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Lecture 7

Lecture 7 - Employment and Taxation

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Department
Accountancy
Course
AYB320
Professor
All Professors
Semester
Fall

Description
LECTURE 7 – EMPLOYMENT AND TAXATION PAYG Withholding Requirement to withhold  If a person is in receipt of salary and wages, commissions, bonuses or allowances, the employer has an obligation to withhold PAYG instalments from their gross salary or wages and remit this amount to the ATO each month or quarter on the Instalment Activity Statement or BAS. o This requirement is imposed by S12-35 of Schedule 1 of the Taxation Administration Act 1953 Duties to Remit PAYG Withholding to the ATO The date by which the PAYG withholding tax must be remitted to the ATO depends on whether the entity is classified as a: (a) Small Withholder  Withholds $25,000 or less in PAYG withholding tax during a financial year.  It is required to withhold payments from employees and remit these amounts to the ATO on a quarterly basis. (s 16-75(3) of Schedule 1 of the Taxation Administration Act 1953) (b) Medium Withholder  Withholds between $25,001 and $1 million in PAYG withholding tax during a financial year.  It is required to withhold payments from employees and remit these amounts to the ATO on a monthly basis (depending on whether the entity lodges monthly or quarterly BAS’s). (s 16-75(2)) (c) Large Withholder  Withholds more than $1 million in PAYG withholding tax during a financial year.  It is required to withhold payments from employees and electronically remit these amounts to the ATO within 7 days of payment of the salaries and wages. (s 16-75(1)) PAYG Payment Summaries  Every employer must provide each employee with a PAYG Payment Summary o It shows the gross salary paid + amount withheld  The payer must also complete a PAYG Withholding Payment Summary Annual Report summarising the details of all PAYG payment summaries provided to employees during the income year. o Must be sent by the employer to the ATO no later than 14 August. Employee Entitlements  S 26-10 ITAA (1997) provides that no deduction for employee entitlements (such as annual leave, sick leave and long service leave) is allowed until such time as the payment has been made. Superannuation  Employers have to provide each employee with minimum superannuation of 9% of employee’s earnings.  Under the superannuation guarantee scheme, employers are required to make quarterly superannuation contributions into the employee’s nominated superannuation fund by the 28th day following the end of the relevant quarter. o Employers who fail to do so are liable to pay the superannuation guarantee charge, which is not tax deductible.  The superannuation guarantee applies to all employees in respect of full-time, part-time and casual employees. An employer is any individual or entity (eg a company, a non-profit organisation) that utilises the services of an employee. Exclusions from superannuation  An employer is not required to provide superannuation support for some employees, including: o Employees paid less than $450 in a particular month; o Employees aged 70 or over; o Employees aged under 18 and working part-time (ie not more than 30 hours per week); o Employees paid for private or domestic work for not more than 30 hours per week (eg a part-time housekeeper); o Non-resident employees paid for work done outside Australia; o Resident employees paid by non-resident employers for work done outside Australia; o A member of the reserve force paid a salary which is exempt (S51-1 ITAA 1997) o Foreign executives; o Partnerships, company or trust contractors; and o Taxi drivers by taxi operators because the relationship is one of bailment, not one of employer and employee.  An employer is required to contribute a minimum of 9% of the employee’s earnings base (referred to as the “ordinary times earnings” up to a maximum of $40 170 per quarter in the 2010 income year and $42 220 for the 2011 income year. o Ordinary times earnings are the payments employees receive for working their normal hours of employment Tax-deductibility of Superannuation Contributions  An employer is able to claim a tax deduction for its contributions made to a complying superannuation fund in respect of eligible employees (s290-60 and 290-70 ITAA 1997) o Contributions must be actually paid to the fund.  There is no limit on the tax deduction that an employer can claim when they make superannuation contributions for their employees. o However, when an employer contributes over a certain level the employee will be subject to excess contributions tax of 31.5% (s 292-15)  The limit that applies to employer contributions (known as ‘concessional contributions’) for the 2008 and 2009 financial years is $50,000.  For the 2010 income year it is $25 000. (S290-80 ITAA (1997)).  A transitional contribution limit applies if the employee is 50 years of age or over between 1 July 2007 and 30 June 2012.  The transitional contributions limit is $100 000 for the 2008 and 2009 years and will be $50 000 for the 2010, 2011 and 2012 years.  