Edited version of your written advice

Authorisation Number: 1012914122031

Date of advice: 30 November 2015

Ruling

Subject: Fringe benefits tax: definition of employee

Question

Are persons participating in the program considered to be employees for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

This ruling applies for the following periods:

FBT Year ended 31 March 2014

FBT Year ended 31 March 2015

The scheme commences on:

1 April 2013

Relevant facts and circumstances

You have entered into an agreement under a Government Program for the placement of individuals in your workplace to gain experience.

Under the terms of the programs you will pay the participants a stipend of a set amount per day and provide accommodation.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 30

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 137

Taxation Administration Act 1953 section 12-35 to Schedule 1

Reasons for decision

Are persons participating in the program considered to be employees for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

The term 'employee' is defined in subsection 136(1) of the FBTAA to mean:

(a) a current employee;

(b) a future employee; or

(c) a former employee.

The term 'current employee' is defined in subsection 136(1) of the FBTAA to mean:

a person who receives, or is entitled to receive, salary or wages.

The term 'salary or wages' is defined in subsection 136(1) of the FBTAA to mean a payment from which an amount must be withheld (even if the amount is not withheld) under one of the listed provisions in Schedule 1 to the Taxation Administration Act 1953 (TAA). The listed provisions include section 12-35, which states:

an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).'

However, an amount is not required to be withheld if:

• the whole of the payment is not assessable income and not exempt income of the person receiving the payment; or

• the payment is a living-away-from-home allowance benefit.

The definition of salary or wages in subsection 136(1) of the FBTAA is extended by section 137 which provides that a person will be deemed to be an employee where a non-cash benefit is received that would constitute salary or wages if it had been a cash payment.

The term employer is defined in subsection 136(1) of the FBTAA to mean:

(a) a current employer;

(b) a future employer; or

(c) a former employer;

but does not include:

(d) the Commonwealth; or

(e) an authority of the Commonwealth that cannot, by a law of the Commonwealth, be made liable to taxation by the Commonwealth.

The term 'current employer' is defined in subsection 136(1) of the FBTAA to mean:

a person (including a government body) who pays, or is liable to pay salary or wages, …

Under the arrangement, you will pay the participants a stipend and provide accommodation.

Therefore, in applying the above definitions, the participants will be considered to be employees for the purposes of the FBTAA if:

• a withholding obligation arises under section 12-35 of the TAA (even if no amount is withheld) in relation to the stipend; or

• the participant is deemed to receive salary or wages under section 137 of the FBTAA.

Is there a withholding obligation under section 12-35 of the TAA in relation to the stipend?

In considering whether there is a withholding obligation under section 12-35 it is necessary to consider the following questions:

(a) Is the stipend salary, wages, commission, a bonus or an allowance?

(b) If the stipend is an allowance, is it a living-away-from-home allowance?

(c) Is the stipend paid to the participant as an employee?

(a) Is the stipend salary, wages, commission, a bonus or an allowance?

The Macquarie Dictionary on line version defines stipend to mean:

noun fixed or regular pay; periodic payment; salary.

Generally, the amount paid as a stipend will be lower than the amount that would be paid as a permanent salary for similar work, but it will be complemented by other benefits. Unlike salary or wages, a stipend may not be paid for the duties performed, but is paid to help offset expenses incurred by the recipient who is able to gain experience and knowledge in a specific field.

In your ruling application, you contend the stipend is not salary, wages, commission, a bonus or allowance as it is paid to cover all incidental expenses incurred during the stay including food, laundry, personal items and entertainment. In making this contention you refer to the form that you sign and the form signed by the participant.

In considering your contentions, although the amount being paid is described as being a stipend, the way in which an amount is described does not determine its treatment for tax purposes. Rather, it is necessary to consider the nature of the payment and the recipient's circumstances.

