel, repairs, etc) total $6,000. Depreciation at 25% is $7,500. As the benchmark interest rate is 7.4%, the deemed interest cost is $2,220 ($30,000 x 7.4%). The business use of the vehicle established under the log book rules is 70% and the employee spent $1,200 on fuel. The taxable value of the car fringe benefit for the FBT year is $3,516, being: ($6,000 + $7,500 + $2,220) x (100% - 70%) - $1,200 = $3, Car parking fringe benefits Under Division 10A of the FBT Act, a car parking fringe benefit arises if a car is parked at the employer s business premises (or in a car space provided that is within the vicinity of the employee s place of employment) for more than 4 hours between 7 am and 7 pm, the car is used for travel between home and work, and there is a commercial car parking station within one kilometre of where the car is parked ordinarily charging more than the car parking threshold for all-day parking (currently $7.83 for the FBT year commencing 1 April 2012). Employers have to determine how many separate car parking fringe benefits are supplied and to do so must choose between 3 different methods: Actual number of benefits (the default method); The statutory formula (spaces) method; or The 12-week register method. Employers then have the choice of 3 different methods of valuing the benefits: Copyright 2013 The Institute of Chartered Accountants in Australia 42

43 The commercial parking station method (the default method); The market value basis; or The average cost method. These methods are explained by the ATO in Ruling TR 96/ Debt waiver fringe benefits A debt waiver fringe benefit arises if an employer releases an employee from an obligation to pay money or arranges for this to happen: section 14. The taxable value of the benefit is the amount waived: section 15. Seemingly straightforward, the waiving of the debt must be in connection with the employment of the employee for a benefit to arise Loan fringe benefits A loan fringe benefit will arise if an employer makes a loan to an employee or allows a debt due to remain outstanding after the due date for payment: s16. Pursuant to Section 136(1), a loan includes an advance of money, the provision of credit, the payment of an amount on account of another person where there is an obligation to repay, or any other transaction that in substance effects a loan. Its taxable value is the amount by which notional interest exceeds actual interest accrued. Notional interest is calculated by reference to the statutory benchmark interest rate, which is 7.40% for the FBT year commencing 1 April The statutory benchmark rate is 6.45% for the FBT year commencing 1 April If an employee uses a loan from the employer for income-producing purposes, the otherwise deductible rule will apply, provided the employee gives the employer a declaration as to the uses of the loan: subsection 19(1). In certain cases the loan benefit may be exempt Expense payment fringe benefits An expense payment fringe benefit arises if the employer pays for expenditure incurred by an employee, for example school fees, or reimburses the employee for such costs: section 20. Care must be taken to ensure an amount paid as an allowance (and subject to income tax in the hands of the employee) is not treated as a reimbursement (subject to FBT for the employer). For example, a reimbursement of car expenses but which is calculated by Copyright 2013 The Institute of Chartered Accountants in Australia 43

44 reference to distance travelled (e.g. cents per kilometre) is not a reimbursement subject to FBT but an assessable allowance: section The otherwise deductible rule applies to expense payments the employee would have otherwise been entitled to claim as an income tax deduction Housing fringe benefits The right to occupy a unit of accommodation provided by the employer, as a usual place of residence, will give rise to a housing fringe benefit: section 25. The taxable value of the benefit is the market value of that right (the statutory annual value ) less any rent paid by the employee: subsection 26(1). Where an employee is required to live and work in a remote area (Refer PSLA 2000/6 for locations considered remote), a housing benefit provided to such an employee will be exempt from FBT: section 58ZC. The taxable value of benefits provided to assist employees to acquire a home or to rent a home in a remote area, are generally discounted by 50%: sections 60 and LAFHA LAFHA are the only type of allowances which are subject to FBT and not assessable to the employee, providing they conform to the requirements of the FBT rules: section 30. Most employers attempt to come within those rules as exemption thresholds do apply. The primary rule is that to qualify as a LAFHA, the allowance must be paid because the employee is required to live away from his or her usual place of residence for work purposes. For oil or gas rig employees, the taxable value of a LAFHA fringe benefit is the amount of the allowance: subsection 31(b). In all other cases, the taxable value is reduced by the extent, if any, of an exempt food component and an exempt accommodation component. For either component to be taken into account a separate declaration is required to be given to the employer by the employee. Both components are defined by subsection 136(1). The exempt food component is the part of an identified LAFHA intended to cover extra food costs as a consequence of being required to live away from home. For this purpose, the extent by which such an allowance exceeds the statutory food amount, which is $42 per week for each adult and $21 per week for each child under the age of 12 at the commencement of the FBT year, is exempt from FBT up to a reasonable amount (as provided by the ATO on an 5 If an employer makes a no private use declaration, all their expense payment fringe benefits are exempt Copyright 2013 The Institute of Chartered Accountants in Australia 44

45 annual basis). Any amount paid over and above the reasonable amount will also be subject to FBT. Example 4.14 Exempt food component of LAFHA Big Box Pty Ltd requires an employee, Ted, to temporarily live interstate and perform duties as a temporary manager of their factory. For this purpose, Ted is paid a LAFHA, a part of which is $130 a week to cover all food costs for himself, his wife, and their 3 year old son, who both relocate with Ted. The exempt food component $25 per week, being $130 reduced by the statutory food amount of $105 ([$42 x 2] + $21). This means that $25 of the allowance is exempt from FBT. The exempt accommodation component is, broadly the amount of a LAFHA that is intended to cover the employee s additional accommodation cost as a result of being required to live away from home. Example 4.14 Exempt accommodation component of LAFHA Ted s relocation interstate for Big Box Pty Ltd is for 9 months. For this purpose, he rents an apartment for $350 per week while maintaining his family s usual place of residence in their home state. The accommodation component of Ted s LAFHA is $1,600 per month. Over the term of Ted s assignment, the exempt accommodation component of his LAFHA is $13,650, being 39 $350. This means the taxable value of the accommodation component is $750, being ($1,600 x 9) less $13,650. The ATO says it is reviewing LAFHA benefits as it believes some employers may be claiming excessive amounts for exempt accommodation and food components. In April 2011, the ATO wrote to some employers who are paying this allowance, requesting information for each employee who received the allowance Developments in Living Away From Home Concessions As a result of the concessional tax treatment of LAFHAs, the provision of such benefits have become very popular with employees travelling interstate or coming into Australia for shortterm work secondments. The current view of the government is that this has allowed employees to access tax-free income outside the original policy intent, which is resulting in a significant and growing cost to Copyright 2013 The Institute of Chartered Accountants in Australia 45

46 revenue. Accordingly, in November 2011, the government released a consultation paper regarding its proposed changes to the treatment of LAFHAs and other fringe benefits that obtain concessional tax treatment based on the living away from home concept 6. After considerable changes, legislation was enacted with effect from 1 October The changes The changes broadly apply from 1 October 2012, with some transitional provisions applying to LAFHA paid until 30 June 2014 under LAFHA arrangements in place, and not materially altered after, 7:30 pm on 8 May The new rules mean: 1. All employees receiving a LAFHA after 1 October 2012 must substantiate the exempt accommodation component and may have to substantiate the exempt food component if it is greater than the amount the Commissioner considers reasonable ; 2. From 1 October 2012, employees will be required to maintain a home for their own use in Australia (which they are living away from for work) to access the concession; and 3. The LAFHA will only qualify for concessional treatment for 12 months at a given location. Where a resident is transferred for work and was receiving a LAFHA prior to 7:30 pm on 8 May 2012, they will not be subject to the requirement to maintain a home in Australia, or the 12 month limitation until 1 July Where a temporary resident was receiving a LAFHA prior to 7:30pm on 8 May 2012, they will be required to maintain a home in Australia from 1 October 2012, but will not be subject to the 12 month limitation until 1 July Consultation Paper - Fringe Benefits Tax (FBT) Reform Living-Away-From-Home Benefits, released 29 November Copyright 2013 The Institute of Chartered Accountants in Australia 46

