PAYG WITHHOLDING

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PAYG WITHHOLDING REPORTABLE
BENEFITS

• June 2004

Sponsored by the Department of Treasury and
Finance Tax Compliance Unit
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Todays Presenter Steve Batrouney Principal
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PAYG

• PAYG overview
• PAYG what payments are caught?
• Remittance of withholdings
• Latest ATO rulings on PAYG
• Other ATO documentation and fact sheets
• Payment summaries and reporting obligations

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Reportable Benefits

• Overview
• How is the value of the reportable benefits
  calculated?
• Taxable value of benefits
• Impact on employees
• Planning opportunities
• Questions

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PAYG OVERVIEW
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PAYG Overview What is the PAYG System?

• PAYG is a single integrated system for reporting
  and paying
• Tax on business and investment income and
• Withholding amounts from payments and remittance
  to the ATO
• The purpose of the PAYG system is to standardise
  and simplify the withholding tax and instalment
  laws

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PAYG Overview What is the PAYG System? (cont)

• The PAYG system replaced the 11 previously
  existing systems including the Pay As You Earn
  system (PAYE), the prescribed payments system
  (PPS), the Reportable Payments System (RPS),
  other withholding systems and the provisional tax
  and company tax instalment system
• The PAYG system incorporates two separate systems
  under the one regime the PAYG instalment system
  and the PAYG withholding system

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PAYG Withholding

• The process by which the payer withholds amounts
  from payments to others and remits these to the
  ATO
• Therefore it is important to understand
• When to withhold
• How much to withhold
• When to remit the withheld amounts to the ATO
• How to report withheld amounts to the ATO and
  payees

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QUESTIONS

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PAYG WITHHOLDING WHAT PAYMENTS ARE CAUGHT?
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PAYG Withholding What Payments are Caught?

• Detailed in Schedule 1 of the Tax Administration
  Act 1953 (Division 12)
• 24 withholding payments, including
• 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
  (eg. a member of a committee)
• A return to work payment to an individual

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PAYG Withholding What Payments are Caught?
(cont)

• 24 withholding payments, including
• A payment of pension or annuity
• An eligible termination payment
• A payment for unused leave on an individuals
  retirement or termination of employment
• A Commonwealth education or training payment
• A compensation, sickness or accident payment
• Payments to volunteers are not a withholding
  event as personnel are not employees

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Salary Sacrifice Arrangements

• Benefits provided under an effective Salary
  Sacrifice Arrangement's (SSA) are not salary or
  wages and not subject to PAYG (TR 2001/10)
• Effective SSA
• Employee agrees to receive part of total
  remuneration as benefits
• Agreement made before salary/wages are earned
• Ineffective SSA
• Mere redirection of entitlement to receive
  salary/wages already earned to be paid in
  non-monetary form (eg. super)

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Employees vs Contractors

• The distinction between an employee and an
  independent contractor is often difficult
• An employee
• Relationship with employer is often referred to
  as a contract of service
• Contracts to provide labour
• Works in the service of the employer and works on
  account of, or in the business of, the employer
• Employee doesnt bear the risk

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Employees vs Contractors (cont)

• In contrast, an independent contractor
• Relationship is often referred to as a contract
  for services
• Contracts to achieve a result
• Works in his or her own business and works on his
  or her own account
• Will usually hold an ABN
• The contractor bears the risk
• See TR 2000/14
• Employee/Contractor Checklist or DTF Tax
  Knowledge Centre Website

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Employees vs Contractors (cont)

• An entity must withhold an amount it pays to an
  individual as an employee
• An amount paid by an entity to a contractor does
  not require any withholding, except under
• A voluntary agreement to withhold
• No ABN withholding
• PAYG withholding may also be required if the
  contractor falls into the Personal Services
  Income provisions (by the Personal Services
  entity)

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Employees vs Contractors (cont)

• If a contractor does not quote an ABN withhold
  48.5 of the payment
• As contractor, relationships do not fall under
  another withholding requirement, an entity will
  have to withhold amounts from payments if a
  voluntary agreement is in place (assuming the
  contractor holds an ABN)

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Employees vs Contractors (cont)

• The Employees Independent Contractors
  Checklist can assist employers to determine
  whether a worker is an employee or a contractor
  for the purpose of PAYG Withholding
• The criteria in the checklist are intended to
  provide an indication as to whether a worker is
  an employee or contractor rather than provide an
  absolute position.