Further, the description of a payment as a stipend will not prevent the payment being considered to be salary or wages for the purposes of the FBTAA. For example:

• a stipend paid by a Religious Institution to a Minister of Religion comes within the definition of 'salary or wages' in subsection 136(1) of the FBTAA; and

• ATO ID 2004/736 in considering a stipend received under a research fellowship carried out in Australia by a taxpayer who is a resident of Australia and of the United States states:

A stipend paid on periodic basis is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Similarly, in considering whether 'a limited amount of money' paid for personal expenses that was received by an individual who also received board and lodging while residing at an Australian college was assessable income, ATO ID 2002/205 stated:

The taxpayer undertakes various duties at the college and is provided with board and lodgings and a limited amount of money for personal expenses. The taxpayer receives the money on a regular basis, and it is earned, expected and relied upon. The money received by the taxpayer is therefore ordinary income and assessable income under section 6-5 of the ITAA 1997.

In your application you also contend that the stipend does not come within the definition of salary or wages as the participants are volunteers. The ATO website publication non-profit/your-workers/type-of-worker/Volunteers/Paying volunteers in considering this issue states:

Volunteers can be paid in cash, given non-cash benefits or given a combination of both cash and non-cash benefits. These payments are given various descriptions, including honorariums, reimbursements and allowances. Sometimes they are given no name at all.

The name or description of the payment does not determine its treatment for tax purposes - it depends on the nature of the payment and the volunteer's circumstances.

Generally, receipts that are earned, expected, relied upon and have an element of periodicity, recurrence or regularity are treated as assessable income of a volunteer.

If a person's activities are a pastime or hobby - rather than income producing - money and other benefits received from those activities are not assessable income.

A payment that is not assessable to a volunteer will have many of the following characteristics:

• The payment is to meet incurred or anticipated expenses.

• The payment has no connection to the volunteer's income-producing activities or services.

• The payment is not received as remuneration or as a consequence of employment.

• The payment is not relied upon or expected by the volunteer for day-to-day living.

• The payment is not legally required or expected.

• There is no obligation on the part of your organisation to make the payment.

• The payment is a token amount compared to the services provided or expenses incurred by the volunteer. Whether the payment is token depends on the full facts surrounding the payment and volunteer's circumstances.

These factors are considered below in relation to the stipend paid to the participants:

Is the payment intended to meet expenses incurred or expected to be incurred in the position?

In your application you stated that the stipend was paid to cover all incidental expenses incurred during the stay including food, laundry, personal items and entertainment. In reviewing the Agreement we have not been able to identify a clause which supports this statement.

The Agreement does not specify that the payment is to reimburse costs incurred in the position. Further, it is noted that there is no reconciliation of the costs incurred by the participants and the Agreement states that the participant is responsible for the personal expenses not covered under the Agreement.

Therefore, the payment appears to be a payment made generally for living expenses, rather than a payment made to cover expenses incurred in the position.

Does the payment have a connection to the participant's income producing activities or services?

The ATO website publication non-profit/your-workers/type-of-worker/Volunteers/Paying volunteers/honorariums provides the following examples in relation to this factor:

Whether an honorarium is assessable income of the volunteer depends on the nature of the payment and the volunteer's circumstances. Honorary rewards for voluntary services are not assessable income and related expenses are not deductible.

Example: Honorarium not assessable

Michael works as a computer programmer at the local city council and volunteers as a referee for the local rugby union. This year, he organised an accreditation course for new referees. He applied for a grant, arranged advertising, assembled course materials and booked venues. Michael is awarded an honorarium of $100 for his efforts. The honorarium is not assessable income.

Fees received for professional services voluntarily provided are assessable income of the volunteer. In this situation, they may be entitled to a deduction for expenses incurred in performing these professional services.

Example: Honorarium assessable

Judy has a graphic design business and volunteers at the local art gallery. Judy prepares the gallery's annual report using her business's software and equipment. At the gallery's annual general meeting, Judy is awarded an honorarium of $800 in appreciation of her services. This honorarium will be assessable income to Judy because it is a reward for services connected to her income-producing activities.

The Agreement specifies that the participants must already be working in the relevant field. This indicates their circumstances are more comparable to those of Judy than Michael in the above examples.

Is the payment received as remuneration or as a consequence of employment?

Guidance for considering this factor was provided by the decision of Hill J in Roads and Traffic Authority of NSW v FC of T (1993) 43 FCR 223; (1993) 26 ATR 76; (1993) 116 ALR 482; 93 ATC 4508 (RTA).

