Australian tax obligations affecting employers are always changing. This update addresses changes to the laws affecting employers – including payroll tax, fringe benefits tax, income tax, superannuation and pay-as-you-go withholding – as well as the ATO’s interpretation of those laws and regulations from the last 6 months (September 2016 to March 2017).

Payroll tax

The courts continue to adjust the grouping, employment agency and taxable wages boundaries.

A university that sourced external experts for client work (written reports, laboratory testing and training) was held not to be an ‘employment agency’ liable for NSW payroll tax, because the university contracted to provide agreed results rather simply placing the experts in the clients’ businesses. The court read down the literal breadth of the employment agency rules on the basis that they went far beyond the mischief at which they were directed, namely inserting an agency into an otherwise employment-like relationship.

The NSW OSR had been taking a more expansive approach to this than other States.

Grouping avoided by beneficiary disclaimer

Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1594

A potential beneficiary of a discretionary trust who had not ever received a distribution from it was able to disclaim his interest in the trust in order to avoid being a deemed ‘controller’ of it. Control would have grouped the beneficiary with the trust for payroll tax purposes, and resulted in joint and several liability for unpaid payroll tax.

De-grouping prevented by financial support

Urmar P/L ATF Ross Burton Family Trust v Chief Commr of State Revenue [2017] NSWCATAD 54

Financial support provided by a mainly land-holding trust to two trucking companies that it owned stymied the trust’s de-grouping application. The trust was found to be substantially connected with the companies notwithstanding the appointment of separate day-to-day trucking managers.

Player image payments subject to payroll tax

Brisbane Bears – Fitzroy Football Club Ltd v Commissioner of State Revenue [2016] QSC 231

Players and coaches undertaking promotional and marketing appearances for a football club were paid, in addition to the fees for their services, for consenting to the use of their images. The court held that the image payments were received in the course of providing the promotional and marketing services, and were therefore subject to payroll tax. The court acknowledged that the position would have been different if the image use had been independent of the services.

Following its court loss against Qantas, the NSW OSR now accepts that employer contributions to top-up DB superannuation plans may be in part payroll tax free. If for example following poor investment returns a fund actuary calls for higher employer contributions than normal, or the employer seeks to build up a buffer in the fund, the OSR now accepts that the extra contributions relate to the entire period of DB employees’ fund membership. If that includes pre-1 July 1996 periods, which would pre-date the application of payroll tax to superannuation contributions in NSW, the portion of the contribution relating to those periods will be payroll tax free.

The same would apply to top-up contributions for DB employees in other States, albeit with different pay-roll tax start dates.

Charities exemption lost

Fringe benefits tax (FBT)

Further concessions are available for work-related road travel.

The ATO has agreed to allow businesses with a fleet of work cars (at least 20 cars) to use a single average business use percentage across the whole fleet. This will save having to fall back on the higher cost statutory fraction method where an individual log book is missing or incomplete.

Conditions for using the fleet method are:

  • the cars must be used predominantly for business and must not be salary packaged;
  • none of the cars can be luxury cars;
  • employees must be required to keep log books, and valid logbooks must be held for at least 75% of the fleet; and
  • the employer must either choose the cars or allow employees to choose from only a limited list.

The ATO has ruled that employer-provided travel cards for use on public buses between home and work, including cards funded by salary sacrifice, are FBT exempt. The exemption is the same as more commonly applied for utes used for home to work travel.

The exemption cannot be applied for home to work travel by train, tram or ferry because they are not motorised road vehicles.

Income tax

More clarity has been provided about the taxation of deferred cash, industry severance schemes, compensation payments and the residency of individuals.

The High Court confirmed that a deferred cash bonus calculated and paid upon termination of employment was fully taxable as ordinary income for services rendered. The payment was not to be concessionally taxed as either a capital gain from exploitation of rights granted under the bonus plan or as an employment termination payment.

The decision also provides comfort that the grant of cash bonus plan rights does not give rise to fringe benefits tax.

Even though Mr Blank had spent the earlier years of his service overseas the whole of the cash bonus was fully taxable. See our Riposte for more details.

