U10

00

ITA 2015
TAX TREATMENT OF
EMPLOYMENT INCOME

prepared for the course team by

Pet er Fulche r

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Welcome to Week 10 of AF308.

This week we look in some detail at the tax treatment of income from employment in the ITA
2015. We look at three new matters we have not previously considered.
First, the specific tax called PAYE Final.
Second, the specific tax called Fringe Benefits Tax.
Third, the exclusion of employment income from the loss carry forward rules.

Let’s get started.

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Introduction
Beak v Robson; Hochstrasser v Mayes; Tennant v Smith; do these case names ring a bell? I
hope so. ITA 2015 s.15; does that section reference ring a bell? I hope so. And these bells
that are a-ringing, do they play a tune? I hope so. When we study, our objective is to make
the subject our own. Bells are a start. Being able to hum the tune is better. Being able to sing
boldly and loudly is where we want to get to.

Earlier in this course we looked at the idea of income from employment. This week we look
at the tax treatment of employment income under the ITA 2015.

A Recap
‘This week we look at the tax treatment of employment income under the ITA 2015.’ Perhaps
I should say; ‘This week we look in detail at the tax treatment …’ since I have earlier said
something on this matter. Here is a quick recap.

Section 15 provides a definition of ‘employment income’. (It includes some receipts and
gains that are not income on general principles. Parliament is expanding the tax net.)
Employment income together with business income (s.17) and property income (s.18)
composes ‘gross income’ (s.14). Gains from an employee share scheme (s.16) also enter
gross income.

Gross income less allowable deductions produces chargeable income (s.13). As regards
deductions, s.22(1) provides no deduction is allowed for ‘(b) an expenditure or loss incurred
by an employee in deriving employment income’.

Thus chargeable income includes any employment income of the taxpayer but no expenses
related to the derivation of employment income.

Chargeable income is subject to Income Tax (s.8(1)) and beyond $270,000 also subject to
SRT.

As regards the tax treatment of employment income this constitutes what we might call the
general story. Employment income but not expenses is included in chargeable income and
subject to the general tax on income called Income Tax.

And this week

This week we look in detail at the tax treatment of employment income under the ITA 2015.
What we find is something very different from the general story found in ss.15, 14, 13.
22(1)(b) and 8(1). We find that the Act creates two specific taxes concerning income from
employment and that for most taxpayers income from employment will not enter chargeable
income and will not be subject to Income Tax. ‘Most taxpayers’ but not ‘all taxpayers’. It’s
complicated.

The two specific taxes are PAYE Final and Fringe Benefits Tax. I want to begin with the
former.

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PAYE, the acronym
PAYE is an acronym from the expression ‘pay as you earn’. It is usually written in upper case
but sometimes you may see it written in lower case (‘paye’). A variant on the expression ‘pay
as you earn’ is the expression ‘pay as you go’. PAYE is not a new expression. It first appears
in an income tax context more than 70 years ago. In Fiji, the expression is seen in the former
ITA 1974 and regulations made thereunder.

In the ITA 1974, PAYE was one of a triumvirate. The Act provided for ‘provisional tax’ and
‘advance tax’ and ‘PAYE’. None of these were true taxes. They were rather tax collection
mechanisms. They were part of the income tax system.

The ITA 1974 imposed a general tax on income. It was given a name. It was called ‘normal
tax’. Normal tax was levied on ‘chargeable income’. (More technically was levied on a
taxpayer and calibrated by reference to the taxpayer’s chargeable income.) Normal tax was an
annual tax on chargeable income.

An income tax system, as we have seen, focuses on three concerns: information, assessment
and collection. There is a natural chronology. First obtain information, second make an
assessment, and third collect payment in satisfaction of the assessed tax liability. However, in
practice we often collect payment in advance of assessment. In practice we do this because it
is practical and tax administration is all about practicality.

The triumvirate of ‘provisional tax’ and ‘advance tax’ and ‘PAYE’ concerned the collection
of payments throughout the year. Provisional tax concerned payments by sole traders,
partners and individual investors. Advance tax concerned payments by companies. PAYE
concerned payments by employees. The three collection mechanisms varied in their details
but had a common goal. That goal was to collect prepayments over the tax year as the
taxpayer derived income. We see this stated most clearly in the expression ‘pay as you earn’
or “PAYE’.

