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Meaning of employment income
Section 46AB VEA – Meaning of employment income
Employment income is income earned, received or derived from remunerative work as an employee, in an employer/employee relationship. Income from self-employment as a Sole Trader business, or other forms of business income, is not employment income but may be defined as gainful work income for the work bonus. See gainful work income.
Employment income in the form of salary, wages, commissions and employment-related fringe benefits satisfies the test of employment income.
In considering whether a person is receiving employment income or business income (as a self-employed Sole Trader or from a Partnership, Private Company or Trust), the same factors should be considered as in assessing whether the income should be treated as business income for the income test generally:
· persons receiving employment income would normally receive PAYG pay slips and Payment Summaries from their employer,
· employment income is recorded as a gross amount on a person's individual income tax return as “Salary or wages” or “Allowances, earnings, tips, etc”,
· business income of a self-employed Sole Trader is recorded in the Supplementary section of the individual's income tax return, allowing for deduction of expenses, and a net figure is transferred into the Income section of the tax return, and
· business income of a Partnership, Private Company or Trust is recorded in a separate business income tax return with net income distributions transferred into the individual's income tax return.
Income generated by a person's business is only employment income if it is paid by the business to the individual in the form of a wage or salary. To satisfy this requirement it must be shown as an expense (Salary or Wages) on the Business Profit and Loss statement and as “Salary or wages” or “Allowances, earnings, tips, etc.” on the individual's income tax return.
Amounts not part of employment income
Section 46AB VEA - Meaning of employment income
Amounts which are excluded from the employment income concession, requiring that they be assessed in full under the income test, are:
·payments of compensation or payments under an insurance scheme relating to the person's inability to earn, derive or receive employment from remunerative work
·comparable foreign pension payments, and
·leave payments to persons no longer involved in remunerative work.
Assessment of leave payments
Where a person has actually ceased working for an employer and has received payments in lieu of accrued leave, or has stopped work and is continuing to be paid outstanding leave entitlements leading up to the cessation date of their employment, these payments have no association with the person's engagement in remunerative employment. These leave payments are excluded from the meaning of employment income whether the payments are made as a lump sum, a series of regular payments or otherwise.
Sick leave, annual leave, maternity leave, long service leave and other leave types from which the person returns in order to resume their remunerative employment are assessed as part of employment income.
From 1 July 2019, all director’s fees will be assessed as employment income and eligible for the work bonus.
Prior to 1 July 2019
When assessing remuneration described as director's fees, it is necessary that the person receives the payment in the form of salary, wages or commission, in their capacity as an employee of the company, for the Work Bonus to apply.
Director's fees are therefore generally excluded from the meaning of employment income where the person is attributed with control over the company or entity making the payments. In these cases the person's ownership or control means that they are undertaking the role of employer, and the necessary conditions for the Work Bonus, that the person is performing remunerative work undertaken in an employer/employee relationship, is unlikely to exist
Where a person works for a company or other entity in which they exercise no control, or has no association (e.g. no family connection) with those controlling the entity, remuneration designated as director's fees may be regarded as employment income where the delegate is otherwise satisfied that the person is genuinely undertaking work in an employer/employee relationship.
Royalty payments are not generally work bonus income. Where remunerative work has been undertaken, this may be considered gainful work income and included as work bonus income.
For work bonus purposes, employment income is ordinary income that is earned, derived or received from remunerative work undertaken by a person in an employer/employee relationship or income generated from gainful work such as business earnings from self-employment that meet the personal exertion test. It includes salary, wages, commissions and employment related fringe benefits.
The following payments are excluded from the definition of employment income:
- superannuation payments,
- payments of compensation or payments under an insurance scheme relating to a person's inability to earn, derive or receive employment from remunerative work,
- termination payments,
- comparable foreign pension payments, and
- leave payments to persons no longer involved in remunerative work.