47 Table 1: Treatment for permanent residents and for temporary residents maintaining a home in Australia which they are living away from for work Income tax treatment Fringe benefits tax treatment Allowance provided to an employee for living away from home 1 Allowance included in assessable income of the employee. Income tax deduction provided for substantiated expenses for accommodation and for food above a statutory amount. Expense payments benefits provided to an employee living away from home for accommodation and food 2 Exempt from FBT for actual expenses for accommodation and for food above a statutory amount. Employer reimburses the expenses incurred by employee. Accommodation and food provided directly for an employee living away from home 3 Exempt from FBT for accommodation and for food above a statutory amount. Employer directly provides accommodation for and food to an employee. Table 2: Treatment for other temporary residents Income tax treatment Allowance provided to an employee for living away from home 1 Allowance included in assessable income of the employee. No entitlement to a deduction for LAFH expenses. Expense payments benefits provided to an employee living away from home for accommodation and food 2 LAFH benefits subject to FBT. Employer reimburses expenses incurred by employee. Fringe benefits tax treatment Accommodation and food provided directly for an employee living away from home 3 LAFH benefits subject to FBT. Employer provides all accommodation and food to employee. Notes to tables: 1 Where an employer provides an allowance to an employee for living away from home but there is no intention that the employee reconciles the allowance with actual accommodation and food costs. 2 Where an employer reimburses expense or pays expenses on behalf of an employee and the employee provides supporting documentation to the employer (may be upfront reimbursement or after the fact). 3 Where an employer provides all accommodation and food to the employee living away from home.

48 4.16 Airline transport fringe benefits If free or discounted travel in a passenger aircraft is provided to an employee of an airline or a travel agent (or an associate of the employee) on a flight, and the flight is provided under customary industry stand-by arrangements, an airline transport fringe benefit arises: section 32. The benefit only arises if the travel is undertaken by employees on the basis that their stand-by travel rights are subordinate to those of other airline customers. All other airline transport-related fringe benefits are residual fringe benefits Board meals If an employee is provided with accommodation by an employer, and there is an entitlement under an industrial award to at least 2 meals per day (or under an employment arrangement, at least 2 meals per day are ordinarily provided), a board fringe benefit arises: section 35. To qualify as a board meal, the meal must be provided by the employer, or a related company in a wholly owned group, on the employer s (or the related company s) premises or at or adjacent to a work site. The taxable value of a board meal is $2 for a person 12 years or older at the beginning of the FBT year and $1 per meal for a younger person, less any amount paid for the meal. The otherwise deductible rule can also apply in but only respect of meals supplied to an actual employee: section Entertainment fringe benefits Broadly, the provision of entertainment to an employee is a fringe benefit. The general approach of the FBT Act is to tax fringe benefits involving entertainment under the specific heads of liability, e.g. as expense payment fringe benefits, property or residual fringe benefits. However, there are also specific categories dealing with meal entertainment (section 37AC) and employers who are tax-exempted (section 38). In addition, expenses incurred in hiring or leasing entertainment facilities are known as entertainment leasing facility expenses. Entertainment benefits that are subject to FBT are deductible under section of the ITAA An exception applies where the entertainment benefit is an exempt benefit. For example, where meal entertainment is consumed by an employee on an employer's

49 premises on a business day, section 41 will treat the benefit as an exempt benefit. It will therefore be exempt from FBT but will not be deductible for income tax purposes Meal entertainment Generally, meal entertainment must consist of the provision of food and drink in circumstances which constitute the provision of entertainment. Meal entertainment does not constitute meals that are merely for sustenance or refreshment, e.g. morning and afternoon teas and light meals (unless alcohol is provided). An employer may choose one of 2 methods to calculate the taxable value of a meal entertainment fringe benefit (sections 37B and 37C): the 50/50 split method or the 12-week register method: section 37AA. The taxable value of the meal entertainment is reduced by any contributions from an employee or an associate of an employee. If no method is elected, the taxable value is determined on the basis of the actual expenditure and captured as either an expense payment benefit or as a property benefit. The FCT's views on the application of the FBT and income tax rules dealing with food and drink are set out in Ruling TR 97/17. Example Meal entertainment Big Box Pty Ltd reimburses its Marketing Director, Valentina, for the total cost of a 3 star restaurant meal she incurred entertaining 2 very important suppliers. The total cost, including GST, was $960. Big Box adopts the 50/50 split method for all meal entertainment. Accordingly, the taxable value of the benefit is $480, being 50% of the total meal cost (irrespective of the amount attributable to Valentina, being 1/3 of $960). For income tax purposes, the general rule is that Big Box is denied a deduction under section 8-1 of the ITAA 1997 for the total reimbursement: section 32-5 of the ITAA However, section overrides that outcome to the extent the expense is a fringe benefit. In turn, the general rule and section are rendered inapplicable because section 51AEA of the ITAA 1936 specifically allows Big Box an income tax deduction of the taxable value under the 50/50 split method, $480. For GST purposes, Big Box makes an election under section of the GST Act to use the 50/50 split method, thereby giving rise to an input tax credit entitlement in relation to the income tax deductible amount, being $44-1/11 th of $480 (see GSTR 2001/3 and GSTA TPP 051). Copyright The Institute of Chartered Accountants in Australia

50 4.19 Property fringe benefits The provision of property (free or at a discount) in respect of a person's employment is a fringe benefit: section 40. Property means all tangible and intangible property: subsection 136(1). However, goods supplied on a working day and consumed on the employer's premises are exempt property benefits: section 41. The ATO considers the meaning of consumed is to be limited to that which can be eaten, drunk or otherwise devoured. This exemption does not apply to entertainment where the 50/50 split method or the 12 week register method has been elected. There are different valuation rules which apply according to whether the property provided to the employee is an in-house or an external benefit: sections 42 and 43. The otherwise deductible rule can also apply to reduce the taxable value of a residual fringe benefit: section Residual fringe benefits The category of residual benefits (section 45) is intended to pick up all other benefits not covered by any of the specific categories previously discussed. A residual benefit will generally arise at the time the benefit is provided, which may be over a period of time, such as would occur where an employee has the use of property. If the benefit extends to more than one FBT tax year, it is taxable on a proportional basis in each year: section 46. An example of a residual benefit can be the provision of a motor vehicle other than a car. Note that a number of residual fringe benefits (specified in section 47) are exempt from FBT. There are different valuation rules which apply to residual fringe benefits according to whether the benefits are in-house or external. The otherwise deductible rule can also apply to reduce the taxable value of a residual fringe benefit: section FBT returns Employers are required to lodge an annual return setting out the value of all fringe benefits paid or given during the year and the tax payable on that amount: sections 68 and 70 of the FBT Act. The due date for lodgment of FBT returns lodged is 21 May, however under the Tax Agents Lodgment Program it is usually extended to 28 May following the end of the FBT year. The relevant lodgment dates are the same for instalment and non-instalment taxpayers. The FCT also has the power, exercisable by written notice, to require a person to furnish a return in relation to any FBT year: section 69. A return must be in the approved form. If an employer fails to obtain required documentary evidence before lodging an FBT return, but has good reason to expect that the evidence will Copyright The Institute of Chartered Accountants in Australia