Employees are also able to make after-tax voluntary superannuation contributions into their fund. These are called “non-concessional contributions”. o Employees are not able to claim a tax deduction for these contributions (s 290-155, 290-160 and 290- 165). o The non-concessional contributions are capped at a maximum amount of $150,000 per annum for taxpayers less than 65 years of age.  However, taxpayers are allowed to “bring forward” three years of contributions and pay $450,000 in one year providing nothing is paid in the following two financial years.  Since 1 July 2003, employers must make superannuation contributions into employees’ superannuation funds for each quarter. o The amount must be paid within 28 days after the end of each quarter o If the contributions are not made into the employee’s superannuation fund by the due date, the employer is subject to the superannuation guarantee charge (SGC). The SGC is made up of three components:  The superannuation guarantee shortfall (being the actual amount of superannuation owing for each employee that was not paid by the due date);  An administration penalty (a flat $20 per quarter per employee); and  A nominal interest component (currently set at 10% per annum calculated on the daily balance of the amount of superannuation owing for each employee). o The superannuation guarantee charge (consisting of the abovementioned three components) is not deductible to the employer (S 26-95 ITAA (1997)).  The superannuation guarantee charge is based on salary or wages and not ordinary times earning.  Employers who do not meet their superannuation obligations by the 28th day of the month following the end of each quarter in which the employee was paid must lodge a “Superannuation Guarantee Statement” in the approved form and pay the superannuation guarantee charge on the employee’s salary and wages to the ATO by the 28th day of the second month following the end of that quarter. o An employer who does not lodge an SGC statement on time is also liable for a penalty that is known as the Part 7 penalty. This penalty is two times the SGC payable. o The Commissioner has a power to remit this penalty in whole or part. Fundamentals of Salary Packaging What is salary packaging?  Salary packaging or a salary sacrifice arrangement is an arrangement between an employer and an employee where the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing benefits of a similar cost to the employer.  The purpose of a salary packaging arrangement is to enable an employee to pay for certain fringe benefit items from their pre-tax salary. o This can then improve the after tax cash in hand position for the employee.  Generally, the cost to the employer of providing the benefit is the cost of the benefit plus any FBT payable on the provision of that benefit.  When structuring the package, it is essential that the employee sacrifice sufficient gross salary to cover: o The actual costs to be paid by the employer; and o The amount of FBT payable by the employer.  Thus, the employer should be in the same after-tax position as they would have been had a cash salary been paid.  To achieve the maximum benefit from salary sacrificing, employees should consider packaging the following benefits: o Superannuation. This is because superannuation is not subject to FBT and is generally fully tax deductible; o Benefits which are exempt from FBT, such as laptop computers; o Benefits with no taxable value, such as where the taxable value of a benefit is reduced to $Nil by virtue of employee contributions or application of the “otherwise deductible rule”; o Concessionally taxed fringe benefits, such as cars whose taxable value is calculated under the statutory formula method. Total Cost of Employment  The “total cost of employment” is the total amount that an employer is willing to pay to all parties for the services of the employee.  The employer then offers the employee the option of receiving this amount in the form of either cash, or a combination of both cash and non-cash (or fringe) benefits. o If the employee decides to take their remuneration package in the form of both cash and fringe benefits, the employer ensures that the total cost equals the “total cost of employment Benefits of Salary Packaging  The employer can attract new and continue to retain staff by offering a range of salary packaging items.  There may also be savings for the employer on payroll tax, workers compensation, and possibly superannuation guarantee contributions, depending on what has been packaged. o The major benefits of salary packaging to the employee is that the employee can receive more after tax disposable income. o Due to a lower cash salary, the employee may be pushed into a lower tax bracket, meaning they pay less tax on their cash salary.  In the case of a laptop computer used primarily for work purposes, there is no FBT payable (as it is an exempt fringe benefit). o If any FBT was payable by the employer, the employer usually passes the FBT onto the employee as a reduction of their pre-tax salary.  