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Importance of documenting PAYG withholding from SMSF pension payments

The recent case of Price v Commissioner of Taxation [2019] FCA 543 involved an employee who failed to establish an entitlement to income tax credits because the employee did not have sufficient evidence that his employer withheld PAYG withholding amounts from his taxable income.

The case is relevant to SMSFs given that the trustee of a fund must keep records of PAYG withholding amounts when paying a pension to a member. The Court held journal entries alone are not conclusive evidence of the withholding process and that maintaining a relevant bank account, complemented by accounting entries, is required to support the fact that PAYG withholding has occurred.

Melissa Ramov, Maddocks Lawyers

Facts

The taxpayer, Mr Robert Price issued proceedings in the Federal Court of Australia seeking a declaration that he was entitled to income tax credits against his liability for income tax. The entitlement to income tax credits was sought because of payments said to be withheld from his income by his employer under the PAYG system.

In order to determine whether Mr Price was entitled to the income tax credits, there needed to be sufficient evidence that income was withheld by Mr Price’s employer under the PAYG system.

Mr Price was employed as a truck driver by his brother, Jim Price. Jim Price did not remit the PAYG withholding amounts to the Commissioner of Taxation and didn’t take care of his brother’s super and tax arrangements as promised.

The key question in this case was whether amounts were withheld from Mr Price’s taxable income.

Decision

If the amounts were withheld then Mr Price would be entitled to the income tax credits. If the amounts were not withheld, then Mr Price would not be entitled to the income tax credits. The fact that the amounts were not yet remitted to the Commissioner of Taxation did not mean that there was an inference that the amounts were not withheld by Mr Price’s employer.

The Court held that journal entries alone may not be sufficient evidence that a PAYG withholding amount has been withheld. Where there is only evidence of accounting entries, then to determine whether amounts are withheld, there must be a close examination of the books and records together with the surrounding circumstances of a matter. Although, the income deposited into Mr Price’s bank account was less than that which he was entitled to – indicating an amount had been withheld - this did not mean that an inference could be drawn that his employer did withhold PAYG withholding amounts. 

In this case, Mr Price lost his claim because neither he nor his employer held sufficient evidence that PAYG withholding amounts were withheld from Mr Price’s income.

Impact on SMSFs 

SMSF trustees must ensure that they pay members the minimum pension amount by 30 June every financial year.  For members under 60 years of age, if the account based pension has a taxable component, then the SMSF must withhold the relevant PAYG withholding amount from pension payments to the member.

Accordingly, to prove that the trustee is withholding payments, remitting the amounts withheld to the Commissioner of Taxation before 30 June is the best form of evidence. However, trustees should also ensure that they maintain a separate bank account in which they set aside withholding amounts before remitting them to the Commissioner of Taxation and keep accounting entries of the amounts witheld.

Failure to:

  • withhold amounts could mean that income from the SMSF’s assets which support the payment of a retirement phase pension may no longer be exempt from income tax for the relevant financial year; and
  • evidence amounts withheld, could mean that the member is not entitled to the relevant income tax credits.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of matters.

 

Lawyer in Profile

Melissa Ramov
Melissa Ramov
Lawyer
PH: 61 3 9258 3746

Melissa is a lawyer in the Maddocks Commercial team.

Melissa has been involved in acting for a range of commercial and professional industry clients.

Melissa advises extensively in the following areas:

  • drafting and reviewing commercial contracts;
  • corporate law;
  • self-managed super funds;
  • business and company sales and acquisitions; and
  • financial services law.