51 be obtained within a reasonable time, section 132A effectively allows the employer to prepare and lodge the return as if the documentary evidence had been obtained. Although no FBT return needs to be lodged where the taxable value of fringe benefits is nil, employers are advised to lodge a Notice of Non-lodgment of FBT Return form (available on the ATO website) to avoid lodgment enforcement action being initiated. If an annual return is lodged by an employer and no previous return of that year has been lodged and no assessment raised, the FCT is deemed to have made an assessment, at the time the return is lodged, of both the fringe benefits taxable amount and the amount of FBT payable (including nil amounts): section 72 of the FBT Act. The relevant amounts will be those specified in the return. The employer is entitled to a credit for the net amount of instalments already paid, i.e. the instalments paid less any credits claimed under section 112A: section 105. The return is deemed to be a notice of assessment served on the employer on the same day the return is lodged Instalments As mentioned above, if an employer s FBT liability for the previous year equals or exceeds the threshold amount ($3,000), the employer is required to pay FBT for the current year in quarterly instalments. The FBT payable at the end of the FBT year is the assessed tax less the net instalments paid during the year. The relevant provisions are in Division 2 in Part VII of the FBT Act (sections 101 to 113). The FBT instalment system is aligned with other business tax instalment obligations that are reportable and payable under the BAS (or IAS). Consequently, the 4 instalment dates are 21 July, 21 October, 21 January and 21 April: subsection 103(1). However, if the employer is a deferred BAS payer on the day an instalment would otherwise be due, the instalment dates are 28 July, 28 October, 28 February and 28 April. An employer must notify the FCT, in the approved form, of the amount of an instalment on or before the day on which the instalment is due and payable: section Instalment credits If the calculation of an FBT instalment results in a negative amount, the amount of the instalment is nil. In addition, the employer can claim a credit equal to that negative amount: section 112A. This will arise, for example, if an employer makes an estimate of tax for the Copyright The Institute of Chartered Accountants in Australia

52 FBT year that is less than the notional tax amount used in the calculation of an earlier instalment for the year. Any credits must be claimed under the BAS after the end of the relevant quarter: section 112A Notional tax amount The notional tax amount is one of the following amounts (subsection 110(1)): The tax assessed for the most recent FBT year (base year) for which an assessment has been made; or Nil - where the employer has not been assessed for the immediate preceding year of tax, but there has been a nil assessment for an earlier year of tax, or where an employer has not had tax assessed at any time before the current year (i.e. for employers who lodge an FBT return for the first time). Alternatively, where there has been a change in the rate of tax for the current year, the notional tax amount is either the tax assessed for the base year (provided the instalment is due and payable before the tax rate takes effect) or the amount varied in accordance with the FBT Regulations (see Regulation 12) in other cases. The FCT may substitute his own estimate of the tax payable for the notional tax amount if he has reason to believe that the tax payable will exceed the amount of the employer s tax for the base year or nil (where nil would otherwise apply): subsection 110(3). The FCT must give at least 30 days written notice of his substituted estimate: subsection 110(4) Employer's estimate Employers may also estimate the notional tax amount by making an estimate of FBT (if any) payable for the year and providing a written statement to the FCT showing the basis on which the estimate was made: subsection 110(5) and section 112. If this is done, the estimated FBT for the year is substituted as the notional tax amount, with effect from the last day of the quarter in relation to which the employer s estimate was made: subsection 110(5). Only one such estimate may be made in respect of each instalment. The FCT may substitute, for the employer s estimate, the amount that the FCT considers should have been the amount estimated by the employer, having regard to information in returns furnished by the employer and any other available information. In such a case, the Copyright The Institute of Chartered Accountants in Australia

53 new notional tax amount will be the lesser of the FCT s estimate or the notional tax amount before the employer s estimate: subsection 112(3). If an employer has estimated its notional tax amount, and the estimate is less than 90% of the employer s tax assessed for the year and that tax assessed has become due and payable, the employer is liable for the General Interest Charge (GIC). If the FCT substitutes a notional tax amount under subsection 112(3), he must notify the employer in writing of the consequential increase in the relevant tax instalment and the new due date for payment of the instalment (which must not be earlier than 14 days after the notice is served): section 113. Copyright The Institute of Chartered Accountants in Australia

54 FBT - Reference table Key legislative references: Fringe benefits tax is levied under the Fringe Benefits Tax (Assessment) Act of 1986 Tax cases: Identifiable employee - FCT v Indooroopilly Children Services (Qld) Pty Ltd v FCT (2007) 65 ATR 369 Provided in respect of employment - J&G Knowles & Associates Pty Ltd v FCT (2000) 44 ATR 22; Slade Bloodstock v FCT [2007] FCAFC 173 ATO releases: Entertainment Food & Drink - TR 97/17, Minor benefits 2007/12, Car parking TR 96/26, GST and employee contributions GSTR 2001/3, Gross-up system - TR 2001/2, Private Use - MT 2027, Remote locations PSLA 2000/6 FBT Guide for Employers ATO Employer/Contractor Decision Tool ITR, BAS or Schedule reference: An FBT Return will need to be lodged where employers provide FBT instalment amounts already paid through activity statements will count as credits against the total FBT liability (or refund) Copyright The Institute of Chartered Accountants in Australia

55 5 Payroll tax 5.1 Overview All states and territories administer and collect their own payroll tax which is levied on wages paid to employees within their jurisdiction. Employers will need to take care where their obligations extend to more than one state or territory, as each state and territory has its own payroll tax legislation leading to different requirements and interpretations. For convenience, references in this chapter to state or states also include the territories (the ACT and the Northern Territory) unless otherwise stated. Further, Commissioners in this chapter refers to the respective state revenue Commissioners. All states have agreed to harmonise many of their payroll tax rules. The first two states to introduce harmonised rules were NSW and Victoria (with effect from 1 July 2007). The aim of harmonisation is to simplify payroll tax requirements for businesses through improved consistency between jurisdictions. The harmonised measures will be of particular benefit to businesses that operate in more than one jurisdiction. With the completion of the harmonisation of payroll tax legislation across all states, there is still be some differences from state to state, including some changes being phased in. For example, each of the states has retained control over their respective individual rates and thresholds. The principal areas where the rules have been (or will be) harmonised are: Timing of lodgment; Motor vehicle and accommodation allowances; Accommodation allowances; A range of fringe benefits; Work performed outside a jurisdiction; Employee share acquisition schemes; Superannuation contributions for non-working directors; and Grouping of businesses. Copyright The Institute of Chartered Accountants in Australia

56 5.2 Is your business liable? Payroll tax is payable in each state by an employer whose total annual Australian wages exceed a specified exemption threshold (although payroll tax is generally only payable on wages paid in relation to services performed within the state: see below table). A number of anti-avoidance measures have been introduced by the states over the years. The most important of these are grouping of related employers and measures to combat the increasing use of subcontractors and employment agents under arrangements that do not fall within the strict legal definition of an employer/employee relationship. The rates of payroll tax applicable in each jurisdiction as at 1 July 2013 are set out in the table below. Jurisdiction Payroll range (annual) $ NSW , ,001+ Vic 0 550, ,000+ Qld m 1.1m 5.5m 5.5m+ WA 0 750, ,001+ SA 0 600, ,001+ Tas m 1.25m+ ACT m 1.75m+ NT 0 1,500,000 1,500,000+ Tax payable Nil 5.45% of excess over $750,000 Nil 4.9% of excess over $550,000 Nil 4.75% of excess over $1.1m, less periodic deduction 4.75% of total wages Nil 5.5% of excess over $750,000 Nil 4.95% of excess over $600,000 Nil 6.1% of excess over $1.25m Nil 6.85% of excess over $1.75m Nil 5.5% of excess over $1,500,000 Notes 1 Thresholds indexed annually on 1 July. Copyright The Institute of Chartered Accountants in Australia