In considering whether an amount paid to employees pursuant to various awards for the cost of fares to and from work was salary or wages, Hill J at ATC 4512 said:

The language of the definition of ``salary or wages'' in s. 221A(1) is deliberately wide. The legislative purpose was to include in the definition, and so that tax could be deducted by the employer and ultimately remitted to the Commissioner as an anticipatory payment of the employee's tax liability, all amounts paid as a reward for services rendered by the employee:
FC of T v J Walter Thompson (Australia) Pty Ltd (1944) 7 ATD 401; (1944) 69 CLR 227 and at ATD 405-406; CLR 233-234.

Further, at ATC 4514 Hill J said:

It was argued for the Commissioner that the only amounts which fell within the definition of wages in s. 221A were amounts which actually remunerated the employee for actual services performed. It was said that, as travelling to and from work preceded the employee's service, then a fortiori the payments in question could not be a reward for the employee's service but were antecedent to that service. With respect, this argument misconceives the test propounded in Flick and is clearly contrary to the views expressed by the High Court both in J Walter Thompson and in Murdoch.

It may be true that travel to and from work is not an allowable deduction under s. 51(1) of the ITA Act because the expenditure on such travel is not expenditure in gaining assessable income but expenditure in getting to work in order to gain that income:
Lunney v FC of T (1958) 11 ATD 404; (1957-1958) 100 CLR 478. But it does not follow from that, that an amount paid to compensate an employee for the cost of that travel is not within the definition of ``wages''. Indeed, one might ask rhetorically, what else would the payment to the employees be other than as additional compensation to the employees for their services. There is no need that the remuneration relate to specific services rendered, as long as the payment in question is remuneration for services generally. [emphasis added]

In applying this guidance it is noted that the Agreement requires participants to be engaged in certain aspects of your operations for at least 30 hours per week and in your application you state:

The participant is engaged in active participation within the program and does not act solely as an observer.

That is, the participant receives the stipend for the duties undertaken. It is a payment that relates to the services provided.

Is the payment relied upon or expected by the volunteer for day-to-day living?

The payment is a regular payment that is relied upon by the participant for day-to-day living.

Is the payment legally required or expected?

The payment is required to be paid under the terms of the Agreement.

Is there an obligation on the part of your organisation to make the payment?

As set out above, you have an obligation under the terms of the Agreement to make the payment.

Is the payment a token amount compared to the services provided or expenses incurred by the participant?

The participants receive a set amount per week which is comparable to the national minimum adult wages for the periods this ruling as advised by the Fair Work Commission (www.fwc.gov.au/awards-and-agreements/minimum-wages-conditions/annual-wage-reviews/annual-wage-review-2013-14).

Therefore, the amount of stipend received by participants is by itself comparable to the salary that might be received by a permanent employee working 30 hours per week under no award and cannot be considered to be token in nature.

In considering the nature of the payment and the recipient's circumstances we do not accept your contention that the stipend will not be assessable as the participants are volunteers.

As discussed above, the stipend is paid on a regular basis under the terms of a contractual agreement to a participant who is employed in the relevant field. It cannot be considered to be a token amount paid for voluntary services. Further, the payment is paid without accountability for the expenses likely to be incurred by the participants.

Therefore, the payment has many of the characteristics of a payment of salary. However, if it is not considered to be salary it will be an allowance in accordance with the guidelines provided by Taxation Ruling 92/15 Income Tax and fringe benefits: the difference between an allowance and a reimbursement.

Both salary and allowances can be subject to withholding under section 12-35 of Schedule 1 to the TAA. However, a withholding obligation will not arise if the payment is an allowance that is a living-away-from-home allowance.

(b) Is the stipend a living-away-from-home allowance?

Subsection 30(1) of the FBTAA sets out the circumstances in which a payment will be a living-away-from-home allowance. Subsection 30(1) states:

Where:

(a) at a particular time, in respect of the employment of an employee of an employer, the employer pays an allowance to the employee; and

(b) it would be concluded that the whole or a part of the allowance is in the nature of compensation to the employee for:

(i) additional expenses (not being deductible expenses) incurred by the employee during a period; or

(ii) additional expenses (not being deductible expenses) incurred by the employee, and other additional disadvantages to which the employee is subject, during a period;

by reason that the duties of that employment require the employee to live away from his or her normal residence;

the payment of the whole, or of the part, as the case may be, of the allowance constitutes a benefit provided by the employer to the employee at that time.