As we know (week 8) collection mechanisms may utilise prepayments and may utilise third
parties (e.g. the Income Tax (Collection of Provisional Tax) Regulations 2016).

Sometimes prepayments and third parties may be used in combination. This is what the ITA
1974 did under the collection mechanism known as PAYE. The PAYE Regulations required
an employer to withhold a portion of a salary payment to the employee. Sums withheld were
paid to the CIR.

Tables prepared by the CIR determined the sum to be withheld. Tables were constructed to
ensure that the aggregate sums withheld for the year closely approximated the anticipated
normal tax liability of the taxpayer (the employee) assessed at the close of the tax year.

Sums collected in this fashion (prepayments) were set against the assessment made once the
tax year ended. Overpayment produced a refund. The refund was called a ‘tax refund’. It was,
of course, not strictly speaking a refund of tax. It was a payment. And a payment is a
payment is a payment. The tax refund was a payment remedying excess payments by the
debtor (the taxpayer) to the creditor (the CIR).

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Events in 2013
In the year 2013 the ITA 1974 was still in effect. Over the years since 1974 there had been
many amendments to the Act. In the year 2013 there was a major amendment to the Act
concerning employment income. Amendments introduced a specific tax on employment
income popularly known as PAYE Final.

The amendments in 2013 continued the practice of having an employer withhold a portion of
the employee’s salary payment and account to the CIR. What was different was that the
withholding was not now just a collection mechanism. The withholding was rather a
substantive tax. It was a withholding tax. Since it concerned only employment income it was
also a specific tax.

What do we know about specific taxes? We know that if legislation imposes a general tax on
income and then alongside that a specific tax, we raise the spectre of double tax. Furthermore,
we know that the neatest way to prevent double tax is to omit the income subject to specific
tax from the chargeable income figure on which we charge the general tax. This is what the
2013 amendments did. Employment income subject to PAYE Final was omitted from
chargeable income.

Why all this history? Well, because the specific tax introduced to the ITA 1974 in 2013 is
continued in the new ITA 2015.

ITA 2015 and PAYE Final

In Fiji’s new ITA, PAYE Final is created by means of two related provisions. The first is
s.111 headed ‘Withholding of tax from employment income’.

Section 111(1) provides:

‘(1) Subject to this Subdivision, an employer must withhold tax from a payment of
employment income to an employee as prescribed.’

The second is s.125 headed ‘Withholding tax as a final tax’.

Section 125 provides:

‘(1) This section applies to tax withheld during a tax year under –
(a) section 111 …
(2) If this section applies, the tax withheld is a final tax on the income in respect of
which the tax has been withheld and –
(a) the income is not included in –
(i) gross income in computing the chargeable income of the person who
derives it for any tax year, …
(b) no deduction is allowable under this Act in computing the chargeable income
of the person for any expenditure or loss incurred in deriving the income;
(c) the income is not reduced by any deduction allowed under this Act or by any
loss carried forward; and
(d) the tax withheld is not reduced by any tax credits allowed under this Act.’

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We see here that an employer is to withhold from employment income (as defined in s.15) as
prescribed (s.111(1)).
Sums withheld are a final tax (s.125(2)).
Employment income subject to the specific tax is omitted from gross income/chargeable
income (s.125(2)(a)(i)). This defeats any spectre of double tax.

The employment income is also insulated from other matters relevant to the Act’s general tax
on income.
Expenses in deriving the employment income are not deductible in determining chargeable
income (s.125(2)(b)).
The employment income subject to the specific tax is a gross figure without any deduction
for expenses or past losses (s.125(2)(c)).
The specific tax cannot be reduced by any credit (s.125(2)(d)).

[In week 6 we looked at the specific taxes created by ss.9, 10 and 11.
Note that s.125(2) is very similar to s.12. Here is s.12:
‘Subject to this Act, the tax imposed under sections 9, 10, and 11 on a person is a
final tax on the income in respect of which it is imposed and –
(a) the income is not included in gross income in computing the chargeable
income of the person for any tax year;
(b) no deduction is allowed under this Act in computing the chargeable income
of the person for any tax year for any expenditure or loss incurred by the
person in deriving the income;
(c) the amount on which tax is imposed under section 9, 10 or 11 is not
reduced by a deduction allowed under this Act including for any loss
carried forward; and
(d) the tax payable by the person under section 9, 10 or 11 is not reduced by
any tax credits allowed under this Act.’]