57 2 Note that a deduction system applies in Queensland between $1.1m and $5m. An employer whose total wages are between $1m and $5m is entitled to a deduction from taxable wages of $1 for each $4 by which total wages exceed $1m. Tax is levied at 4.75% on taxable wages less the allowable deduction. Broadly, an employer is liable to pay payroll tax in a particular state in respect of: Wages paid or payable in that state, unless the wages are for services performed entirely in another state; Wages paid or payable outside the state where the wages are for services performed wholly within the state; and Wages paid outside Australia for services performed mainly in the state. Under the harmonised legislation, wages paid in Australia for services performed overseas for more than 6 months are exempt (including the wages paid in the first 6 months). In addition, under new nexus provisions effective from 1 July 2009, if an employee works in more than one jurisdiction in a month (e.g. some airline industry employees), payroll tax is payable in the jurisdiction where the employee resides or, if the employee does not reside in Australia, in the state where the employer's registered ABN address is located What are wages? In all states, wages are defined to include wages, salaries, commissions, bonuses, and allowances paid or payable pursuant to an employer/employee relationship, including payments at piece work rates or otherwise and whether payable in cash or in kind. Wages will also include payments of director's fees or other remuneration to a director of a company. Employers may also be liable for payroll tax on wages paid or payable by or to a third party in respect of an employee's services. That is, a liability cannot be avoided by paying wages to a third party. Other examples of wages include: Fringe benefits All states impose payroll tax on the grossed-up value of fringe benefits. In all jurisdictions, the gross-up rate for the Type 2 aggregate fringe benefits amount is used (i.e. grossed up by ). Superannuation contributions All states tax contributions by employers to superannuation funds or schemes on behalf of employees and deemed employees (including contractors and directors). Copyright The Institute of Chartered Accountants in Australia

58 Employee share acquisition schemes All jurisdictions have specific provisions to tax the value of shares and options. Termination of employment Payments made to an employee in respect of the termination of employment are subject to payroll tax to the extent they are subject to income tax (ie amounts that are exempt such as those relating to genuine redundancies will be exempt from Payroll Tax) Wages and salaries paid to apprentices Some states grant a payroll tax rebate for certain businesses for wages and salaries paid to apprentices or new entrant trainees. The rebates are usually subject to meeting specific requirements. Travel allowances All states tax motor vehicle and accommodation allowances exceeding the relevant exemption thresholds for the state. In order for a payment to constitute wages for payroll tax purposes, it should generally be paid to a person or in relation to a person in their capacity as an employee and not in any other capacity. The test as to whether an employee/employment relationship exists requires the totality of the relationship to be considered, although capacity to control the activities of the worker will often be the starting point. This has been discussed earlier. A distinction must be drawn between wages paid to an employee as such and payments to independent contractors as the latter are only taxed under the provisions regarding contracts and employment agents Contractors and employment agents All states have specific provisions to deal with payments to contractors and subcontractors. The provisions aim to tax contracts if the worker is hired as an independent contractor, but works and operates like an employee. Generally, payments to contractors and subcontractors for the provision of such services are liable for payroll tax unless there is an exemption available under the relevant state legislation. For example, a contract for services which the contractor provides to the public generally is usually exempt. Where an exemption is not available, the payments are deemed to be wages for payroll tax purposes. The various revenue offices recognise that many contractor arrangements involve some elements of materials or equipment being supplied by the contractor. Accordingly, Copyright The Institute of Chartered Accountants in Australia

59 certain deductions have been approved for various classes of contracts to reflect a deemed amount for materials and equipment. However, there are anti-avoidance provisions that enable the respective Commissioners to ignore arrangements designed specifically to avoid tax by falling into one of the classes of contracts that are exempt. Example Contractors Lyn operates a ladies fashion retail chain and engages a website developer to build an online shopping website for her business. The business headquarters are located in NSW. Lyn is not in the business of providing web development services. In NSW, there is a payroll tax exemption for contracts for services required on an intermittent basis, and the service provider provides its services to the public generally: subparagraph 32(2)(b)(i) of the Payroll Tax Act 2007 (NSW). Accordingly, the contract between Lyn and the web developer is specifically exempt from payroll tax. All jurisdictions have special provisions in their respective payroll tax legislation relating to employment agents. All jurisdictions impose tax on employment agents where the agent pays the worker but there is no employer/employee relationship between the worker and the end-user. In all jurisdictions, where the contract between the agent and the worker is a contract of service, the agent and not the end-user of the worker's services is liable for any payroll tax. 5.3 Exemptions Certain wages may be exempt from payroll tax, e.g. wages paid to an employee on leave because they are an ADF member, wages paid to employees who are absent from work on volunteer fire-fighter or emergency service duty, and maternity and adoption leave payments. Note that not all states have the same exemptions, so care is required to ensure an exemption is applicable. Copyright The Institute of Chartered Accountants in Australia

60 Example 5.3 Exemption maternity leave Big Manufacturing Co has 2 female employees who want to go on maternity leave. In NSW, wages paid or payable to an employee in respect of maternity leave are exempt from payroll tax. The exemption applies to a female employee in connection with her pregnancy or the birth of her child up to a maximum of 14 weeks full time pay: section 53 of the Payroll Tax Act 2007 (NSW). Big Manufacturing Co must obtain and keep a medical certificate, or a statutory declaration, to claim the exemption. Certain types of organisations may be exempt from payroll tax, e.g. Commonwealth departments and non-business statutory authorities, charitable bodies, religious institutions, public benevolent institutions, public hospitals, public ambulance services, non-profit primary and secondary education bodies and councils in respect of certain activities excluding the supply of electricity, water and sewerage. Note that the relevant state legislation should be checked to clarify the tax-exempt status of an organisation. Example 5.3 Exemption non-profit organisation Help Charity runs a soup kitchen and a clothing exchange shop. It is a non-profit organisation and pays wages to 2 employees. The employees manage the day-to-day operations of the soup kitchen and the clothing exchange shop. In NSW, wages paid or payable by a non-profit organisation are exempt if paid by a non-profit organisation whose objectives are solely or dominantly for charitable purposes: section 48 of the Payroll Tax Act 2007 (NSW). Accordingly, the wages paid to the employees by Help Charity are exempt from payroll tax. 5.4 Grouping provisions All states have introduced grouping provisions mainly to tackle arrangements whereby related businesses under the same control split their payroll to take advantage of the exemption thresholds. In general, employers may be grouped for the purpose of calculating their liability for tax on all taxable wages paid by members of the group if: The employers are related corporations under the Corporations Act 2001; Copyright The Institute of Chartered Accountants in Australia

61 The employers are commonly controlled; The employers use common employees; or One employer has a controlling interest in the other (being a corporation) arising from the tracing of interests. Where a person is a member of 2 or more groups, all the members of each group are subsumed into one group. In all jurisdictions, all members of a group are jointly and severally liable for any unpaid tax. Only one member of a group can claim the group's threshold entitlement (or deduction). This member is known as the Designated Group Employer (DGE). Grouped employers are required to nominate a DGE for their group (usually the employer who pays the highest wages). The nominated member must have total Australian wages exceeding the relevant threshold (or deduction), e.g. $678,000 in NSW and $550,000 in Victoria. The other members of the group are not entitled to any threshold (or deduction) and pay a flat rate of tax. The annual threshold (or deduction) entitlement is determined on the basis of the total actual wages of the group. The harmonised legislation provides the Commissioners with the discretion to exclude a member from a group where a business carried on by that member is carried on independently of, and is not connected with, the carrying on of a business carried on by any other member of that group. Factors taken into consideration include the nature and degree of ownership or control of a business and the nature of a business. However, entities that which are related corporations within the meaning of the Corporations Act 2001 cannot be excluded from a group. The discretion must be applied for in writing. Note that Western Australia has deferred until 1 July 2012 the introduction of the harmonised grouping rules. Copyright The Institute of Chartered Accountants in Australia