The application of this subsection was considered by the Federal Court in Atwood Oceanics Australia Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 742; (1989) 30 IR 58; 89 ATC 4808. In considering whether an allowance paid to employees working on off shore oil rigs Lee J at ATC 4816-4817 said:

The first requirement of para. 30(b) was that it be an allowance in respect of which ``it would be concluded'' that the allowance bore a certain quality. The paragraph did not state by whom such a conclusion would be drawn, unlike the repealed provisions of sec. 51A of the Income Tax Assessment Act 1936 where the nature of the allowance was determined according to the Commissioner's satisfaction. It was the requirement of the paragraph that the circumstances of payment of the allowance be such that a reasonable person would conclude, applying an objective view thereto, that the allowance bore the character described in the paragraph. The required character of the allowance was that it be a payment to an employee in the nature of compensation for additional expenses incurred by the employee during a period of employment, or for additional expenses so incurred and other additional disadvantages to which the employee was subject during that period by reason of the fact that the employee was required to live away from his usual place of residence.

…

It was also a requirement of sec. 30 that the allowance in the nature of compensation, relate to additional expenses incurred by an employee during a period, or to additional expenses incurred and additional disadvantages to which the employee was subject during a period.

…

An obvious example of such additional expenses would be extra costs for food and accommodation that would not be incurred if the employee were not required to live away from home. Section 31 of the Act reduced the taxable value of the living-away-from-home allowance fringe benefit by excluding from the allowance the reasonable cost of additional accommodation for the employee during the relevant period and the reasonable cost for food during the period less ordinary food expenses that would be expected to be paid by an employee in any event during that period if the employee were not living away from home. (See sec. 136: ``exempt accommodation component'', ``exempt food component'', ``food component'', ``recipients allowance'' and ``recipients allowance period''.)

Those provisions demonstrated that the legislation anticipated that the allowance would have calculable components such as those related to possible additional costs for food and accommodation. In other words, the allowance would have some clear connection with likely additional expenditure.

In applying this extract, for the payment to be a living-away-from-home allowance there needs to be a basis for concluding that the payment was in the nature of compensation for additional expenses incurred by the participant or additional expenses and other disadvantages to which the participant was subject and the amount paid should be based on specified components.

As discussed above, the clause in the Agreement relating to the stipend provides no indication that the amount is paid to cover additional non-deductible expenses incurred by a participant as a result of being required to live away from home to perform employment duties. Further, it does not consist of calculable components.

Therefore, it is not possible to conclude that the stipend was a living-away-from-home allowance.

(c) Is the stipend paid to the participant as an employee?

Factors that need to be considered to determine whether an individual is an employee (as opposed to an independent contractor) are listed on the Australian Taxation Office website at www.ato.gov.au/Non-profit/Your-workers/Type-of-worker/ (QC 18195)

Employee - definition

Generally, an individual is considered to be an employee if they meet the following requirements:

• are paid for time worked

• receive paid leave - for example, sick, annual, recreation or long service leave

• are not responsible for providing the materials or equipment needed to do their job

• must perform the duties of their position

• agree to provide their personal services

• have work hours set by an agreement or award

• are recognised as part and parcel of your organisation's business

• do not take commercial risks and cannot make a profit or loss from the work performed

In considering these factors:

• the participants are paid a pre-determined amount each week for working a set number of hours;

• the payment is made under the terms of an Agreement which sets out the duties that the employee is expected to perform;

• the participants are not responsible for providing materials or equipment;

• the participants agree to provide personal services;

• throughout the period in which the participants are with you they are part of your activities; and

• they do not take commercial risks and cannot make a profit or loss from the work performed.

Therefore, although the participants do not receive paid leave the factors listed above provide a basis for concluding that the stipend is paid to the participant as an employee.

Conclusion

The participants in the Program are employees for the purposes of the FBTAA as the stipend is assessable income and comes within section 12-35 of the TAA.

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