Sections 111 and 125 in combination formally create the specific tax known as PAYE Final.
But what is the tax rate? And how is it computed? On these important substantive matters we
are told nothing. For this, we have to look at what is ‘prescribed’ (s.111(1)).

Prescribed per s.111(1)

Section 111(1) obliges an employer to withhold tax from payments of employment income as
prescribed.

Section 2 states:
‘ “prescribed” means prescribed in the Regulations;’.

Section 142 empowers the Minister to make regulations. Section 142 provides:
‘(1) The Minister may make Regulations –
(a) prescribing forms or other matters as required under this Act; or
(b) to give effect to the provisions of this Act.
(2) Without limiting the general effect of subsection (1), Regulations made under
that subsection may –

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 (a) contain provisions of a saving or transitional nature consequent on the
implementation of this Act ; or
(b) prescribe penalties for the contravention of the Regulations.
(3) If Regulations made under this section are of a transitional nature and are
made within 6 months after the commencement of this Act, the Regulations may
provide that they take effect from the date on which the Act comes into force.’

Here things get a little awkward. To the best of my knowledge no regulations have been
prescribed for s.111. Certainly none can be found on the FRCS website. Absent prescribing
regulations, employers cannot make any deduction from a payment of employment income.
Absent prescribing regulations, there is no specific tax called PAYE Final in the ITA 2015!

I describe the situation as awkward because it is well known that throughout 2016 and 2017
employers have withheld tax when paying salary to employees. How do we explain this? It
appears that in the absence of regulations under s.111, everybody (FRCS, employers and
employees) has utilised the regulations entitled Income Tax (Withholding Tax) Regulations
2013. These Regulations were created under the old ITA and have no application to the new
ITA.

This is a course in income tax law. We utilise the ITA 2015 as an example of a particular real
world ITA. This is not a course in Fiji income tax practice. We attend to the law and not to
practice. What are we to do? I propose that on this one occasion we just do what everybody
in Fiji appears to be doing. We will pretend that the regulations created under the old ITA
have been continued and are also the regulations under the new ITA.

With the pretence in hand, let’s proceed.

What is to be withheld per s.111? The central provision in the 2013 regulations is regulation
6. Regulation 6(2) provides:
‘… the amount of tax to be withheld by the employer from a payment of
employment income to the employee for a payment period, referred to in this
regulation as the “current payment period”, is computed according to the following
formula where –
Income Tax to withhold = [A1/F x G] – B1 + Income Tax on C2 – Income Tax
on C1 [if result < 0, then tax to be withheld = 0];
SRT to withhold = [A2/F X G] – B2 [If result < 0, then tax to be withheld = 0];’

Regulation 6(2) then defines the different variables utilised in the two formula.
‘A1 = Income Tax payable on C1;
A2 = SRT payable on C2;
B1 = Income Tax withheld to date;
B2 = SRT withheld to date;
“F” means the number of payment periods in the tax year;
“G” means the number of completed payment periods, including current period;
“B” means the tax withheld to date;
“C1” means [D x (F – G + 1)] + E [however, if the pay period is the same as the
previous, then C1 = C1 in the previous pay period];

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 “C2” means C1 + H;
“D” means the amount of employment income paid by the employer to the
employee in the current payment period;
“E” means the total amount of employment income paid by the employer to the
employee in the previous payment periods in the tax year;
“H” means the total bonus paid to date including that paid in the current period;
and
“SRT” means Social Responsibility Tax.’

We can call this the Reg 6 formula on sums to be withheld.

(Alternatively, if you wish, you can call this the spaghetti formula.)

[By a happy co-incidence the Reg 6 formula refers to the general tax on income as ‘Income
Tax’. This makes it practical to utilise the formula under the ITA 2015 where the general tax
on income has the same name.]