62 Example 5.4 Grouping Chocolate Empire Pty Ltd (Chocolate Empire) and holds more than 50% of the issued share capital of CoCoa Concepts Pty Ltd (CoCoa Concepts). Chocolate Empire manufactures confectionary and CoCoa Concepts is a marketing company. Cocoa Concepts is involved in a limited joint marketing campaign with Jono Café restaurants. In these circumstances: Chocolate Empire and CoCoa Concepts are grouped for payroll tax purposes. Chocolate Empire and Cocoa Concepts are considered to be related corporations under the Corporations Act As the companies are considered to be related corporations under the Corporations Act 2001, the Commissioner in this instance does not have the discretion to exclude a member from the group. As Chocolate Empire pays more payroll tax, the companies may consider nominating it to be the DGE for the group so it can claim the group s threshold entitlement. However, CoCoa Concepts will be required to pay a flat rate of tax. Cocoa Concepts and Jono Café are not grouped for payroll tax purposes. However, if employees of CoCoa Concepts are also performing duties under the direction of Jono Café, Jono Café will also be included in the group for payroll tax purposes. Jono Café may apply for the FCT s discretion to exclude it, however, the Commissioner must be satisfied that the business of Jono Café is independent of, and not connected with, the business of CoCoa Concepts. Note that all entities are located in the one state in this example. Copyright The Institute of Chartered Accountants in Australia

63 5.5 Administration There are a host of practical administrative matters relating to payroll tax which require the attention of employers. These include: Registration Employers are responsible for registering with the relevant state revenue office for payroll tax purposes. Registration is required within 7 days after the end of the month in which total Australian wages exceed the weekly or monthly amount based on the relevant threshold: see following table. An application for registration must be made online or in an approved form. Returns For the first 11 months of a financial year, monthly returns in the prescribed or approved form must be lodged with the Commissioner by the 7 th day of the following month except in the Northern Territory, where the due date is the 21 st day of the following month. Payment of the tax due must accompany the return. An annual return must be lodged by 21 July each year (31 July for the ACT) to reconcile monthly tax payments in respect of the previous 11 monthly returns and the employer's annual tax liability based on total annual wages: see table below. Any outstanding tax must accompany the return. Depending on the jurisdiction, some states may allow for a different return period (i.e. quarterly, annual) and/or payment due date to assist smaller employers. Employers need to check the requirements for each state. Interest and penalties Penalty tax may be imposed in cases where an employer either fails to lodge a return on time or fails to include all taxable wages in a return. Each state has its own interest and penalty tax regime which are similar, but are not identical. In each state, the Commissioner has the discretion to remit the whole or part of the penalty tax imposed. Objections and appeals Each jurisdiction has an objection and appeals process where a person who is dissatisfied with a decision of the Commissioner may lodge an objection. There is generally a 60-day time limit for lodging an objection, although an extension of time may be allowed. A person dissatisfied with an objection decision may appeal to the Supreme Court or an administrative tribunal (depending on the jurisdiction). Registration requirement and return due dates for each jurisdiction as at 1 July 2011 are set out in the table below. Copyright The Institute of Chartered Accountants in Australia

64 Jurisdiction Register within 7 days after the end of the month in which total Australian wages exceed the threshold Return due dates NSW Monthly thresholds 28 days = $57, days = $61, days = $63,699 Register online with the NSW Office of State Revenue Monthly returns are due by the 7 th day of the following month (or next business day) Annual reconciliation return is due 21 July each year (includes June month) Vic Monthly threshold $45,833 Register online with the Victorian State Revenue Office PTX Express Qld Monthly threshold $91,666 Register with the Qld Office of State Revenue approved application form WA Monthly threshold $62,500 Register online with the WA Office of State Revenue Revenue Online SA Monthly threshold $50,000 Register online with RevenueSA RevNet Copyright The Institute of Chartered Accountants in Australia

65 Tas Monthly threshold = No. of days in month divided by days in the year x $1.25 million Register with the Tasmanian State Revenue Office approved application form ACT Monthly threshold $145, Register with the ACT Revenue Office approved application form Monthly returns are due by the 7 th day of the following month (or next business day) Annual adjustment return is due 31 July each year (includes June month) NT Monthly threshold $125,000 Register with the Territory Revenue Office approved application form Monthly returns are due on the 21 st day of the following month Annual adjustment return is due on 21 July each year (includes June month) Copyright The Institute of Chartered Accountants in Australia

66 Payroll Tax - Reference table Key legislative references: NSW New South Wales Payroll Tax Act 1971 VIC Victorian Payroll Tax Act 2007 QLD Queensland Payroll Tax Act 1971 SA Payroll Tax Act 2009 WA Payroll Tax Assessment Act 2002 TAS Payroll Tax Act 2008 NT Northern Territory Payroll Tax Act 1979 ACT Payroll Tax Act 2011 Copyright The Institute of Chartered Accountants in Australia

67 6 Workers compensation system 6.1 Overview Workers compensation insurance provides protection to employers and their employees in the event of a work-related injury or disease. Each state and territory has enacted its own workers compensation system which is funded by premiums paid by employers. Through the workers compensation system, injured workers may have an entitlement to periodical payments or lump sum payments. Premiums paid by a business for workers compensation insurance are deductible under section 8-1 of the ITAA For convenience, references in this chapter to state or states also include the territories (the ACT and the Northern Territory) unless otherwise stated. 6.2 Employer obligations Employers are responsible for ensuring that they have a current workers compensation insurance policy in place. Each state has enacted its own workers compensation legislation, and there are various substantial differences between the states, so employers operating across different jurisdictions will need to identify their requirements. Each state has its own provisions covering: Employer liabilities and responsibilities; Definition of worker and wages; Who can insure; and The amount of cover and premiums. Generally, the definition of wages in most states closely mirror that of payroll tax - i.e. wages can include: salary/wages, overtime payments, bonuses and commissions, director fees, sick leave and public holiday loadings, employer superannuation contributions, grossed-up value of fringe benefits, long service leave payments, and termination payments. However, each state will have its differences for workers compensation insurance purposes. In addition, each state specifies its own requirements for the calculation of premiums. Copyright The Institute of Chartered Accountants in Australia

68 Example 6.2 Employer obligations Jason operates an auto-repair workshop and employs two employees, including an apprentice. Jason must have a current workers compensation insurance policy to cover all workers and is required to pay workers compensation premiums. Depending on which state Jason s business is operating in, he will need to identify his obligations as an employer - this includes identifying wages paid. Jason pays wages, including employer contributions to superannuation, and double-rates for public holidays. Broadly, the premiums will be based on the industry Jason s business operates in and the amount of annual wages paid to workers. The following is a broad overview for each state covering: the relevant authority; employer s obligation to insure; and calculation of premiums New South Wales In NSW, workers compensation is administered by the WorkCover NSW. All NSW employers must have a workers compensation policy if they pay more than $7,500 in wages, employ an apprentice or trainee, or are part of a group for premium purposes. Workers compensation insurance in NSW is provided by private insurance companies. Premium rates are set by the WorkCover NSW with rates varying depending on the industry classification. All employers are allocated to an industry class for premium rating purposes. The rates are set out from time to time in Insurance Premium Orders. In NSW, the Insurance Premium Orders also set out the formulas for calculating premiums. There is also provision to adjust premiums to take account of an employer s claims history. An employer's premium is the prescribed WorkCover Industry Classification (WIC) rate multiplied by the total wages paid to workers Victoria In Victoria, workers compensation is administered by the Victorian WorkCover Authority (VWA). All employers who in any financial year have paid or are liable to pay remuneration in Victoria exceeding the exemption limit of $7,500, or employ apprentices or trainees, are required to take out a WorkSafe Injury Insurance Policy. Copyright The Institute of Chartered Accountants in Australia

