Issue
Will contributions made by an employer to an approved worker entitlement fund, in order to provide income protection insurance to its employees, constitute exempt benefits under section 58PA of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?
Decision
No, contributions made for income protection insurance do not constitute exempt benefits in terms of section 58PA of the FBTAA.
Facts
An employer is covered by an industrial award (IA) which imposes an obligation on the employer to make payments to its' eligible employees when those employees cease employment.
As part of this process, the employer entered into an enterprise agreement (EA) with its union with regards to those previously mentioned employees whereby the employer would join and participate in an approved worker entitlement fund nominated by the union.
Both, the IA and the EA are 'industrial instruments' in terms of subsection 136(1) of the FBTAA.
The EA specifies the quantum of the contributions to be made by the employer to an approved worker entitlement fund for the purposes of meeting employee redundancy pay.
The EA also states that the employer is required to make contributions to the approved worker entitlement fund in respect of employee income protection insurance.
The IA makes no mention of a requirement for income protection insurance.
Reasons for Decision
Section 58PA of the FBTAA, provides that a contribution is an exempt benefit if: (a) a person makes a contribution to an approved worker entitlement fund; and (b) the contribution is made under an industrial instrument; and (c) the contribution is either: (i) made for the purposes of ensuring an obligation under the industrial instrument to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met; or (ii) for the reasonable administrative costs of the fund (emphasis added).
In terms of the highlighted words in the previous paragraph, the initial assumption that could be made is that the industrial instrument referred to in paragraph 58PA(b), is the same instrument referred to in subparagraph 58PA(c)(i).
However, in order to determine whether this section is referring to the possible existence of more than one industrial instrument, reference is made to paragraph 8.12 in Chapter 8 of explanatory memorandum to the Tax Laws Amendment (2005 Measures No. 2) Bill 2005 (EM) which amended the intent of the original 2003 provision in the following way: 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.
The EM quoted above, therefore recognises the possible existence of more than one instrument in the form of a 'related legal instrument'. For such an instrument to exist however, it presupposes the existence of the main legal instrument in the form of an 'industrial instrument 'with the related legal instrument merely being used to determine quantum or other relevant matters in order to make leave payments or payments when the employee ceased employment.
To be 'related', reference is made to the Macquarie Dictionary [MultiMedia], version 5.0.0, 1/10/01 which defines the term as: 1. associated; connected.
Therefore, whilst such a connection could be inferred between two industrial instruments it must still be proven that in making the contribution under the EA that it has been wholly for the purposes of the IA as per paragraph 58PA(b) through meeting the requirements of subparagraph 58PA(c)(i). That is, by ensuring that an obligation is met under the IA to either make leave payments or payments when an employee ceases employment.
Whilst the EA specifies the quantum of the contributions to be made for redundancy payments which are associated with the IA's purpose in providing for income insurance, this is not in accordance with the stated purpose of the main industrial instrument of making payments when an employee ceases employment.
In this respect, it can be concluded that the EA has no overall association or connection to the IA but rather by providing for income insurance it is providing for a new purpose outside meeting the initial obligation imposed by the original award and as such does not constitute a related legal instrument.
The fact that part of the document could be viewed as being 'associated' to the IA is therefore not relevant in concluding whether the EA is a related legal instrument for the purposes of section 58PA of the FBTAA as it provides for purposes outside of the IA and not in accordance with 58PA(c)(i).
As that necessary connection cannot be established, the EA does not meet the requirements of subparagraph 58PA(c)(i) and accordingly such contributions do not constitute exempt benefits in terms of section 58PA of the FBTAA.