Australian tax obligations affecting employers are always changing. This update addresses changes to legislation and case law developments 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 5 months (August to December 2018).
1 Payroll tax
The court held a common health service business structure did not result in payroll tax, and the tribunal in Queensland held that sub-groups cannot be de-grouped.
1.1 Health industry services structure survives payroll tax challenge
A common structure for health professionals is to engage the clinic (or store) he or she works within to provide a consulting room and administrative support functions.
Managing patient billings is one of the support functions often provided. The clinic (or store) holds the billings it collects on trust for the professional, deducts its service fee, and distributes the balance to the professional. The court held the distribution did not constitute ‘payment’ of wages under a relevant contract for the provision of services to the clinic (or store) that could be subject to payroll tax because the money disbursed already belonged to the professional beneficially.
1.2 Sub-group de-grouping was not allowed in Queensland
Xede Pty Limited v Commissioner of State Revenue (Qld)  QCAT 362 (30 October 2018)
The payroll tax grouping rules aggregate the entities that each conduct part of a single business that has been split between them so that the tax free threshold is claimed only once between those entities. The group members are also jointly and severally liable for the payroll tax of the group. To stop any structure that should be grouped from escaping, the rules catch a deliberately very broad range of entities, including all commonly owned or controlled entities. The Commissioner is then able to exercise a de-grouping discretion to bring about a sensible limit to the group. That is the theory.
However, the de-grouping rules are more technical and restrictive than that: For a group member to be excluded from the group, a business of that group member needs to be operated substantially independently from, and without substantial connection with, the operation of the business of any other group member. The Tribunal said this means a sub-group of entities that between themselves operate inter-dependently and in a connected way cannot be de-grouped from a wider group. Only a single entity that operates standalone can be de-grouped.
Be aware that grouping can also arise from inter-use of employees. Temporary placement by a group of one of its employees into another group could cause grouping between them that cannot then be undone by the discretion.
2 Fringe benefits tax (FBT)
Nothing to report.
3 Income tax
The courts considered what is needed for a contract to be for a “result” and held that income from providing technical services from India were assessable in Australia.
3.1 Collaborative project work is not a contract for individual “result”
Douglass v Federal Commissioner of Taxation  AATA 3729 (3 October 2018)
Employment-related tax laws adopt a variety of simplified statutory methods that look at a limited array of indicia to determine whether a relationship is sufficiently “employee-like” to be treated as such. Passing the “results” test is the most direct way to prevent personal services income (PSI) earned by a contracting entity being attributed to the individual worker under Division 86.
However, the contract needs to make clear with a degree of specificity what measurable deliverables entitle the contracting entity to payment, and that the contracting entity must provide any tools and equipment necessary to undertake the work and is liable to remedy its defective work. Describing the contracting entity’s role or function in an overall collaborative project, as occurred in the Douglass case, would alone be generally insufficient. If discrete results cannot be specified at the outset of a project, then consider separate job sheets to specify them as they become known, with a separate agreed payment for each job completed.
3.2 Income from remotely-provided technical services from India to Australian clients is assessable
Technical consulting services fall within the unusually broad definition of ‘royalty’ in the Indian treaty. The consequence was that payments by Australian clients of an Indian company for those services were royalties income under the treaty and therefore deemed to be sourced in, and assessed in, Australia. This was an appeal from Tech Mahindra.
Treaties with other countries do not have the same broad royalty definition that created this issue. The more general issue to perhaps consider is where in the world remote service providers who are employees are located, and whether that creates a permanent establishment and tax reporting and withholding obligations in that country.
3.3 Redundancy tax free age limit to be raised
Mid-Year Economic and Fiscal Outlook 2018-19, Appendix A, page 121 (17 December 2018)
A genuine redundancy payment has a tax free component based on the number of completed years of service. However, the concession has an age limit of 65 years. Employees who have reached that age are unable to claim the concession.
The Government will raise that age limit to align with the Age Pension qualifying age, which is currently 65.5 years and gradually rising to 67 years by 1 July 2023.
3.4 Substantiated overtime meals are deductible
The Tribunal has confirmed that properly substantiated overtime meals consumed on a break from work are tax deductible, but not meals consumed after the employee has finished work for the day.
Where an assessable overtime meal allowance is paid under an industrial entitlement, the ATO does not require written evidence of a reasonable offsetting deduction claim.
3.5 Employee remuneration trusts ruling finalised
Employer contributions to a remuneration trust can only be deducted if the amount is expected to be fully disbursed to employees within a ‘relatively short’ period, which the ATO says it accepts as being within 5 years. This is less generous than the 15 years that is allowed for contributions to employee share scheme trusts under Division 83A. Our previous Riposte on the draft ruling set out other key points.
4 Superannuation and pensions
4.1 Retirement age benefits to be enhanced
Changes that are proposed from 1 July 2019 will:
- increase the fortnightly employment earnings that are not Age Pension income tested to $300 (up from $250), and extend the concession to earnings from self-employment; and
- expand who may participate in the Government ‘reverse mortgage’ pension loan scheme from part-rate Age Pensioners to people whose income and assets are too high to receive an Age pension, or who receive the full Age Pension. As part of the change, the maximum fortnightly loan amount will be increased to 150% of the full-rate Age Pension (up from the current 100%), less any Age Pension amount received for the fortnight.
5 Pay-As-You-Go withholding (PAYG-W)
Black economy legislation increases reporting compliance costs and risks for honest taxpayers.
5.1 Deduction denied where fail to meet withholding requirements
Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Act(29 November 2018)
Mistakes, even honest ones, in not withholding any amount from a wages payment, or withholding but failing to report it to the ATO, will from 1 July 2019 result in denial of the tax deduction for the wages payment. This is on top of other existing culpability and director penalties.
The same denial of a deduction will also apply for failing to withhold from a payment to a contractor that has not quoted an ABN, or withholding from such a payment but not reporting it.
However, a voluntary disclosure conceding the withholding or reporting error protects the deduction.
A risk area is perhaps ABN contractors (from whom withholding is not required) that are arguably rather employees (from whom withholding is required). The paying entity may not want to concede the argument. Requiring individual contractors to operate through a company, family trust or labour hire agency ought to definitively eliminate the PAYG issue for it.
In related news, Federal Commissioner of Taxation v Cassaniti  FCAFC 212(30 November 2018) has confirmed on appeal that an employee is still entitled to claim tax credits for amounts the employer withholds but does not remit to the ATO. By denying the deduction the ATO might now be better placed to still at least in effect collect 30%.
5.2 Transport, IT, security and cleaning industry sub-contract reporting
Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Act (29 November 2018), Law Companion Ruling LCR 2018/8 (31 October 2018)
Entities with an ABN that provide any of the following services will be required to annually report the amount of consideration they pay their sub-contractors to undertake the work for them. The first year to report will be 2019/2020. The list of services are:
- courier and road freight;
- security, investigation and surveillance; and
There is an exception to the reporting if less than 10% of the entity’s turnover is from reportable transactions.
Payments within a consolidated group are not caught, and services that are provided as an ancillary part of supplies that are not on the list do not count towards the 10%. The accompanying Law Companion Ruling provides an example where food takeaway delivery (i.e. by courier) is regarded as a separate recognised supply from the food, but a delivered purchase from an online-only store is only a single supply.
Similar quarterly reporting already applies for entities that predominantly provide building and construction services and sub-contract that work.