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 4 months (April to July 2017).
South Australia and Victoria announced new payroll tax discounts, and an industry-sponsored ombudsman was held to be an exempt charity.
Rates and thresholds for 2017/18
Current rates and thresholds are as follows:
Payroll tax rate
Payroll tax rate
New rate discounts:
- SA: A 2.5% discounted rate applies for employers with up to $1 million payroll. The lower rate is phased out between payroll of $1 million and $1.5 million.
- VIC: A 3.65% discounted rate applies to wages paid by regional Victorian employers for work in regional Victorian areas.
Tax-free threshold clawbacks:
- QLD and WA: The tax free threshold is not available for large employers in these states. The threshold is phased out between national payroll of $1.1 million and $5.5 million in QLD, and between $850,000 and $7.5 million in WA.
Jobs Action Plan (NSW): As a reminder, the Jobs Action Plan (NSW) offers payroll tax rebates of $2,000 after one year plus $4,000 after two years from the date an employer creates a new full-time position, with pro rata rebates for new part-time and casual positions. The requirements to access the scheme are:
- the new position must be registered with the Office of State Revenue within 90 days of its creation;
- the actual employer cannot have more than 50 full-time equivalent (FTE) existing positions in NSW on the creation date (employees of related group members do not count towards 50); and
- the actual employer’s FTE must he higher on the 1st and 2nd anniversaries than immediately before the new position was created.
If a new position is transferred between group members or due to a business acquisition, then the original employer that created the position registers it and the actual employer on the 1st and 2nd anniversary claims the rebates.
Charitable exemption for industry ombudsman
Charitable exemption was extended to an industry-sponsored non-profit body established to settle disputes that small customers had because the body’s purpose was considered to be of public benefit to the community, and the body was not a Government regulator that could enforce its own decisions. Rather, a separate statutory authority enforced the decisions made by the body.
Fringe benefits tax (FBT)
Rates and thresholds for 2017/18
The FBT rate reduced to 47% from 1 April 2017 to maintain alignment with reduction in the top personal income tax rate to 47% from 1 July 2017. Consequential changes were made to the type-1 and type-2 gross up rates to 2.0802 and 1.8868 respectively.
Other key updated FBT rates and thresholds for 2017/18 are as follows:
- car parking benefit threshold: $8.66
- (car parking near the employee’s primary work location can give rise to a taxable benefit if the lowest public cost for all-day parking of at least 6 daylight hours duration at a commercial parking station within 1 kilometre of where the car is parked is greater than $8.66);
- reasonable food and drink allowance while living-away-from-home: $247, plus $124 for each accompanying adult and $62 for each accompanying child (weekly, for Australia); and
- benchmark interest rate: 5.25%.
The ATO issued a warning to healthcare practitioners about the tax on lump sum inducements paid by clinics and released detailed draft rulings about employee travel expense claims and employee remuneration trust arrangements.
The travel expense draft ruling was in response to several tribunal decisions denying employee travel expense claims made without due care and a recommendation by a House of Representatives Economics Standing Committee report that the ATO review its compliance activity in the area.
Rates and threshold changes for 2017/18
The top marginal income tax rate which is applicable to taxable income over $180,000 reduced, as mentioned, to 47%. The reduction was due to expiry of the temporary budget repair levy. The 47% rate includes 2% Medicare Levy.
Key updated thresholds and limits for 2017/18 are as follows:
- the employment termination payments low rate cap, up to which the concessional ETP tax rates generally apply, increased to $200,000 (up from $195,000); and
- the genuine redundancy payment tax free amount increased to $10,155, plus $5,078 per completed year of service (indexed each 1 July).
Inducements paid by clinics to healthcare workers
The ATO has warned of its concern that lump sums paid by clinics to doctors and other health practitioners to either commence working from the clinic or to continue doing so are likely to be taxable as ordinary income rather than taxed concessionally as capital gains.
Sportspersons’ image rights safe harbour
The ATO has issued draft guidance to say it will accept 10% of total fees payable to a professional player under a service contract as instead taxable to an associated tax resident entity that holds a non-exclusive licence to use the player’s image and fame. The balance of the fees will generally be salary or wages for the player. More well renowned professional sportspersons may wish to seek commercial valuations to support a higher percentage that is taxable to their associated entity.
Payments for use of copyright and trademarks (for example over the player’s signature) are not covered by the guidance, but do not involve provision of services by the player so do not need to be apportioned.
Work-related travel expense claims targeted by ATO
The ATO issued a draft ruling to replace several older rulings on employee travel expense claims. Key points are:
- travel costs to the employee’s primary work location are tax deductible if bulky equipment needs to be carried, or if the travel time is paid time during which the employer exercises direction and control over the employee;
- travel costs to a secondary work location for the same employer (called a ‘co-existing’ work location in the ruling) are tax deductible;
- overnight accommodation and meal costs while working at a secondary work location for the same employer are tax deductible if the distance from the employee’s permanent home is more than 100km;
- an assignment to a new work location for 3 months where the employee will work at that location most work days during that time is enough to make the assignment location the primary work location. That also means the living-away-from-home FBT rules would need to be considered. Previously the ATO only provided a 21 day safe harbour up to which travel would generally always be considered a business trip rather than living-away-from-home;
- travel between work locations on a single day for the same employer is tax deductible, but work emails and phone calls done from home or in-transit do not make travel from home to the primary work location tax deductible.