A complex formula
Why is the Reg 6 formula so complex?
The specific tax PAYE Final is a withholding tax. As a withholding tax it is in one respect
highly unusual. It does not impose a flat tax.

Consider the withholding tax imposed by s.10. (NrWT can be thought of as a single tax or
alternatively as seven different taxes (see the discussion in week 6).) Here we see that for
each form of income subject to the tax there is a flat tax. This is typical of a withholding tax.

By contrast, under regulation 6 the calculation of the sum to be withheld references the tax
rates for Income Tax. For resident individuals this is a progressive tax with rates varying
from 18% to 20%. (Likewise, SRT is a progressive tax.)

Referencing the progressive rates utilised for Income Tax also has a further consequence. It
introduces a tax period. Again we don’t normally see this in a withholding tax. In NrWT
there is no time dimension. The tax arises and only arises when a payment is made to the
non-resident taxpayer.

What PAYE Final is attempting to do is highly ambitious. Tax is to be withheld each pay
period. The sum withheld is a final tax. The amount to be withheld depends on a progressive
tax rate which utilises a tax year. How in month one can we know the taxpayer’s average rate
of tax for the year?

You can if you wish try a few calculations utilising the Reg 6 formula. Best to have some
Panadol at hand. Just kidding. No Panadol required. FRCS has made calculations easy by
providing a spread sheet. A copy of the spreadsheet is in this week’s moodle section under
the heading Further Reading.

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A complication
Prior to 2013, Fiji utilised a PAYE system as a collection mechanism. People often referred
to ‘PAYE tax’ but there was in truth no tax with that name. There was only the general tax on
income called ‘normal tax’. Sums withheld under the PAYE system were just prepayments
towards the taxpayer’s anticipated normal tax for the year.

With the changes in 2013 this is no longer the case. We have now a substantive tax called
PAYE Final and this substantive tax utilises progressive tax rates. More particularly it utilises
the same progressive tax rates as the general tax on income called Income Tax. This gives
rise to a complication. I call it ‘double dipping’. Double dipping refers to a situation where a
person who is entitled to some benefit gets that benefit not once, but twice.

Let me illustrate the problem.

Suppose we have a resident individual X.
X has a job providing employment income of $30,000 annually.
X also has investments producing income that is included in gross income, and after
deductions, chargeable income. X’s chargeable income is also $30,000.
Recall that X’s chargeable income does not include her employment income (s.125(2)(a)(i)).
Recall also that our first bracket for income tax is 0-30,000 and has a zero rate.

Two questions:
What is X’s Income Tax liability on chargeable income of $30,000. Answer: zero.
What is X’s PAYE Final on employment income of $30,000. Answer: zero.

You can perhaps see now why I use the expression ‘double dipping’.
The tax threshold is $30,000. Because both Income Tax and PAYE Final reference the same
set of progressive tax rates, X gets the benefit of the zero rate on the first bracket twice.
What a fantastic outcome for X.

X’s fantastic outcome is, of course, too good to be true. As we know, when things are too
good to be true they usually are not true.

In fact X cannot double dip. The legislation has anticipated this ‘problem’ and provided a
solution. This solution involves an adjustment to the calculation of X’s Income Tax. Section
8(6) provides the adjustment. Here is s.8(6).
‘(6) If, for a tax year, an individual has both chargeable income and employment
income to which section 125 applies, the Income Tax payable on the chargeable
income is computed according to the following formula –
A-B
where –
A is the amount of Income Tax that would be payable on an amount of
chargeable income equal to the aggregate of the individual’s chargeable
income and employment income to which section 125 applies for the year;
and
B is the amount of Income Tax that would be payable on an amount of
chargeable income equal to the individual’s employment income to which
section 125 applies for the year.’

You need to read the two definitions carefully.

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The calculation of A involves two steps.
We first calculate the sum of the taxpayer’s chargeable income and employment income.
Using the example of Ms X this is: $30,000 + $30,000 = $60,000.
Second we calculate the Income Tax on this figure.
This is: 3,600 + (20% of 60,000 – 50,000) = 5,600.

The calculation of B involves a single step.

What is the Income Tax on a chargeable income figure equal to the employment income? For
Ms X this is zero.

The final step in the calculation is: A – B.

