House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 8 - Fringe benefits tax - worker entitlement funds

Outline of chapter

8.1 Schedule 8 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to remove the condition that contributions to approved worker entitlement funds must be required under an industrial instrument in order to be eligible for an exemption from fringe benefits tax (FBT).

Context of amendments

8.2 Worker entitlement funds are funds which provide for employee entitlements such as leave or redundancy payments. Currently 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.

8.3 A 'fund' is an approved worker entitlement fund if it is prescribed by regulation and a declaration is not in force in relation to the fund. From 1 April 2003, funds have been able to obtain prescription as an approved worker entitlement fund if it meets certain criteria. Long service leave funds established and operated by or under commonwealth, state or territory legislation are also approved worker entitlement funds.

8.4 As a transitional arrangement, the FBT exemption also applied to certain contributions made to existing worker entitlement funds during the FBT years beginning on 1 April 2003 and 1 April 2004.

8.5 Under the transitional arrangements, contributions to existing worker entitlement funds are exempt when they are in accordance with existing industrial practice and are made for either:

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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

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for the reasonable administrative costs of the fund.

8.6 A fund is an existing worker entitlement fund if it accepted contributions during the FBT year beginning 1 April 2002 for the purposes of meeting obligations in relation to leave payments or payments when an employee ceases employment.

Summary of new law

8.7 These amendments will replace the current condition that contributions to approved worker entitlement funds must be required under an industrial instrument in order to be eligible for an exemption from FBT. Following the amendment, contributions to an approved worker entitlement fund must be made under an industrial instrument.

Comparison of key features of new law and current law

Detailed explanation of new law

8.8 The proposed amendments to the FBTAA 1986 will replace the current condition that contributions for leave or redundancy payments must be required under the industrial instrument in order to be eligible for an exemption from FBT. [Schedule 8, item 1, paragraph 58PA(b)]

8.9 The criterion for an exemption from FBT will be satisfied where the contribution is made under an industrial instrument to an approved worker entitlement fund, for the purposes of meeting obligations to make leave or redundancy payments for employees.

8.10 Industrial instruments, such as awards, may include an obligation for employers to provide leave or redundancy payments for employees, based on the length of an employee's service. Employers may have the option of providing for the payments themselves, or by way of making contributions to a worker entitlement fund. Thus the wording of these industrial instruments may make contributions to a worker entitlement fund optional. The industrial instruments may not require employers to meet their obligation to provide those payments by way of a contribution to a worker entitlement fund.

8.11 Prior to these amendments, contributions needed to be 'required under an industrial instrument' in order for the contribution to be eligible for an exemption from FBT. As a result, employers may be liable to pay FBT on their contributions to approved worker entitlement funds in cases where the contributions are optional, but not required, under the relevant industrial instrument.

8.12 Whilst an obligation to make contributions for the purposes of meeting employee leave or redundancy payments is made under the industrial instrument, the amendments allow related legal instruments to be used to determine the quantum and other relevant matters regarding the contributions. An obligation to make a contribution will arise when the employer elects to make the payment to an approved worker entitlement fund. [Schedule 8, item 2, subparagraph 58PA(c)(i)]

8.13 In certain cases it is only through the interaction of the industrial instrument and related legal instruments that an obligation to provide leave or redundancy payments to an employee and the actual amount payable can be enunciated. For example, an employer may be required to provide leave or redundancy payments, calculated on the length of service, by way of contributions to a worker entitlement fund under an industrial instrument (such as a federal or state award). The amount of the payment and other relevant matters may be specified in the trust deed of the fund. While the trust deed of the fund is a related legal instrument, it is not the industrial instrument.

Application and transitional provisions

8.14 These amendments will apply in respect of the FBT year beginning on 1 April 2005 and all later FBT years. [Schedule 8, item 3]