Well it seems the debate is settled – General Insurers are responsible for withholding PAYG tax from certain Income Protection Benefits.
A recent query to the ATO has resulted in some feedback which may come as quite a shock to many.
In brief, the situation is summarised as follows:-
- Section 12-120 of the Taxation Administration Act 1953 places an obligation on Insurers to withhold taxation on Benefit payments – this has actually been in place since 1973!
- It applies to claims where benefits are paid to individuals who are not the Policy Owner due to incapacity for work and when payment is calculated on a periodic basis – i.e. Weekly Benefits (even if paid in a lump sum);
- The Policy Owner could be an employer, union or sports association and the obligation to withhold would apply;
- Any payment to the Policy Owner which is passed directly onto the individual is considered to have been paid to the individual and so the obligation still applies (although it would be appropriate to verify that the Policy Owner is withholding and not duplicate the withholding).
- KPMG have asked the question and presented a case to the ATO to classify individual members as the policy owner when the Insured is a union or sports association or school, etc and we eagerly await news on this determination;
- It is the responsibility of the Insurer/Coverholder to submit TFN Declarations to the ATO within 14 days of receipt, to provide regular Activity Statements to the ATO, to notify the ATO if a requested TFN declaration is not received within 28 days and to produce PAYG Summaries within 14 days of year end;
The way forward – Do you have the necessary system capabilities?
- The advice from KPMG is for Insurers to voluntarily disclose to the ATO that they have not been withholding in the past and to seek a waiver of past liabilities and penalties on the basis that they will implement a withholding procedure ASAP;
- The voluntary disclosure will involve reporting on applicable benefits paid to individuals since 1 July 2014 and issuing PAYG Summaries to individuals for the financial year ending 30 June 2015 and 2016 as well as communicating to individuals who have received such assessable amounts
- From this point on the Insurers should be obtaining TFN Declarations from their claimants and withholding tax at the applicable marginal rate on each Benefit payment made.
There’s no need to panic – We can help!
- For our existing clients we have the claims data necessary for the production of past and future PAYG Summaries and Activity Statements;
- If your systems aren’t flexible and these changes create more than headaches for you, we are happy to explore solutions with you. Contact our Accident and Health Technical Specialist – Kate Ellis – who can explain how to deal with these changes.