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No ABN Withholding

• A payer must withhold from a payment for a supply
  of goods or services to the recipient where an
  invoice or some other document relating to the
  supply does not quote the recipients ABN
• The payer must withhold at the top marginal rate
  Medicare levy (currently 48.5)
• Withholding does not apply to
• Private or domestic services
• Payments less than 50
• The whole payment is exempt income of the
  recipient
• Payment not made in the furtherance of an
  enterprise carried on in Australia by the payer

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QUESTIONS

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REMITTANCE OF WITHHOLDINGS
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Remittance of Withholdings

• The period within which amounts withheld by
  payers will be required to be remitted to the ATO
  will depend on the status of the withholder.
  That is
• Large Withholders
• Medium Withholders
• Small Withholders
• All Withholders must be registered with the ATO
  and
• Branches may be registered separately from an
  entity

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Large Withholders

• Total amount of withholding remittances for a
  year exceed 1 million
• The Commissioner varies the status of the
  withholder to large withholder

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Large Withholders - Remittance
Large withholders must remit electronically
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Medium Withholders

• Total amount of withholding remittances for a
  year are between 25,001 and 1 million
• The Commissioner varies the status of the
  withholder to medium withholder
• Remittances are to be made electronically by the
  21st day after the end of the month in which the
  amount was withheld

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Small Withholders

• Total amount of withholding remittances for a
  year are up to 25,000
• The withholder is neither a large nor medium
  withholder
• Remittances are to be made by the 21st day after
  the end of the quarter in which the amount was
  withheld

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QUESTIONS

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PAYGLATEST ATO RULINGS
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Latest ATO Rulings

• TR 2003/15 PAYG and payments made by
  trustees under the Bankruptcy Act to
  former employees
• TR 2003/13 ETP payments made in consequence
  of termination of any employment

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Latest ATO Rulings (cont)

• TR 2003/15 - PAYG and payments made by trustees
  under the Bankruptcy Act to former employees
• Trustee has PAYG withholding obligations on
  payments to an individual in respect of a
  provable debt for salary,wages, commissions,
  bonuses and allowances
• The employment relationship does not have to
  exist at the time of the payment.
• The essential element is the character of the
  payment and not the identity or capacity of the
  entity

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Latest ATO Rulings (cont)

• In DCT v Applied Design Development Pty Ltd, it
  was found that the consideration for the payment
  was the services rendered by the former employee
  to the company before its liquidation.
• The nature of the payment remained unchanged by
  the liquidation process.
• It was found that the payment was made to the
  taxpayer in his capacity as an employee
  notwithstanding that he was a creditor of the
  respondent.

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Latest ATO Rulings (cont)

• The trustee is required to withhold an amount
  from a payment it makes to a former employee of
  the debtor in respect of a provable debt for an
  Eligible Termination Payment.
• Where a trustee makes other payments in respect
  of provable debts for unpaid entitlements of
  former employees, these payments also retain
  their underlying character.

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Latest ATO Rulings (cont)

• TR 2003/13 - ETP payments made in consequence
  of termination of any employment.
• This ruling deals with the phrase in consequence
  of.
• The ATO considers that a payment is in
  consequence of the termination of the employment
  of the taxpayer if the payment
• follows as an effect or result of the
  termination.
• but for the termination of employment , the
  payment would not have been made to the taxpayer.

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Latest ATO Rulings (cont)

• The Reseck, McIntosh, and Le Grand cases held
  that termination need not be the dominant cause
  of the payment
• The ATO adopts a narrow interpretation in these
  cases and requires a causal connection in the
  sense that the payment follows as an effect or
  result of the termination of the employment.
• That is, but for the termination of employment
  the payment would not have been made to the
  taxpayer.

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Latest ATO Rulings (cont)

• A golden handshake is a payment that follows as
  an effect or result of termination.
• From the decision in Le Grand, a payment to
  settle a claim brought by a employee for wrongful
  dismissal has sufficient causal connection with
  the termination of the taxpayers employment.

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QUESTIONS

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Reportable Fringe Benefits
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Overview

• What is a reportable fringe benefit?
• Fringe benefits reported on PAYG Payment
  Summaries (Group Certificates)
• Why are Reportable Fringe Benefits required?
• Growth in non-cash benefits
• Means of capturing total remuneration provided to
  employees
• Based upon the entitys FBT Return

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Reportable Fringe Benefits

• What is the Reportable Amount?
• Grossed up Taxable Value (including GST)
• Total Taxable Value must be gt1,000 for each
  employee
• Gross up factor is always 1.9417 regardless of
  whether Type 1 or Type 2 benefit

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Reportable Fringe Benefits

• What are the Reportable Benefits used for?
• Liability to the Medicare Levy Surcharge
• Child support payments under the Family Law Act
• Recovery of HECS debt
• Superannuation Eligible Termination Payment
  Surcharge
• Income tests for Youth Allowance, Family Tax
  Benefit Child Care Benefit (non-grossed up
  taxable value)
• Personal and spouses super contribution rebate