The advantage in salary packaging lies largely in the fact that the employee is provided with benefits (which they would usually have to pay for from post-tax salary). Taxation of Termination Payments  A termination payment is a payment made by a taxpayer’s employer in respect of termination of employment including situations where an employee resigns, is retrenched, dismissed or dies. o If a person dies, any payment is referred to as a death employment termination payment. Other termination payments Other termination payments include lump sum payouts made to employees on termination of employment in respect of:  unused annual leave; and  unused long service leave Unused Annual Leave  Annual leave is any leave described as annual leave or recreational leave and annual holidays, being leave to which a taxpayer is entitled by law, award or contract. (S 83-10(1) ITAA (1997))  Most employees take their annual leave whilst they are employed. As such, annual leave taken during the term of the taxpayer’s employment is assessable to the taxpayer in the same way as salary and wages under S 6-5 of ITAA (1997).  The taxation of unused annual leave depends on the period in respect of which the annual leave has been accrued. (S 83-10 of ITAA (1997)) (i) Leave Accrued Before 18 August1993  Where a lump sum payment is made in respect of unused annual leave that accrued before 18 August 1993, the lump sum amount received is fully assessable. o However, PAYG withholding tax is deducted at 31.5% (ie 30% tax plus 1.5% Medicare levy). (S 83-15)  The employer is required to include this amount next to Label “A” on the employee’s PAYG Payment Summary. (ii) Leave Accrued On or After 18 August 1993  Where a lump sum payment is made in respect of unused annual leave that accrued after 18 August 1993, the lump sum amount received is fully assessable. o In other words, the amount of tax withheld is at the taxpayer's marginal rate of tax.  Payments for unused annual leave made on the death of an employee is exempt from tax (S 101A(2) of ITAA (1936))  As the tax treatment for lump sum annual leave payments varies depending on when the leave entitlement accrued, it is necessary to apportion the annual leave between:  pre-18 August 1993; and  on or after 18 August 1993. The taxation of unused annual leave is shown below in Diagram 2 below. When was the lump sum annual leave accrued? Fully assessable Fully assessable 30% rebate applies No 30% rebate applies Before On or After 18 August 1993 18 August 1993 Unused Long Service Leave  Long service leave is long service leave, extended leave or leave of a similar kind (however described) to which a person is entitled by law, award or contract. (S 83-70 of ITAA (1997) o LSL taken during the term of the taxpayer’s employment is assessable to the taxpayer in the same way as salary and wages and is assessable to the taxpayer under S 6-5 ITAA (1997).  However, payments made to an employee on termination of employment in respect of their unused long service leave are specifically covered in Ss 83-65 to 83-115 of ITAA (1997).  Taxation of unused long service leave depends on the period in respect of which the annual long service leave has been accrued. (i) Leave Accrued Before 16 August1978  Where a lump sum payment is made in respect of unused long service leave that accrued before 16 August 1978, only 5% of the lump sum amount received by the taxpayer is included in the taxpayer's assessable income for the year of income and is taxed at the taxpayer’s marginal tax rate (Item 1 of S 83-80 ITAA (1997)). o The remaining 95% of the payment is not assessable and is not exempt. (IE NO TAX PYABLE ON 95%).  The employer is required to include this amount next to Label “B” on the employee’s PAYG Payment Summary. (ii) Leave Accrued Between 16 August 1978 and 17August1993  Where a lump sum payment is made in respect of unused long service leave that accrued between 16 August 1978 and 17 August 1993, the lump sum amount received is fully assessable.  However, PAYG withholding tax is deducted at 31.5% (ie 30% tax plus 1.5% Medicare levy) (S83-85 ITAA (1997))  The employer is required to include this amount next to Label “A” on the employee’s PAYG Payment Summary. (iii) Leave Accrued on or After 18 August 1993  Where a lump sum payment is made in respect of unused long service leave that accrued after 18 August 1993, the lump sum amount received is fully assessable at the taxpayer's marginal rate of tax.  Payment for unused long service leave made on the death of an employee is exempt from tax (S 101A(2) of ITAA (1936)).  As the tax treatment for lump sum long service leave payments varies depending on when the leave entitlement accrued, it is necessary to apportion the long service leave between:  pre-16 August 1978;  16 August 1978 and 17 August 1993; and  on or after 18 August 1993. The taxation of unused long service leave is shown below in Diagram 3 below. When was the lump sum long service leave accrued? 5% included in Fully assessable. Fully assessable assessable income 30% rebate applies No 30% rebate applies Between 16 August 1978 Before
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