69 An employer's premium is the prescribed premium rate for a particular location from which the employer operates, multiplied by the total remuneration paid to workers employed at that location Queensland Workers compensation in Queensland is administered by WorkCover Queensland. All Queensland employers are required to take out an accident insurance policy to insure their workers against workplace accidents. Premiums in Queensland are calculated by a formula that combines the: employer s declared gross wages; the relevant premium rate which is based on the relevant industry classification; and adjustments based on the employer s claims experience. An employer s premium is calculated by multiplying as estimate of wages by the relevant premium rate for the employer Western Australia WorkCover WA is the agency responsible for overseeing workers compensation in Western Australia. Workers compensation insurance is provided by private insurance companies. All employers are required to obtain a current policy of insurance for any worker employed by them. Such a policy must be obtained from an approved insurer. Premium rates for workers' compensation are reviewed and published annually by WorkCover WA. An employer's premium is the prescribed rate multiplied by the total of wages, salaries, commissions, bonuses, overtime, allowances, directions and all other benefits paid to or in relation to a worker before the deduction of income tax South Australia WorkCover SA is responsible for the administration of the WorkCover scheme in South Australia. All employers, except exempt employers, are required to register with WorkCover SA and pay an annual levy (i.e. premium). Broadly, employers are exempt if they pay less than the threshold amount a year ($11,597 for the 2012 calendar year), unless a claim has been lodged by a worker. Employers cannot employ a worker without having registered with the WorkCover SA. The premium rates are set by the Workers' Rehabilitation and Compensation Corporation based on employer classification. An employer's premium is the prescribed rate for a particular class of industry from where the employer operates multiplied by the total Copyright The Institute of Chartered Accountants in Australia

70 remuneration paid to workers employed by that employer. Remuneration is defined as including payments made to, or for the benefit of, a worker which are determined by the Corporation to be remuneration Tasmania WorkCover Tasmania is responsible for the administration of workers compensation matters in the state. In Tasmania, workers compensation insurance is provided by private insurance companies. All employers, other than approved self-insurers, are required to obtain and maintain a policy of insurance. Insurance premium rates are set by the insurance companies and vary according to the relevant trade or calling of the workers engaged by an employer. WorkCover Tasmania is responsible for monitoring the rates set by insurance companies. An employer is required to pay a premium equal to the prescribed premium rate for each occupation or calling in which it engages workers, multiplied by the gross wages paid to workers in each relevant occupation or calling ACT ORS WorkCover is the government agency responsible for the administration of the workers compensation legislation in the ACT. All employers are required to obtain and maintain in force a policy of insurance or indemnity with a private insurance company that is an approved insurer. Insurance premium rates are set by the individual insurance companies and vary according to the relevant trade or calling of the workers engaged by an employer. The Regulations may prescribe maximum rates of premium to be charged for specified classes of work. The premium payable by an employer is an amount equal to the prescribed premium rate multiplied by the total wages, salaries and all other remuneration paid or allowed to workers. Copyright The Institute of Chartered Accountants in Australia

71 6.2.8 Northern Territory In the Northern Territory, administration of the relevant legislation for workers compensation is vested in the Work Health Authority via its NT WorkSafe administrative arm. All employers, except a self-insurer, must obtain and maintain in force a policy of insurance for all workers employed. Insurance premium rates are set by the individual insurance companies and vary according to the relevant trade or calling of the workers engaged by an employer. There is a Premium Monitoring Committee which is responsible for the monitoring of the rates set by insurance companies. An employer is required to pay a premium equal to the prescribed premium rate for each occupation or calling in which it engages workers multiplied by the gross payments made to workers in each occupation or calling. Workers compensation Reference table Key legislative references: NSW Workers Compensation Act 1987 VIC Workers Compensation Act 1958 QLD Workers Compensation and Rehabilitation Act 2003 SA Workers Rehabilitation and Compensation Act 1986 WA Workers Compensation and Injury Management Act 1981 TAS Workers Rehabilitation and Compensation Act 1988 NT Workers Rehabilitation and Compensation Act ACT Workers Compensation Act 1951 Copyright The Institute of Chartered Accountants in Australia

72 Copyright The Institute of Chartered Accountants in Australia

73 7 Superannuation 7.1 Overview Compulsory superannuation is one of the Government's key methods of ensuring that people have money available to them after their retirement. Generally, employers are required to make compulsory contributions to superannuation funds for their employees. These contributions generally cannot be accessed until an employee's retirement. Superannuation funds provide benefits to members as a lump sum or pension in the event of the member's retirement or permanent disability, or to dependants on the death of a member. 7.2 The superannuation guarantee system The superannuation guarantee system requires all employers to provide a minimum level of superannuation support for their employees. The prescribed minimum level of superannuation support is 9.25% of an employee's earnings base - this has applied since 1 July 2002 (please refer above on increasing the rate of compulsory superannuation). An employer is entitled to a tax deduction for contributions made to a complying superannuation fund or a Retirement Savings Account (RSA) for the purpose of providing superannuation benefits for an employee if certain conditions of Subdivision 290-B of the ITAA 1997 are met. However, the contributions are only deductible for the year in which the contribution is made. From 1 July 2008, all employers must at a minimum, use OTE to calculate the minimum superannuation guarantee contributions required for their employees, notwithstanding it has an obligation under for example an industry award. Broadly, OTE are the total of earnings in respect of ordinary hours of work, including commissions, shift loadings and over-award payments. Where employers provide less than the required minimum level of support, or pay late, they will be liable to pay a non-deductible charge called the SGC. The ATO administers and collects the charge where employers do not provide a minimum level of superannuation support for their employees or pay such contributions late. The amounts are largely redistributed in the form of superannuation contributions to complying funds in respect of those employees. The key legislation governing the charge is the Copyright The Institute of Chartered Accountants in Australia

74 Superannuation Guarantee (Administration) Act 1992 (SGAA) and the Superannuation Guarantee Charge Act Increasing the rate of compulsory superannuation The Superannuation Guarantee (Administration) Amendment Bill 2011 increased the superannuation guarantee charge percentage to 9.25 (effective 1 July 2013). There will be increments of 0.25% in the first two years and 0.5% thereafter to reach 12%. The Act also abolishes the superannuation guarantee age limit altogether from 1 July Who is covered? The superannuation guarantee scheme applies to all employers in respect of their employees, including self-employed persons working within their own companies. There are no exempt employers. The definitions of employee and employer are defined to have their ordinary meaning: section 12 of the SGAA. The SGAA also extends the terms to deem a range of other relationships to be that of employee and employer, e.g. company directors, professional entertainers, artists and sports persons, and members of Federal and State Parliaments. Therefore, the applicability of the terms is wide-reaching. However, the SGAA also makes provisions to exempt certain employees. The following flow-chart illustrates broadly when an employer must pay superannuation for an employee. Copyright The Institute of Chartered Accountants in Australia

75 Note that it is not possible for an employer to contract out of their superannuation guarantee obligations Employees at common law An employee for superannuation guarantee purposes is anyone who is an employee at common law. That is, a person who receives salary or wages in return for work or services. On the whole, the superannuation guarantee definition of employee mirrors that in the PAYG provisions. However, there are some minor differences. The FCT has issued Ruling SGR 2005/1 which explains when an individual is considered to be an employee for superannuation guarantee purposes. Ruling SGR 2005/1 discusses the key indicators that should be considered when determining whether a person is an employee. These include: The degree of control that a person engaging another person to perform work can exercise over that person (i.e. the control test ); Whether the substance of a contract is to produce a given result; Who bears the commercial risk and responsibility (e.g. for poor workmanship); Who provides the assets and tools; and Whether benefits such as annual and sick leave are provided. Copyright The Institute of Chartered Accountants in Australia

