Employment taxes update - December 2017

14 December 2017

Australian tax obligations affecting employers are always changing. This update addresses changes to legislation, case law developments and ATO rulings affecting employers – including payroll tax, fringe benefits tax, income tax, superannuation and pay-as-you-go withholding – from the last 4 months (August to December 2017).

Payroll tax

Fringe benefits tax (FBT)

Income tax

Superannuation

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

Payroll tax

Employment agency rule extended

JP Property Services Pty Limited v Commissioner of State Revenue [2017] NSWSC 1391

The court said a contractor who provides services that are integral functions in a client’s business is liable for payroll tax as an ‘employment agent’, but not if the services are incidental functions. Drawing that distinction requires a fact sensitive analysis of the scope of the client’s business. The service provider in the case performed after-hours floor cleaning in a supermarket, which was not considered integral. By contrast, the judge said regular cleaning of business equipment would have been integral.

The decision followed on from Knight Watch v Commissioner of State Revenue [2017] NSWCATAD 223 which held that a contractor that provided workers subject to the general control and direction of the client was also liable for payroll tax as an employment agent. The workers in the case were contract security guards under supervision of a supermarket manager.

The cases are significant principally because the ‘employment agency’ rules have fewer exemptions than the ‘relevant contract’ rules that might previously have been thought to apply. Contractors in other industries might also be concerned. Our Riposte article discusses the issue further.

Trust beneficiary disclaimer failed to stop grouping

Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184

The NSW appeal court reversed a lower court decision and held that a disclaimer by a potential beneficiary of its interest in a family discretionary trust could not retrospectively prevent it being a deemed ‘controller’ of the trust. Control caused each potential beneficiary of the discretionary trust to be grouped together in the periods prior to the disclaimer. The result was that one son’s business was liable for the payroll tax of the other son’s insolvent business. The case has been appealed to the High Court, so this may not be the last word.

Player image payments subject to payroll tax

Brisbane Bears – Fitzroy Football Club v Commissioner of State Revenue [2017] QCA 223

Players and coaches undertaking additional promotional and marketing appearances for a football club were paid a single fee for (i) those services and (ii) consenting to use of their images in connection with those services. The fee was apportioned on a market value basis between the two aspects. The first portion was clearly for services and therefore taxable ‘wages’. The QLD appeal court affirmed a lower court decision that the image payments were also received in the course of providing the services, so were also taxable ‘wages’. The position would be different for a fee for image use independent of services.

For income tax purposes, draft Practical Compliance Guide PCG 2017/D11proposes a 10% safe harbour apportionment of sportspersons’ fees to image rights without a formal valuation, enabling that portion to be alienated to a related Australian entity. However, the guidance may now need to be reviewed given the QLD case treated the whole fee as taxable ‘wages’.

Chamber of commerce fails to gain charitable exemption

South Australian Employer’s Chamber of Commerce & Industry v Commissioner of State Taxation [2017] SASC 127

Charitable exemption for advancing trade and commerce requires a broader primary purpose than promoting the interests of businesses only. Consumers and employees are also stakeholders in trade and commerce and their perspectives should also be considered. Without those perspectives being considered, services and lobbying that the SA Chamber provided for businesses were held to be an end in themselves, rather than part of the broader a broader charitable trade and commerce purpose. Consequently, the SA Chamber was denied the charitable exemption.

WA tiered-payroll tax rate details

 Pay-roll Tax Amendment (Debt and Deficit Remediation) Act 2017

 WA has now enacted its tiered payroll tax rates for larger employers. The higher tiered rates apply from 1 July 2018 for 5 years. Details are that:

  • the higher 6% rate on WA wages over $100 million and 6.5% rate on WA wages over $1.5 billion apply only on the portion of an employer’s WA wages over those thresholds, rather than applying to every dollar of WA wages if the employer’s payroll exceeds the relevant threshold; and
  •  for WA employers that also have wages in other states, the thresholds are pro-rata in line with the portion of national wages paid in WA. That means large nationwide businesses are significantly affected, not just large WA iron ore miners. 

Payroll tax on fringe benefits calculated using new lower FBT gross up rate in NSW

Revenue Ruling PTA 003 version 3 (NSW)

The type-2 grossed-up value of fringe benefits are included in the wage base on which payroll tax is owed. For simplicity, employers can elect to use 1/12 of the prior year aggregate fringe benefits for the calculation of each of the first 11 monthly payroll tax instalments, with a true up in June.

The FBT rate reduced from 49% to 47% on 1 April 2017 resulting in the type-2 gross up rate reducing from 1.9608 to 1.8868. Revenue NSW is somewhat generously allowing employers who made the election to use the lower 1.8868 gross-up rate for the whole of the payroll tax year ended 30 June 2017 and for 2017/18 payroll tax instalments.

Fringe benefits tax (FBT)

Is Uber a taxi?

Tax Discussion Paper TDP 2017/2

The ATO proposes to treat Uber and other ride-sourcing vehicles hired by the public as ‘taxis’ which can qualify for the s.58Z exemption for taxi travel to or from work. Although not the final ATO position yet, it follows the recent GST decision that held an Uber vehicle was a taxi.

