I am announcing today that the Government will provide a fringe benefits tax (FBT) exemption for certain payments to prescribed employee entitlement funds from 1 April 2003.
Employee entitlement funds may be set up to protect employee entitlements in the event of insolvency, or to provide for entitlements, such as redundancy and long service leave.
The Tax Office has ruled that payments into such funds will be subject to FBT from 1 April 2003. However, payments made by the funds to an employee are also taxable in the hands of the employee as either eligible termination payments or as salary and wages depending on the circumstances of payment. As a result, payments into employee entitlement funds would be effectively taxed twice - once as a fringe benefit when paid into the fund and once when paid out of the fund.
To ensure this does not occur, the Government will exempt from FBT certain payments to employee entitlement funds that have been prescribed in regulations. The Commissioner of Taxation will be responsible for advising the Government on whether funds meet the criteria required in order to be prescribed. This will allow the Commissioner to distinguish between bona fide funds and funds with the object of tax minimization.
The criteria will address characteristics such as what payments can be made from the fund, who controls the fund and the extent to which funds are available to be distributed to individual employees. The exemption could apply to payments such as redundancy, annual leave, long service leave and sick leave.
The criteria for funds to be prescribed will be developed in consultation with representatives of employee entitlement funds.
Those funds that meet the criteria will be prescribed in regulations with effect from 1 April 2003, the start of the 2003-04 FBT year.