76 Some indications of the control test include where the employer has a right to: Control the employee s activities during work hours; Restrain the employee from working for others and engaging in other activities; Set dress standards, behaviour standards and control other aspects of behaviour; Control the hours of work, work allocated and performance standards; and Remunerate the persons at an agreed level and not in respect of profits gained. Identifying whether a person is an employee is a question of fact and requires an examination of the terms and circumstances of the contract with regard to various key indicators. This is not always a straightforward task. No one indicator of itself is determinative of the relationship and the totality of the relationship between the parties must be considered. Importantly, parties cannot deem a relationship between themselves to be something that it is not by simply giving it a different label. Example Your client has recently engaged a worker with an ABN to provide service for the next 12 months on a construction project. The worker has their own insurance, will provide their own tools (where required) and will be paid based on achievement of certain construction milestones. Your client treats this person as a contractor and will not withhold from the payments made to the worker under Schedule 1 of the TAA Contractors In certain situations, a person who describes him or herself as an independent contractor may in fact be an employee for superannuation guarantee purposes. Under the extended definitions of employee and employer, a person who works under a contract wholly or principally for labour is an employee of the other party to the contract: subsection 12(3) of the SGAA. The term labour includes intellectual and artistic effort as well as physical work. To the extent that a contract is partly for labour and partly for something else (e.g., the supply of Copyright The Institute of Chartered Accountants in Australia

77 goods, materials or hire of plant or machinery), it will qualify only if it is principally for labour: see Ruling SGR 2005/1. Where a particular individual engaged under a contract is an independent contractor at common law and the terms of the contract in light of the subsequent conduct of the parties indicates that: The contractor is remunerated (either wholly or principally) for their personal labour and skills; The contractor must perform the contractual work personally (there is no right of delegation); and The contractor is paid by reference to hours worked, rather than for the amount or quality of work performed (i.e. payment is not for a result), the contract is considered to be wholly or principally for the labour of the contractor and he or she will be an employee under subsection 12(3). Practice Statement PS LA 2006/14 outlines the FCT s approach where an employer has not made the required superannuation contributions for an individual engaged under a contract that is wholly or principally for the person s labour. If an employer mistakenly makes contributions when not required, the contributions may be recoverable. Example Carrying-on from the example above in Section 7.3.1, this same worker, although they may not be an employee for withholding purposes and Schedule 1 of the TAA 1953, this same worker may be an employee for super guarantee purposes under section 12(3) of the Super Guarantee (Administration) Act Who is excluded? The SGAA applies to all employers. However, there are certain employees for which employers do not need to provide superannuation support. These employees include: Employees who are paid less than $450 in a month: subsection 27(2); Employees under 18 years of age who are working no more than 30 hours per week: section 28; Copyright The Institute of Chartered Accountants in Australia

78 Persons paid to do private or domestic work for not more than 30 hours per week for a non-business employer, e.g. nannies and housekeepers: subsection 12(11); Employees in their capacity as members of the Reserve Forces (except those in continuous full-time service) receiving income tax-exempt pay and allowances: section 29; Employees who are aged 70 or over: paragraph 27(1)(a) (abolished from 1 July 2013 per the Superannuation Guarantee (Administration) Amendment Act 2012); Non-resident employees who are paid solely for work undertaken outside Australia: paragraph 27(1)(b); and Resident employees who are employed by non-resident employers and are paid solely for work undertaken outside Australia: paragraph 27(1)(c). Note that the above list is not exhaustive Use of interposed entities In some cases, the worker may not contract directly with the payer. Rather the worker will use an interposed entity to contract for the work. The individual then carries out this work, with payment received by the interposed entity. In this case, the relationship between the payer and the interposed entity is not an employment relationship. So it cannot be a relationship of common law employment and will not cast a liability to make superannuation contributions on the payer. In addition, to be caught by the extension in section 12(3) SGAA, the contract has to be one for the labour of the person who contracts to do the work. Since the interposed entity cannot do the work, the relationship is also not caught by the extension in section 12(3). Consequently, a payer who contracts with a worker via the worker s interposed entity will have no liability to pay superannuation contributions or pay Superannuation Guarantee Charge. This is confirmed in SGR 2005/1 in paragraphs 13 and 14: 13. Where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, Copyright The Institute of Chartered Accountants in Australia

79 either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. However, the individual may be the employee of the intermediary company or trust, depending on the terms of the arrangement. 14. If a partnership has contracted to provide services, then the person who actually does the work is not the employee of the other party to the contract. This is so even if the worker is a partner and even if the contract requires the partner to do the work. However, if partners contract outside the partnership in their own personal capacity to provide their labour to fulfil a contractual obligation, they can be employees of the other party to the contract. Example Changing the facts of the examples in Sections and 7.3.2, if the worker receives payment for their services through a company or trust there will be no withholding or SG obligations for the entity engaging the services of the worker. The worker pay then be an employee of the company or trust in which case the company or trust may have the withholding and SG obligations). 7.4 Notional earnings base The SGAA prescribes a minimum level of superannuation support that employers must provide for each of their employees - currently 9.25% of an employee's notional earnings basis. The earnings base is determined as at the first day of each quarter or the date on which the employee commenced employment. If an employee s base changes from quarter to quarter, employers will need to ensure that the amount of superannuation support they provide is in line with the earnings base changes. Since 1 July 2008, an employee s notional earnings base is the same as his or her OTE and an employer is required to calculate its minimum superannuation support required based on an employee s OTE in order to avoid a liability for the SGC. Copyright The Institute of Chartered Accountants in Australia

80 Where an employer has failed to make the minimum level of superannuation contribution by the quarterly due date, salary or wages are used to calculate an employee s individual shortfall component of the SGC: section 19 of the SGAA. Note that there are more payments considered to be salary or wages than OTE. From 1 July 2009, Ruling SGR 2009/2 explains the FCT s views on what constitutes OTE and salary or wages Ordinary time earnings Employees are required to use OTE as the default basis to calculate the minimum superannuation guarantee contributions required for their employees. However, employers may use another notional earning base other than OTE, which may be contained in an industrial award or legislation, but only if the earnings base is greater than the employee s OTE. OTE are the total of earnings in respect of ordinary hours of work : section 6 of the SGAA. This mainly covers remuneration for an employee s service (salary or wages), including commissions and performance bonuses. However, OTE specifically excludes lump sum payments of unused sick leave, annual leave, long service leave on termination of employment, and certain overtime payments. Example OTE and/or salary or wages Kate is employed under an agreement which specifies that her ordinary hours will not exceed 35 hours a week. The agreement also provides that Kate will receive overtime payments for each hour she works exceeding her ordinary hours at a rate of double-time. The payment for the 35 ordinary hours of work is OTE. The overtime payments are not OTE, but are taken to be salary or wages for SGC purposes. Kate s manager, Pauline, is employed under an agreement which specifies a gross annual salary of $110,000. The agreement recognises in a non-specific way that she may often be expected to work more than the ordinary hours of work prescribed. There is no distinct provision for overtime hours. However, Pauline will receive bonuses if she meets performance goals. The whole amount of salary payable and the bonuses are OTE and salary or wages for SGC purposes. Copyright The Institute of Chartered Accountants in Australia

