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| INTRODUCTION |
| 1. | Under section 2AAA of the Pay-roll Tax Act 1971 (the Act), distributions under a trust, made from 1 July 2005, to a person as beneficiary that are in lieu of wages for work done by the beneficiary for the trust may be liable to payroll tax. |
| 2. | The purpose of this ruling is to advise employers of how to determine that part of a distribution to a beneficiary that is liable for payroll tax. |
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| RULING |
| 3. | Where an employer provides a trust distribution in lieu of wages to a person who provides work for the trust, that distribution constitutes wages liable for payroll tax only if there is a “wages shortfall”, and the distribution is made in the financial year in which the work is done or in the following year. |
| 4. | A wages shortfall occurs when the total wages paid is less than that which would be paid at the “market rate” (to be defined below) for that work. |
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Eg: The amount that would have been paid at the “market rate” for the work is $5 000 and total wages paid equals $3 000. The wages shortfall is $2 000.
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| 5. | Where the total wages paid is equal to or greater than that which would have been paid at the “market rate”, there is no wages shortfall and consequently the distribution incurs no payroll tax liability. |
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Eg: The amount that would have been paid at the “market rate” for the work is $3 000 and total wages paid equals $5 000. There is no wages shortfall.
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| 6. | The component of the distribution that is included as wages liable to payroll tax cannot be larger than the amount of the distribution. Therefore, if the distribution does not exceed the wages shortfall, the amount of the distribution is the wages liable for payroll tax. |
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Eg: The wages shortfall is $2 000 and the distribution is $1 000. The wages liable for payroll tax is $1 000.
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| 7. | If the distribution exceeds the wages shortfall, the amount of the wages shortfall is liable for payroll tax. |
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Eg: The wages shortfall is $2 000 and the distribution is $5 000. The wages liable for payroll tax is $2 000.
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| Determining the “Market Rate” and “Market Rate Wage” |
| 8. | To undertake the above it is necessary to calculate the amount that would have been provided for the work performed by the beneficiary if it was paid at the “market rate”; this will be referred to as the “market rate wage”. |
| 9. | Sub-section 2AAA (7) defines the “market rate” as the minimum rate that applies under a Tasmanian or Federal industrial instrument as defined in Tasmanian and Federal legislation. |
| 10. | The Act defines an industrial instrument as an award, an enterprise agreement, a public sector industrial agreement, a former industrial agreement, a contract determination or a contract agreement. The Corporations Act 2001 (Commonwealth) defines an industrial agreement as a contract of employment, or a law, award, determination or agreement relating to the terms and conditions of employment. |
| 11. | Details of wages and conditions of employment for work covered by Federal awards and agreements are available from the Commonwealth Government’s WageNet website (www.wagenet.gov.au). For work covered by State awards details are available from the Tasmanian Industrial Commission website (http://www.tic.tas.gov.au/). |
| 12. | Where there is no applicable industrial instrument rate, the “market rate” that applies is the average weekly earnings figure “Full-time adult ordinary time earnings - original” Tasmania, for the February quarter prior to the beginning of the financial year, as published in Australian Bureau of Statistics publication 6302.0 – Average Weekly Earnings Australia. |
| 13. | When the average weekly earnings is the applicable “market rate”, an employer may choose one of three methods to determine the “market rate wage”, but the same method must be used for all work done by that person for the whole of a particular financial year. The three alternatives are: |
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- The hourly rate, determined by dividing the weekly figure by 40; or
- The daily rate, determined by dividing the weekly figure by 5, and applied for each day on which the beneficiary provided services during the relevant period, regardless of the number of hours of service provided during each day; or
- The weekly rate applied for each week or part of a week during which the beneficiary provided services, regardless of the number of days or hours of service provided during that week.
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| Distributions from another Trust |
| 14. | Where a person performs work for a trust or other entity, and a distribution is provided from another trust in lieu of wages to the person that provided the work, then for payroll tax purposes the distribution is treated as if it was provided by the trust or other entity for which the work was performed. |
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| Example |
| 15. | In this example a person who is a beneficiary of a trust undertakes work for an employer who is the trustee of the trust. The employer pays the beneficiary $2 000 in wages, and during the year pays a distribution from the trust of $8 000. The work is performed full-time over eight weeks of the 2005-06 financial year. There is no applicable industrial instrument so the prescribed “market rate” of $884.10 must be used to determine whether there is a “wages shortfall”. |
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Market Rate Wage = No. of weeks worked x TAS Full-time adult ordinary time earnings
= 8 x $884.10
= $7 072.80
Wages Short Fall = Market Rate Wage – Wages Paid
= $7 072.80 - $2 000
= $5 072.80
Trust Distribution of $8 000 > Wages Shortfall of $5 072.80 |
| As the “Wages Shortfall” of $5 072.80 is less than the Distribution of $8 000, then the “Wages Shortfall” will be wages for pay-tax purposes. That is, $5 072.80 of the distribution is liable for payroll tax under the distribution provisions. The wages paid of $2 000 will be included as wages liable for payroll tax under other provisions in the Act.
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