While things on the salary sacrifice arrangements have been quiet for some time, recent cases have before the AAT indicate that the Commissioner has been more active in this area than we might have thought.
Senior Member of the AAT, Frank O’Loughlin has heard two cases – one was fully favourable for the Commissioner.
The earlier case – Adrain Heinrich and the Commissioner of Taxation http://www.austlii.edu.au/au/cases/cth/AATA/2011/16.html – involved an employee with an existing salary sacrifice arrangement that ceased his employment on medical grounds. He sought a private ruling from the Commissioner to apply the salary sacrifice into superannuation contributions to amounts that he was to be paid on termination for accrued annual and long service leave entitlements.
In the particular case, the applicant had received the termination payment and, accordingly, the senior member concluded that it was not possible for him to “sacrifice” the amounts already paid.
Mr O’Loughlin observed that, had this not been the case, that if accruals under an employment arrangement entail a right to be paid in money, then the right cannot be dealt with (sacrificed) on the direction of the employee.
If the right that accrues is to part money and non-monetary (i.e. it is sacrificed in advance of accrual) the right is to receive accrued non taxable benefits that are not salary and wages.
The lesson is to sacrifice early.
The second case decided by the Senior Member – Sent and Commissioner of Taxation [2011] AATA 198 http://www.austlii.edu.au/au/cases/cth/AATA/2011/198.html – involved the sacrifice of accrued bonuses arising from the applicants the Applicant’s employment arrangements with Primelife.
The accrued entitlements were satisfied by a payment of $11,600,000 to a Trust of which the Applicant was a beneficiary and the acquisition of Primelife shares by the Trust with that money.
The Commissioner assessed the Applicant twice, once on the basis that the amount was ordinary income and the other assessment under Part IVA. 50% penalty (one-half for lack of reasonable care and one half for lack of reasonably arguable position) was imposed on both assessments.
Mr O’Loughlin found that the part of the $11,600,000 that was referable to bonuses for future services that had not yet accrued was not assessable income of the Applicant. But similar to Heinrich, those entitlements that had already accrued could not be substituted for an employee share benefit.
On the question of the application of Part IVA to the non-assessable component, Mr O’Louhghlin concluded that the some factors of the arrangement pointed in one direction and the others in another. Significantly, the Applicant took on risks and a deferral of benefit that would otherwise have been received. The Senior Member concluded that there was not a dominant purpose of obtaining the tax benefit. Significantly, Mr O’Loughlin observed:
- If this were not the approach to be adopted when considering if Part IVA could apply to any arrangement under which an employee and an employer change remuneration conditions for prospective services, from taxable salary to another form of benefit which is either not taxed under the income tax system or is taxed under the income tax system in a different way or at a different time under what are colloquially described as salary sacrifice arrangements, then such arrangements would be liable to be defeated by Part IVA
As to penalty, the senior member referred to the fact that the Applicant relied on advice of a reputable and experienced firm and had, therefore taken reasonable care. However, the Senior member found that the position was not reasonably arguable so a 25% penalty remained.
Interestingly, in Shin’s case, (http://law.ato.gov.au/atolaw/view.htm?dbwidetocone=05%3ALRP%3ADecision%20Impact%20Statements%3AResolved%3A2010%3
AShin%20(2007%2F2795%20-%202798%26s%202007%2F2802%20-%202805%20)%3B), Mr O’Loughlin had concluded that satisfaction of the reasonably arguable position test satisfied reasonable care. This is a position with which the Commissioner disagrees.
Shades of the “choice principle”!