Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 - Worker entitlement funds
Outline of chapter
2.1 Schedule 2 to this bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to extend by one year the transitional arrangements for the fringe benefits tax (FBT) exemption for certain contributions to worker entitlement funds.
Context of amendments
2.2 Worker entitlement funds are funds which provide for employee entitlements such as leave payments or payments when an employee ceases employment. From 1 April 2003, certain contributions to approved worker entitlement funds are exempt from FBT. The exemption was designed to ensure that these contributions are not taxed twice, once as a fringe benefit when paid into the fund and again as income when paid out of the fund.
2.3 A fund is an approved worker entitlement find if it is prescribed by regulation and a declaration is not in force in relation to the fund. A fund was able to be prescribed as an approved worker entitlement fund from 1 April 2003 if it met the legislative criteria. Long service leave funds established and operating by or under Commonwealth, State or Territory legislation are also approved worker entitlement funds.
2.4 As a transitional arrangement, the FBT exemption also applied to certain contributions made to existing worker entitlement funds during the FBT year beginning on 1 April 2003.
2.5 Contributions to existing worker entitlement funds are exempt when they are made in accordance with existing industrial practice, and the contributions are made for either the purposes of ensuring that an obligation to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met, or for the reasonable administrative costs of the fund.
2.6 A fund is an existing worker entitlement fund if it accepted contributions during the FBT year beginning on 1 April 2002 for the purposes of meeting obligations in relation to leave payments or payments when an employee ceases employment.
2.7 A contribution is made in accordance with existing industrial practice if the taxpayer, or another person in the taxpayer's industry, made payments in the FBT year beginning on 1 April 2002 to an existing worker entitlement fund for purposes of meeting obligations in relation to leave payments or payments when an employee ceases employment.
Summary of new law
2.8 The amendment extends the FBT exemption provided under the transitional arrangements to certain contributions made to existing worker entitlement funds during the FBT year beginning on 1 April 2004. That is, the FBT exemption is extended by one year.
2.9 The amendment ensures that the FBT exemption also applies to certain contributions to approved worker entitlement funds made during the FBT year beginning on 1 April 2004.
2.10 The purpose of the extension of the transitional arrangements is to provide security and certainty to employers making certain contributions to existing and approved worker entitlement funds while they put in place new arrangements to comply with the requirements of the FBT exemption.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Transitional arrangements are extended by one year to ensure that the FBT exemption applies to certain contributions to existing and approved worker entitlement funds during the 2004-2005 FBT year. | Transitional arrangements ensure that the FBT exemption applies to certain contributions to existing worker entitlement funds during the 2003-2004 FBT year. |
Detailed explanation of new law
2.11 Contributions to an existing worker entitlement fund or an approved worker entitlement fund [Schedule 2, item 1, paragraph 58PC(1)(a)] during the FBT year beginning on 1 April 2004 [Schedule 2, item 2, paragraph 58PC(1)(d)] are exempt from FBT.
2.12 The exemption applies when the contributions are made for the purposes of ensuring that an obligation to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met, or for the reasonable administration costs of the fund, and in accordance with existing industrial practice.
2.13 A contribution is made in accordance with existing industrial practice if the taxpayer, or another person in the taxpayer's industry, made payments in the FBT year beginning on 1 April 2002 to an existing worker entitlements fund, or made payments in the FBT year beginning on 1 April 2003 to an approved worker entitlement fund. [Schedule 2, item 3, subsection 58PC(3)]
Application and transitional provisions
2.14 The amendment applies for the 2004-2005 and later FBT years. [Schedule 2, item 4]