Some additional points to note are:
- individual tax deductibility principles are also important for employers in applying the ‘otherwise deductible’ rule to reduce or eliminate FBT on benefits;
- car parking fringe benefits can only ever arise at the primary work location; and
- specific issues relevant for transport industry employees who return home at night are not addressed in the draft ruling.
Work expense claims denied by tribunal
Several recent tribunal decisions denied employee work-expense claims:
- onsite secure lockers meant drive-to-work claims were denied for adock worker who chose to still transport bulky work clothes home each night: Re Rafferty and Federal Commissioner of Taxation  AATA 636;
- unsubstantiated claim for meals while travelling were denied for two long distancetruck drivers who could not produce receipts or other documentation to substantiate the expenses. The claims exceeded the ATO reasonable limit, and therefore the whole claims were denied, not just the portion in excess of the reasonable limit: Re Banks and Federal Commissioner of Taxation  AATA 468 and Re Davy and Federal Commissioner of Taxation  AATA 376;
- unsubstantiated claims for tools, mobile phone and overtime meals were denied for apipe fitter: Re Hamilton and Federal Commissioner of Taxation  AATA 734;
- accommodation, meal and travel costs were denied because the work was not itinerant. The work was not itinerant becausethe farm worker in the case moved from place to place to take up separate and new employment on different farms, rather than as part of itinerant work requirements of a single employer: Re Walker and Federal Commissioner of Taxation  AATA 324;and
- work-travel driving claims were denied due to inadequate records about work trips taken by an employee in his Maserati: Amin and Commissioner of Taxation  AATA 1042.
However, in Amin course fees to study law at university and the cost of flights and accommodation to attend a conference in Las Vegas, both of which the employer had agreed would assist him with his work, were tax deductible. Two extra nights of accommodation en route to Las Vegas were personal and not tax deductible, but that did not necessitate apportionment of the flight cost as partly personal.
Employee remuneration trusts (ERTs)
The ATO released a draft ruling to update its preliminary and considered view about contributions to trusts that are used to provide remuneration to employees. Key points are:
- deductions for contributions are allowed if the employer permanently disperses the amount to the trustee to remunerate employees within 5 years. Expected retention by the trustee for greater than 5 years may indicate that the contribution is a non-deductible capital outlay;
- pre-payment rules may spread deductions for voluntary contributions over the applicable ‘eligible service period’. Those rules will not spread contributions that are made under a contract of service;
- issuing shares to the trustee is not tax deductible;
- FBT applies to a contribution if the identity and share of the benefit a particular employee will take is known, unless the amount will be paid from the trust to the employee as cash remuneration within 5 years;
- PAYG tax withholding applies to payments of cash remuneration from the trust;
- franking credits on dividends distributed by the trust may not be able to be claimed by the employee unless the employee has a sufficient ‘at risk’ vested and indefeasible interest in the trust to which FBT has already applied;
- benefits that are not dependent upon ongoing employment are not remuneration and therefore not subject to PAYG or FBT. Examples include a discretionary benefit provided by the trustee without regard to employment and a benefit provided as a result of the individual exercising an existing right held against the trustee that has already been subjected to FBT;
- if shareholders or their associates are employees that can benefit under the trust, then a deemed dividend from a private company employer may arise under Division 7A and the contribution may not be tax deductible; and
- Part IVA anti-avoidance rules may apply to some contributions, for example where the contributions are loaned back to the employer.
The draft ruling does not address Division 83A ‘employee share trusts’ where employees have rights to the shares themselves rather than rights to cash bonuses of an equivalent value. Nor does the draft ruling address the assessability of contributions to the trust.
The Government announced that salary sacrifice contributions will not be able to be used by employers to discharge SG obligations and released draft legislation for the First Home Super Saver Scheme to allow withdrawal of voluntary superannuation contributions to help buy a first home.
An increase in the tax on transition to retirement pensions means they may no longer be tax effective for some pensioners, and employees with income between $250,000 and $300,000 will have to pay Division 293 tax on their superannuation contributions for the first time.
Rates and thresholds for 2017/18
The Superannuation Guarantee (SG) rate remains 9.5%.
Key threshold and cap changes for 2017/18 are as follows:
- maximum contribution base: $52,760 per quarter (indexed);
- concessional contributions cap: $25,000 irrespective of age (down from $30,000, or $35,000 if aged 50 or over);
- Division 293 tax earnings threshold: $250,000(down from $300,000 last year). Individuals earning over the threshold pay an extra 15% tax on their contributions that are within the concessional contributions cap; and
- non-concessional contributions cap: $100,000 (down from $180,00 last year). The change also impacts the 3-year aggregated cap that can be applied by individuals aged under 65.