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Payment Summary Disclosure

• Minimum amount disclosed 1,942
• Includes fringe benefits provided except
  excluded fringe benefits
• Car parking fringe benefits (unless parking
  provided via expense payments)
• Meal entertainment
• Entertainment facility leasing
• Remote area housing / freight / travel
• Emergency or other essential health care provided
  where a Medicare benefit is not available
• Car benefits arising from travel between home and
  work for personnel using emergency vehicles
• Certain benefits provided to Australian Defence
  Force personnel
• Grossed-up taxable value
• Taxable value x 1.9417 (i.e. 1/1-0.485)

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Payment Summary Disclosure

• Payment Summaries disclose Reportable Fringe
  Benefits for the year ended 30 June
• Termination of employment between the end of the
  fringe benefit tax year (31 March) and the end of
  the income tax year (30 June), employer is
  required to issue a further Payment Summary to
  the employee for subsequent tax year which will
  contain only Reportable Fringe Benefits
• Awareness when Machinery of Government changes

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Taxable Value of Benefits

• Valuation methods prescribed by FBT legislation
• Examples of salary sacrificed benefits
• No taxable value
• Superannuation
• Laptop computers / Electronic Diary / PDAs
• Mobile phones primarily used for work purposes
• Airline lounge / corporate credit card
  memberships
• Professional subscriptions (otherwise deductible)
• Minor benefits

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Taxable Value of Benefits (contd)

• Example of salary sacrificed benefits
• Gross-up taxable value
• HECS (amount of payment)
• Home telephone rental (private portion)
• Reimbursement of study assistance (not otherwise
  deductible)
• i.e. amounts up to 250
• excess is deductible as self education

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Employee Impact

• Medicare levy surcharge
• If no private health insurance
• Taxable income and RFB exceeds 50,000 (single)
  or 100,000 (family) additional 1,500 per
  child
• 1 levy

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Employee Impact (contd)

• Superannuation Surcharge
• Additional amount of tax payable on super
  contributions
• Adjusted Taxable Income (ATI) includes RFB and
  surchargeable contributions
• Surcharge rate will be between 0.00001 and the
  capped rate (14.5 for 2003/04) using the
  following formula
• Rate (ATI Surcharge Threshold) /
  Denominator

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Employee Impact (contd)

• Superannuation Surcharge
• Maximum Rate of Surcharge capped

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Employee Impact (contd)

• Eligible Termination Payments Surcharge
• Sliding surcharge rate up to 15 depending on
  Adjusted Taxable Income (ATI)

• Surcharge amount is your employer ETP that is
  retained in cash (ie. not rolled over to a super
  fund)
• If total gross employer ETP received in cash is
  below the upper surcharge threshold, only a
  portion of the employer ETP is included in your
  ATI
• based on proportion of number of service days
  after 20/8/1996 (up to 365 days) divided by total
  number of eligible service days

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Employee Impact (contd)

• Spouse Superannuation contribution rebate
• The assessable income and RFB of spouse is less
  than 13,800 (or 10,801 to claim full rebate)
• 3,000 limit on contributions for which rebate
  can be obtained
• Income tested Government benefits
• Non-grossed up value of RFB assessed
• Family Tax Benefit
• Part A designed to help in the cost of raising
  children
• Part B extra assistance for families with one
  main income earner

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Employee Impact (contd)

• Other income tested Government benefits
• Child Care Benefit
• Parental Income Test for Youth Allowance
• Child Support Obligations

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Employee Impact (contd)

• Higher Education Contribution Scheme
• RFB included in your HECS repayment income
• HECS Repayment Thresholds

• HRI Taxable income plus any net rental losses
  and total reportable fringe benefits amounts

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Planning Opportunities

• Preliminary steps
• Review your benefits and their taxable value
• Estimate the grossed-up taxable value for you
• Determine whether you are adversely affected
• What if employees are losing money?
• Obtain private health insurance
• 1 of 50,000 500 tax payable but no health
  insurance benefits
• Make employee contributions from after tax salary
• Reduce taxable value of benefits

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Planning Opportunities (contd)

• What if employees are losing money? (contd)
• Change the mix of benefits packaged
• Excluded benefits
• Exempt benefits
• Minor benefits
• Concessionally taxed benefits

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Example

• Facts

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Example (contd)

• Grossed-up Taxable Value of Benefits Provided

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Example (contd)

• Summary
• Contract Salary 90,000
• Superannuation (11) 9,900
• Reportable Fringe Benefits (RFB) 15,048
• Salary RFB (SR) 105,048
• Salary RFB Superannuation
• (SRS) 114,948

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Example (contd)

• Implications
• Medicare Levy Surcharge 1,050
• 1 x SR if SR gt 50,000 no private health
  insurance
• Superannuation Surcharge 1,480
• If SRS gt 94,691 lt 114,981
• (SRS -94,691)/1,355) x super contribution
• If SRS gt 114,981, capped rate of 14.5

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Questions
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