5,600 – zero = 5.600

Sections 111 and 125 and the related s.8(6) is today the main story concerning the tax
treatment of employment income.

A mystery
If, as I have just asserted, ss.111, 125 and 8(6) are the main story, then a mystery arises. What
accounts for the general story with which I earlier commenced under the heading ‘A recap’?
Why does the Act bother to define ‘gross income’ as including employment income if
s.125(2)(a)(i) provides that employment income subject to PAYE Final is not to be included
in gross income? This is a good question.

The answer in brief is this. Section 111 will sometimes operate only as a collection
mechanism. In this situation we are back in a pre-2013 world. Section 111 sits alongside
s.110 as a prepayment towards a tax liability to be assessed at year end. When s.111 operates
only as a collection mechanism, employment income enters gross income and hence
chargeable income. And as part of chargeable income the employment income is subject
along with any other form of income to Income Tax under s.8(1).

The fuller answer requires us to look again at s.125(1).

I earlier quoted s.125 in an edited form. Here is the provision again with less editing.
‘(1) This section applies to tax withheld during a tax year under –
(a) section 111 provided that the employee does not have two or more
employments at the same time for the whole or part of the tax year; …
(2) If this section applies, the tax withheld is a final tax on the income in respect of
which the tax has been withheld and –
(a) the income is not included in –
(i) gross income in computing the chargeable income of the person who
derives it for any tax year, …’

Section 125 has two subsections. Subsection (2) can be thought of as the substantive
provision. It provides that sums withheld are to be a final tax. Subsection (1) has a different
focus. It concerns the question: ‘When does this section apply?’ One answer is in para(a).
The section applies where sums are withheld under s.111. But not on every occasion. There is
a proviso. The section (s.125) will not apply where an employee has, at any time during the
year, two jobs simultaneously. ‘Simultaneously’ is not to be understood literally. An

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individual who works weekdays for Co A and weekends for Co B will satisfy the proviso.
Where the proviso is satisfied, the two employers will still withhold under s.111. But s.125
will not be attracted. In consequence the sums withheld will not be a final tax. A further
consequence will be that para(a) of subsection (2) will have no application.

The number of occasions where a worker has two employments at the same time are likely to
be small, but they will exist.

In situations where s.125 does not apply, a different provision will govern. This is s.124.
Section 124 provides:
‘(1) For the purposes of this Act, if tax has been withheld under this Subdivision
from income derived by a person, the amount of income included in the gross
income of the person is the amount derived before the withholding of the tax.
(2) Subject to subsections (3) and (4), if tax has been withheld under this
Subdivision from income derived by a person, the person is allowed a tax credit for
the tax against the tax due by the person on the chargeable income of the person
for the tax year in which the tax was withheld.
(3) No tax credit is allowed if the tax withheld is a final tax on the income under
section 12 or 125.
(4) A tax credit allowed under this section is applied in accordance with section
8(3).
(5) A tax credit or part of a tax credit allowed to a person under this section for a
tax year that is not credited under section 8(3) for the year is refunded to the person
in accordance with section 33 of the Tax Administration Decree 2009.’

Sections 124 and 125 are alternative provisions. Under the subdivision (Part 9, Div 2, Subdiv
4) there are a number of withholding provisions. For each, either s.124 or s.125 will apply,
but not both. Where s.124 applies the withholding is only a collection mechanism. Where
s.125 applies the withholding becomes a final tax and the relevant income is not included in
gross income.

Note that the expression ‘tax credit’ as used in s.124 merely means a refund of prepayments
in excess of the assessed Income Tax liability.

Note that an employee with two jobs (and thus not subject to s.125) will not satisfy s.105 and
thus must file a tax return under s.104.

Another specific tax

In 2013 the old ITA was amended to create PAYE Final. At much the same time another
specific tax was created. This was the Fringe Benefits Tax (‘FBT’). The FBT also continues
in the ITA 2015.

[To be technical, the FBT was originally created in stand-alone legislation. The earlier
legislation is now repealed and the tax included in the new ITA as Part 4.]

Fringe Benefits Tax

FBT is an odd beast. Blessedly, this odd beast is straightforward.

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The main story is in ss.69 and 70.