SG obligations will not be able to be met using salary sacrifice contributions
Currently mandated 9.5% employer SG contribution obligations can be met through salary sacrifice contributions the employee makes. The Government announced it will legislate to change this so salary sacrifice contributions neither count towards meeting an employer’s mandated 9.5% minimum contributions, nor reduce the wage base on which the 9.5% minimum is calculated. Few employers sought to do this, so it will mostly only have an impact in insolvency scenarios where SG has not been paid.
Salary sacrifice for other benefits, like for a car, will still reduce the wage base on which the 9.5% minimum contributions are calculated.
The announcement comes following the public release of an ATO-chaired inter-agency report recommending the change. The Government is still considering the other recommendations in the report made about improving SG compliance. Of note the report had said Single Touch Payroll reporting should be extended to small employers with less than 20 employees to allow the ATO to undertake real time SG compliance action, and that the ATO should be given flexibility to reduce or waive SG penalties in line with other taxes to encourage voluntary disclosure. ATO-initiated SG compliance action has more than doubled recently, and there will be further increased ATO focus. Construction and accommodation and food industries were identified as having lowest compliance.
Our Riposte article has further details.
First Home Super Saver Scheme (FHSSS)
The Government released exposure draft legislation to allow individuals who make, or whose employer makes, ‘voluntary’ contributions to withdraw those contributions to help buy a first principal place of residence. Tax on the withdrawal is capped at 17%.
A maximum of $30,000 of voluntary contributions are eligible for withdrawal under the scheme; and a maximum of $15,000 of voluntary contributions from any single financial year. Only voluntary contributions made from 1 July 2017 can be withdrawn under the scheme, and withdrawals can be made from 1 July 2018.
Mandated employer contributions to meet requirements of SG legislation, industrial agreements or Awards are not eligible.
Employer salary sacrifice contributions are voluntary, so are eligible. However, due to the employee’s control over salary sacrifice contributions, they are ‘reportable superannuation contributions’. That means they still count against the employee for income testing HELP debt repayment, Family Tax Benefit Part A and a number of other Government benefits and charges.
Some employers as a matter of course contribute over and above their SG, industrial agreement or Award obligations. Those extra contributions are also voluntary and therefore eligible, but since the employee does not control the amount contributed, the amount is not a ‘reportable superannuation contribution’. It is not clear yet how the ATO will practically identify this class of contribution.
Our Riposte article has further details.
Penalty tax on free or discounted services provided to a superannuation fund
The Government announced that from 1 July 2018 any services a ‘related party’ provides to a superannuation fund for free or for an un-commercially low fee will give rise to non-arm’s length income that is taxable to the fund at 47%. Under Tax Ruling TR 2010/1 there are currently no tax consequences for the fund.
The announcement appears aimed at members of self-managed superannuation funds seeking to circumvent contribution caps by providing free or discounted services that enhance the fund’s value. However, a standard employer-sponsor will also be a ‘related party’. Therefore, on the face of the announcement, free or un-commercially discounted administrative support services that it for example provides to the fund could potentially also be caught.
Earnings tax on transition to retirement pensions
Since 1 July 2017, fund earnings on assets supporting transition to retirement pensions have been taxable at 15% until the member reaches a condition of release with a nil cashing restriction, such as age 65. Employees younger age 65 may wish to reconsider whether the strategy of drawing a transition to retirement pension remains viable for them.
Employer liable for SG on wages paid by third party
The ATO has ruled that payments to ex-employees from the Government’s Fair Entitlements Guarantee Scheme were wages paid on behalf of the employer, and therefore the liquidator appointed to the employer company was liable for SG on those wages. The ruling replaces older withdrawn rulings that were of the same effect.
The principle of employer liability for SG could equally apply to other third party payments of employee wages, for example franchisee SG liability where the franchisor pays wages to employees of the franchisee.
Pay-As-You-Go Withholding (PAYG-W)
Issues involving remittance of PAYG to the ATO have been at the fore.
ATO guidance for workers whose wages were processed by Plutus Payroll
Alleged failure by Plutus Payroll and associated entities to send $165m of tax withheld from wages they processed to the ATO has been widely reported in the media. ATO initial guidance is that workers will still be entitled to claim rebates for the tax withheld, and should therefore still include the gross wages in their assessable income.
Labour hire company sham contracts with three straw companies
A labour hire company employed casual employees in the agricultural industry and provided them to farmers for seasonal work. The ATO pursued the company for failure to deduct PAYG tax withholding from wages. The company unsuccessfully argued that it successively contracted with three other companies for one year each to engage the workers and pay their wages and that those other companies were instead the real employers who were responsible for deducting the PAYG. The three other companies had no worth, were each run by straw men, and the contracts with them were disregarded as shams.