Following its court loss in Davies the ATO has provided three key examples of when indeterminate rights are acquired. These are rights that ‘become’ rights to acquire shares. If that happens the rights are treated as always having been rights to acquire a share and may be taxable (retrospectively) on grant. Common examples are rights to either cash or shares at the discretion of the company.

  • An employee joining a ‘free’ short-term incentive plan that is subject to management discretion acquires an indeterminate right when management decides the particular employee qualifies for an award, with only the form of payment in cash or shares to be decided later.
  • An employee subscribing to a plan that may result in cash or shares being granted acquires an indeterminate right at the time of accepting the offer and paying the subscription.
  • A prospective employee promised shares conditionally upon commencing employment and board approval acquires an indeterminate right upon commencement of employment.

Regrettably the payroll tax timing rules do not always correspond to these rules. See our

Industry severance scheme taxed at 49%ElecNet (Aust) Pty Ltd v Commissioner of Taxation [2016] HCA 51

The Electrical Industry Severance Scheme trust was held to be a discretionary trust taxed at 49% on its undistributed earnings, and not a unit trust taxed under Division 6 at the 30% company rate.

Since 49% is higher than many workers’ marginal tax rates the decision inhibits the encouragement for severance schemes provided by the FBT exemption for contributions to these schemes.

When compensation is income

  • Arrears of periodic income support paid in a single lump sum is ordinary income in the year received, but a tax offset may be available to place the worker back in the same tax position as if the support had been paid on time: Edwards v Commissioner of Taxation [2016] AATA 781.
  • Return to work payments paid in a single lump sum under the Return to Work Act 2014 (SA) to redeem an entitlement to weekly payments is also ordinary income: Taxation Determination TD 2016/18.
  • Compensation for personal injury or incapacity paid in a lump sum is a capital receipt that is often tax free, even if the quantum has been calculated by reference to lost earnings from work: Gupta v Commissioner of Taxation [2016] AATA 914.
  • Twelve months rental of an apartment in Malaysia by an Australian national of Malaysian decent was insufficient to prevent Australian tax residency under the tie breaker rule in the tax treaty between the two counties. The individual lived in the apartment for only some of the rental period: Tan v Commissioner of Taxation [2016] AATA 1062.
  • Eighteen months in Oman was not long enough to prevent Australian tax residency given the individual only resided in Oman for work: Landy v Commissioner of Taxation [2016] AATA 754.

Twelve or eighteen months not enough to stop tax residency

Generally the ATO requires a minimum two-year intended stay in the foreign location to break Australian tax residency. Three-years strengthens the position; trips home to Australia weaken the position.

Superannuation

Significant changes to superannuation tax and Superannuation Guarantee (SG) contribution reporting will soon take effect.

Legislated superannuation tax changes

The super changes announced in the 2015/16 Budget have been enacted, and apply from 1 July 2017. Executives and other employees may ask about the impact on them. Key points are as follows.

  • The concessional contributions cap will be cut to $25,000 for all ages, with the unused portion of the cap in 2018/19 and each later year able to be carried forward for 5-years by individuals with less than $500,000 of superannuation savings.
  • All individuals aged under 65, and those aged 65 to 75 who work at least 40 hours in 30 days, will be able to claim tax deductions for personal contributions, potentially reducing the call on employer salary sacrifice contribution facilities over the longer term.
  • The extra 15% Division 293 tax will apply to concessional contributions for individuals earning over $250,000 rather than $300,000. Affected employees who are new to this tax will need to understand the super release authority processes available to them for payment of this tax.
  • Fund earnings on assets that support pension accounts valued at over $1.6 million and transition to retirement pensions will become taxable. These pensions may need to be commuted before 1 July 2017 to preserve the tax free status of unrealised gains on these assets. Pensions that were at any time transition to retirement pensions may be caught by these changes.

Real time reporting of SG contributions

Mandatory Single Touch Payroll (STP) electronic reporting by employers with 20 or more employees from 1 July 2018 will involve real time disclosure to the ATO of “salary and wages”, “ordinary time earnings”, and the required SG contributions. Reporting will be immediately available to employees through the myGov website, and could lead to a corresponding real time focus on SG compliance.

Pay-As-You-Go Withholding (PAYG-W)

Nothing to report.