Section 69 provides:
‘(1) Subject to this Act, a tax to be known as “Fringe Benefits Tax” is imposed for
each quarter at the rate prescribed by Regulations made under this Act on an
employer who has a fringe benefits taxable amount for the quarter.
(2) The Fringe Benefits Tax imposed under subsection (1) for a quarter is computed
by applying the rate prescribed by Regulations made under this Act to the fringe
benefits taxable amount of the employer for the quarter.’

Section 70(1) provides:

‘(1) Subject to subsection (2), the fringe benefits taxable amount of an employer
for a quarter is computed in accordance with the following formula –
A/(1- r)
Where –
A is the total value of fringe benefits provided by the employer to employees in
the quarter; and
r is the rate of Fringe Benefits Tax prescribed by Regulations made under this
Act.’

Looking at these provisions we need to note two points.

First, FBT is not an income tax. (This is why I call it an odd beast. It appears in the ITA but it
is not actually an income tax.) FBT is a tax upon the employer. The tax is calibrated by
reference to the aggregate value of fringe benefits provided to employees for a three month
period. For an employer, fringe benefits are an expense. Rather than an income tax this is an
expenses tax.

The closest analogy is with a payroll tax. A payroll tax is a relatively common form of tax in
which employers are subject to a tax calculated as a percentage of their payroll. Typically this
is a small percentage figure e.g. 1% of payroll. In the FBT, employers are subject to tax by
reference to a portion of their ‘payroll’, that portion being remuneration provided in the form
of a fringe benefit. Unlike a regular payroll tax the tax rate is substantial. The prescribed rate
is 20%.

Second, attention must be given to the tax rate. Formally this is 20%. In substance, the rate is
actually 25%. Here’s the reason. The tax is calibrated by reference to ‘the fringe benefits
taxable amount’ (‘fbta’). The fbta is calculated as A/(1- r).

Here is an example. Suppose an employer provides fringe benefits for a three month period
valued at $100. The fbta is: 100/1- 20% = 100/0.8 = 125.
The tax liability is: fbta x tax rate = 125 x 20% = 25.

The value of fringe benefits provided was $100.

The tax liability is $25.
The effective rate of tax is 25%.

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It is unclear as to why the Act does not directly state a tax rate of 25% rather than stating a rate
of 20% which is then applied to a grossed up figure so as to produce an effective rate of 25%.

Items included in ‘A’ (the aggregate value of benefits applied to all employees for the three
month period) are listed in s.72(1). Sections 73-81 then elaborate on each of the items and
provide for each a valuation formula. You need to read through these sections. They are
straightforward and easy to read.

FBT or employment income

A fringe benefit arising from employment will be subject to FBT in the hands of the
employer or be included in employment income of the worker, but not both.

We see this in s.15. Section 15(1) provides:

‘(1) The following are employment income –
(b) the value of a fringe benefit … derived by an employee in respect of
employment that is not subject to tax under the Fringe Benefits Tax; …’

(The value of a fringe benefit included in employment income will, of course, be subject to
either PAYE Final or Income Tax dependant on whether s.125 applies to the employment
income.)

A fringe benefit that is exempt income is exempt for all purposes. It is neither subject to FBT
nor included in the employee’s employment income. Section 71 lists exempt fringe benefits.
Read this section carefully.

Fringe benefits included in employment income (and thus not subject to FBT) fall into two
groups.
First, fringe benefits provided by a non-resident employer or from sources overseas (see
s.70(2)(b)(c) and s.70(3)).
Second, fringe benefits having a money form. These are allowances and excess employer
contributions to FNPF (see s.72(2)(a)(b) and s.15(1)(c)(d)).

One last matter

This week we are looking in detail at the tax treatment of employment income under the ITA
2015. The most important detail concerns the specific tax PAYE Final and the related
provisions (s.124 or s.125: s.8(1) or s.8(6)) and the specific tax FBT. I have now covered
those matters. One last matter requires mention. This is a more minor matter. I like to call it
‘the lonely worker’.

This final matter concerns past losses. Chargeable income is gross income less allowable
deductions. Allowable deductions include any available loss carry forward (s.30). Where
does s.30 fit in the tax treatment of employment income?