81 7.4.2 Salary or wages Salary or wages are used to calculate an employee s individual shortfall component of the SGC where an employer has failed to make the minimum level of superannuation contributions for an employee. The ordinary meaning of salary or wages is remuneration paid to employees for their services as employees. However, the term is not limited to fixed payments made periodically from work performed. The term also includes certain lump sum payments, bonuses and allowances that are part of the employee s remuneration: section 11 of the SGAA. Payments to an employee that are not given as a reward for their services are not included in salary or wages, e.g. reimbursement for out-of-pocket expenses. However, payments are included in salary or wages if the employee is entitled to receive the money for themselves, e.g. a meal allowance that an employee is free to spend or not as he or she chooses Maximum contribution base Where an employee s salary and wages in a quarter is in excess of the maximum contribution base, they are not included in an employee's OTE. That is, an employer is not required to provide the minimum 9.25% superannuation guarantee support for that part of the employee s earnings above the maximum contribution base. An employee's maximum contribution base is indexed annually. The maximum contribution base for each quarter is $48,040 for It is important to remember that the maximum contribution base threshold is determined per employee and also per employer. That is, if a person is employed by several employers, the maximum contribution base threshold is applied by each employer. Copyright The Institute of Chartered Accountants in Australia

82 Example Maximum contributions base Mark has a gross quarterly salary of $50,000 and is therefore earning above the maximum contribution base threshold - that is, $1,960 ($50,000 - $48,040). Mark s employer does not need to take $1,960 into account when calculating its superannuation support for Mark for the quarter. Mark s employer can provide the superannuation support of $4, ($48,040 x 9.25%). However, Mark can negotiate with his employer to pay his superannuation support based on his actual quarterly salary. If Mark s employer agrees, the superannuation contribution will be $4,625 ($50,000 x 9.25%). 7.5 Salary Sacrifice Arrangements (SSAs) Generally, salary sacrificed contributions to a complying superannuation fund or RSA are treated as employer contributions and therefore reduce any liability the employer may have to pay for the SGC. However, it is important to ensure that a SSA is effective as oppose to ineffective. An effective arrangement is one which is entered into before the employee has earned the entitlement to receive the relevant salary and wages. Amounts paid under an effective arrangement are not considered salary or wages. Therefore, any superannuation contributions made by an employer to a complying superannuation fund or RSA will be counted towards the employer s superannuation guarantee obligations for that employee. Further, contributions made by the employer under an effective arrangement are tax deductible where the conditions of Subdivision 209-B of the ITAA 1997 are met. An ineffective arrangement is one where the employee directs the employer to contribute salary and wages that has been earned into a complying superannuation fund or RSA. Amounts paid under an ineffective arrangement are considered salary or wages. Therefore, any superannuation contributions made by an employer are not considered to be employer contributions for superannuation guarantee purposes. Employers considering SSAs other than for superannuation (e.g. cars, loan benefits, etc) need to be aware of FBT implications. Copyright The Institute of Chartered Accountants in Australia

83 Example 7.5 Salary sacrificing superannuation Damien has a gross annual salary of $150,000 and wants to salary sacrifice $40,000 of his annual salary into superannuation. On 28 June 2011, Damien and his employer agreed on an arrangement to salary sacrifice $40,000 of his annual salary into superannuation and receive the remaining $110,000 as salary. The arrangement took effect on 1 July As the arrangement was entered into before the salary was earned, the arrangement is considered to be an effective arrangement. Therefore, amounts contributed under this arrangement will count towards the employer s minimum superannuation support for Damien. However, if Damien were to have directed his employer to contribute a portion of last month s salary to superannuation. Such a request would be an ineffective arrangement. Amounts contributed under this arrangement would be considered salary or wages and not employer contributions for superannuation guarantee purposes. 7.6 SGC The SGC is imposed where an employer does not make sufficient quarterly superannuation contributions for each employee by the due date. The due date for contributions is the 28 th day after the end of the relevant quarter. Employers are required to assess their own liability for the SGC. The SGC equals the superannuation guarantee shortfall. If an employer has a shortfall for a quarter, the employer is required to lodge a superannuation guarantee statement (SG statement) by the 28 th day of the second month following the end of the quarter. The SGC is payable by the same date. The SGC is not tax deductible: section of the ITAA Copyright The Institute of Chartered Accountants in Australia

84 Quarter ending Employer contribution due SG statement and SGC payment due 30 September 28 October 28 November 31 December 28 January 28 February 31 March 28 April 28 May 30 June 28 July 28 August If an employer does not lodge a SG statement, and the FCT considers there is an SGC liability for the quarter, the FCT may make an assessment of the employer s liability and the amount payable Calculation of the SGC The SGC is made up of four components: The total of the individual superannuation guarantee shortfalls for all employees for the quarter. This is calculated by multiplying the percentage by which the employer failed to meet the required level of contributions by the total salary or wages of each employee up to the maximum contribution base per quarter. This is calculated on the employee's total salary or wages, which includes overtime etc. The shortfall is calculated in respect of each employee and not on an aggregated basis; An additional amount for failing to comply with the choice of fund requirements (if applicable). This is calculated as 25% of the individual superannuation guarantee shortfall for each employee for whom contributions did not comply with the choice of fund requirements, limited to an additional $500 per employee per quarter; The interest component. The rate of interest is currently 10%. The interest component is calculated from the beginning of each quarter to the date the charge is payable; and The employer s administration component for the quarter. The rate is currently $20 for each employee for whom there is an individual superannuation guarantee shortfall. Copyright The Institute of Chartered Accountants in Australia

85 The FCT does not have the discretion to remit or waive the nominal interest and administration components Late payment offset If an employer is late in making a contribution to an employee s fund, the employer may be able to reduce the SGC for a quarter in relation to the employee using the superannuation guarantee late payment offset. To be eligible for the offset, the employer must make an irrevocable election (using an approved form - NAT 14899) within 4 years after the original SG assessment date for the quarter. The contribution to the employee s fund must be made before the employer s original SG assessment date for the quarter, i.e. the earlier of the FCT receiving an original SG statement from the employer for the quarter or a default assessment is raised on the employer for the quarter. The offset reduces, in order, the nominal interest component first, followed by the superannuation guarantee shortfall, then the choice liability. The offset cannot be used to reduce the administration component. The GIC will accrue on any remaining unpaid superannuation guarantee shortfall. The offset is not tax deductible GIC and penalties If an employer does not pay the SGC, or does not remit the SGC in full by the due date, the GIC is payable on any unpaid SGC remaining unpaid. The GIC is calculated under Division 1 in Part IIA to the TAA. The unpaid SGC is reduced by the administration and nominal interest components and is calculated from the due date of payment until the date when the payment is made. The FCT may remit the GIC in circumstances where the Commissioner considers it fair and reasonable to do so. If an employer refuses or fails to provide a SG statement or information relevant to assessing the employer s liability to pay SGC for a quarter, the employer will be liable to pay, by way of penalty, an additional SGC of 200% of the amount of SGC payable for the quarter: section 59 SGAA. Guidelines on the FCT's discretion to remit all or part of the penalty are set out in Practice Statement PS LA 2006/1. Penalties may also apply for failing to retain records, making false or misleading statements in relation to a shortfall amount, and for entering into a scheme to avoid the SGC. Copyright The Institute of Chartered Accountants in Australia

86 7.7 Choice of fund Since 1 July 2005, employers have been obliged to provide most employees with the right to choose the superannuation fund into which their compulsory employer superannuation guarantee contributions are to be paid. Broadly, an employer can satisfy the choice of fund requirements by providing superannuation support or making contributions to a fund chosen by the employee in accordance with the choice of fund provisions. The choice of fund provisions are contained in the SGAA. Key section references: Super Guarantee (Administration) Act 1992 Employee for SG purposes - Section 12 of the Super Guarantee (Administration) Act 1992 Tax cases: Employee or contractor ACE Insurance Ltd v Trifunovski [2013] FCAFC 3; On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366 ATO releases: Principally for labour -SGR 2005/1, Effective Salary Sacrifice Arrangements - TR 2001/10, Ordinary Times Earnings SGR 2009/2, Process where late SGC - PSLA 2006/1, Process where failure to pay SG contractor principally for labour - PSLA 2006/14 ATO Superannuation Employee/Contractor Decision Tool Copyright The Institute of Chartered Accountants in Australia