Simplified FBT exemption for private use of a utes, panel vans, taxis etc

 Draft Practical Compliance Guide PCG 2017/D14

 In order to reduce compliance costs, the ATO is proposing to accept that private use of a ute, panel van, taxi, truck or bus provided predominantly for work but which an employee takes home is only minor and therefore exempt if:

  • wholly private travel in the year is no more than 750km based on the total distance travelled calculated from the opening and closing odometer readings less the ordinary home-to-work travel distance (with 2km leeway added each way for diversions, for example for personal shopping) less the employee’s other claimed business use; and
  • the employee confirms that no single wholly private journey exceeded 200km return.                             

Additional conditions are that:

  • the vehicle is not salary packaged and does not have any non-business accessories; and
  • the cost of the vehicle did not exceed the luxury car threshold.

 An example in the draft tends to suggest, but without being clear about it, that carrying a passenger during home-to-work trips (for example to drop a child at school along the way) will in effect count towards the 750km wholly private travel limit to the extent that the length of the trips are extended by more than 2km. Hopefully the position will be spelled out clearly and explicitly in the finalised guide.

Income Tax

Truck drivers’ reasonable meal allowance is per meal

Taxation Determination TD 2017/19

The annually indexed ATO reasonable meal allowance determination has this year removed the previous $97.40 daily rate for truck drivers. Now there are only per meal rates of $24.25 for breakfast, $27.65 for lunch and $47.70 for dinner actually eaten away from home while working.

Deduction claims are limited to the employer allowance unless substantiated

Watts and Federal Commissioner of Taxation [2017] AATA 2030

Claims for deductions for the difference between a (lower) employer provided allowance for work-related travel and a (higher) ATO-published reasonable rate must be substantiated. Penalties for recklessness were imposed for failing to substantiate the difference claimed. In contrast, where only the amount of the employer allowance is claimed, substantiation is not required where it is no more than the ATO-published reasonable rate.

Source of employment termination payments (ETPs) to foreign nationals changed

ATO Interpretative Decision ATO ID 2010/109 and ATO ID 2010/110 withdrawn

Historically foreign nationals working in Australia were not taxed on ETPs if they were non-residents or temporary residents, and the decision to terminate the employment and the termination payment were both offshore. That was because the termination payment was not considered remuneration for service, but rather compensation for termination of the contract sourced offshore in the place where the termination decision and payment were made.

However, OECD Treaty commentary changed in 2014 to treat most ETPs as remuneration sourced where the work was done. That change has now been recognised by the ATO through withdrawal of its old interpretative decisions on the issue. The result is that non-residents from Treaty countries who are working in Australia are now more likely taxable on their ETPs.

UN project manager not allowed tax immunity

Commissioner of Taxation v Jayasinghe [2017] HCA 26

Officers of international organisations such as the UN are not taxed on their salary. An Australian employee of the UN was engaged as an ‘expert’ project manager on a road project in Sudan, rather than as an ‘officer’, and was therefore still taxed on his UN salary.

Lack of evidence of foreign taxes paid

Shord v Commissioner of Taxation [2017] FCAFC 167

An Australian employee who worked on overseas oil rigs asserted he paid foreign tax on his wages and produced two supporting emails, but the emails did not demonstrate how much foreign tax was paid. The employee therefore failed the onus of proof to claim any foreign income tax offset. The employee did not want to ask the employer or foreign tax authority to confirm the amount of foreign tax paid, and the Commissioner was not obliged to ask.

Superannuation

Salary sacrifice contributions unable to be used to meet SG obligations

Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 2) Bill 2017

A Bill is before Parliament to enact the Government’s announcement that salary sacrifice contributions will not be able to be used to meet the mandated 9.5% Superannuation Guarantee contributions, nor reduce the wage base on which SG is owed. The change will take effect from 1 July 2018 and will mostly be relevant for employees as creditors in employer insolvency scenarios.

Sacrificing for other benefits, such as car, will still reduce the wage base on which SG is owed.

Choice of fund to be extended

The Bill also proposes to extend choice of fund rules to allow employees engaged under a new workplace determination or enterprise agreement made on or after 1 July 2018 to choose the superannuation fund they want their employer contributions made into.

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

Payroll processing provider fined for underpaying client’s employees’ wages

Fair Work Ombudsman v Blue Impression Pty Ltd & Ezy Accounting 123 Pty Ltd [2017] FCCA 2797

Payroll processing providers need to do more than just withhold tax correctly from payments. They need to exercise a degree of care to ensure that their clients are not underpaying workers’ minimum entitlements, for example by comparing records of hours worked with minimum pay rates for those hours.

A payroll processing provider was fined over $50,000 as an accessory for being deliberating unaware that the payments it processed for a restaurant client resulted in almost $10,000 of underpayments to two employees of the client.

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Authors

Graham Warren

Special Counsel

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Adrian O'Shannessy

Consultant

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Cameron Blackwood

Director

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