There are two answers to this question.

First, past losses are simply irrelevant where employment income is subject to PAYE Final.
PAYE Final is a specific tax. Past losses concern chargeable income and thus the Act’s

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general tax on income, namely Income Tax. No connection. Section 125(2) recognises this
logic when it provides:
(2) If this section applies, the tax withheld is a final tax on the income in respect of
which the tax has been withheld and –
(a) …
(b) …
(c) the income is not reduced by any deduction allowed under this Act or by any
loss carried forward;

The second answer concerns the relatively uncommon case (two simultaneous jobs) where
s.125 does not apply to employment income.

Where employment income is included in gross income, past losses cannot be set against
employment income. Nor can any other deductions of a year be set against employment
income. All of this is clear on a careful reading of s.30.

Let me start with other deductions in a year.

We know that any expenses incurred in deriving employment income are not deductible. This
is clearly stated in s.22(1)(b).
But what if an employee (to whom s.125 does not apply) also has a business as a sole trader.
The business is unprofitable for the year. Business expenses exceed business revenue. Can
the business loss be set against the employment income? On general principles one would be
inclined to say yes. Gross income is employment income plus business revenues. Chargeable
income is gross income less expenses. Everything goes into the one pot. Deductible expenses
are set against a single figure, gross income. This is what one might expect. But this is not
what we find. The employment income included in gross income is quarantined. None of the
business expenses can be set against the employment income. We see this in s.30(1).

Section 30(1) provides:

‘(1) If the total deductions allowed to a person for a tax year, … exceeds the
person’s gross income, other than employment income, for that year, the person
has a net loss for the year equal to the amount of the excess.’

In calculating a net loss for the year, we must exclude any employment income in the gross
income figure.

Here is an example.
X has two jobs producing aggregate employment income of $40,000.
X is also has two businesses.
Business 1 is profitable: revenues $20,000, expenses $15,000.
Business 2 is unprofitable: revenue $36,000, expenses $50,000.
X’s gross income is: 40,000 + 20,000 + 36,000 = 96,000
X’s expenses are: 15,000 + 50,000 = 65,000
Prima facie chargeable income is gross income less allowable deductions (s.13).
Chargeable income is 96,000 – 65,000 = 31,000.
However, s.30(1) prohibits account being taken of the employment income.
In consequence we have the following situation:
$56,000 (gross income excluding employment income) – 65,000 = ($9,000).
We have a loss for the year of $9,000. This loss can be carried forward and used as a
deduction in the following year.

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Rather schizophrenically, we still have chargeable income for the year of $40,000. This is the
portion of the gross income composed of employment income. This is the lonely worker.

The second of the rules concerns the carry forward of a loss. A loss carried forward cannot be
set against employment income.

Section 30(2) provides:

‘(2) If a person has a net loss for a tax year, the amount of the loss is carried forward
to the following tax year and allowed as a deduction against the person’s gross
income, other than employment income, derived in that following year.’

Here is an example.
X has two jobs producing aggregate employment income of $43,000.
X also has a business. The business produces a profit for the year of $16,000.
Prima facie X has chargeable income of $59,000.
Then we add one further fact. X has a carry forward loss of say $30,000.
The carry forward loss cannot be set against the employment income.
The carry forward loss is set against the business profit for the year.
$16,000 - $30,000 = ($14,000)
X has a loss to be carried forward for next year of $14,000.
Again, rather schizophrenically, he has in the current year chargeable income of $43,000.
This is the employment income included in gross income which we are forbidden to reduce
utilising a loss carry forward. Such is the lot of the lonely worker.

Some reflection
Why do we have such complex rules?
I don’t know.
The Act is observably hostile to employees.
Expenses in deriving employment income are not deductible.
Losses from other sources cannot be set against employment income.
Employees are isolated and subject to tax on their gross employment income regardless of
their overall income circumstances.
The path of the traditional entrepreneur is to work two jobs while supporting a start-up
business that in its early days make losses, the silver lining being that the business losses may
shelter the employment income from tax. That silver lining is gone. The path of the
traditional entrepreneur becomes so much the harder.

This concludes our detailed review of the tax treatment of employment income in the ITA
2015.

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