Meaning of employee

Section YA 1 "employee" of the Income Tax Act 2007 

Key features

Section 130 of the Taxation (Tax Administration and Remedial Matters) Act 2011 amends the definition of "employee" in section YA 1 of the Income Tax Act 2007 to ensure that a shareholder-employee who elects that their employment income not be subject to PAYE is an employee for the purposes of the FBT rules.

Application date

The amendment applies from the beginning of the 2008-09 income year.

However, a savings provision ensures that the retrospective amendment does not apply for a taxpayer who has taken a tax position on the application of the FBT rules prior to 30 November 2010 relying on the definition of employee prior to this amendment.

Detailed analysis

In the 2007 Act, an employee is defined as a person who is entitled to receive income that is subject to PAYE. As a shareholder-employee of a close company (a company with five or fewer shareholders) may elect to opt out of the PAYE rules for employment income derived from the company, a shareholder-employee does not come within the meaning of employee.

The Rewrite Advisory Panel concluded this is an unintended change in law, and noted that a shareholder-employee who opts out of the PAYE rules should be subject to the FBT rules.

The amendment to the definition of "employee" in section YA 1 ensures that the meaning of employee includes shareholder-employees for the purpose of the FBT rules.