Work tax deductions can’t help unfair dismissal claim

Fair work laws and tax laws – now there’s an interesting mix! Why would they be connected, you ask? Well, it seems they may not be, but that hasn’t stopped a dismissed worker trying to make a connection.

The unfair dismissal laws have been in place for awhile, but it seems they may not be fully understood, if a recent decision by Fair Work Australia is any guide.

Generally speaking, under the unfair dismissal laws, there is an income threshold above which the laws don’t apply and claims can’t be made. The income threshold relates to an employee’s “earnings” or wages, but in the case in question, the employee attempted to bring the concept of taxable income into the equation. He was not successful.

In that decision, a senior retail worker lost a claim that he was protected from unfair dismissal despite claiming that his taxable annual earnings, less work-related deductions, were below the $108,300 high-income threshold as prescribed in the Fair Work Act.

The worker, Mr Read, had a gross annual wage as the menswear buyer of $115,605 when Universal Store dismissed him earlier this year. But Mr Read claimed his taxable income for the year took his earnings below the income threshold when work-related expenses were taken into account.

Under s 382 of the Fair Work Act 2009, a person is protected from unfair dismissal if he or she is covered by a modern award or an enterprise agreement, or if his or her income is less than the high income threshold, which rose from $108,300 to $113,800 in July 2010.

Mr Read claimed his gross income for 2009-10 was $102,405, prior to deduction for work-related expenses such as mobile phone, car, fuel, registration and insurance. Mr Read said he had a car and phone allowance until 2009, when his manager advised he would be better off financially if he made the deductions through his tax return. He received a wage rise as a result, putting his wage above the high-income threshold.

Mr Read contended that his “true income” should be considered, ie. after work-related deductions were subtracted.

Fair Work Australia Commissioner Donna McKenna accepted the company’s submission that deductions for work-related expenses in Mr Read’s income tax return were not relevant in ascertaining his earnings for the purposes of the Fair Work Act, even though those expenses reduce his taxable income. The Commissioner accepted that they did not reduce his “wages” within the meaning of s 332(1) of the Act.

As we all know, tax laws have an interaction with many other laws (eg. social security), but it seems not with the Fair Work laws.

Section 332 of the Fair Work Act defines an employee’s “earnings” as including the employee’s wages and amounts applied or dealt with in any way on the employee’s behalf or as the employee directs, and the agreed money value of non-monetary benefits. The definition does not, however, mention tax deductions. In the Commissioner McKenna’s words, “The expenses/deductions to which [Mr Read] has referred are not identified in the matters which are not included in an employee’s earnings under s 332(2)”.

She said that if Mr Read’s contentions were accepted, “there could be differential outcomes in terms of whether the high-income threshold had been exceeded for employees who had identical wages above the high-income threshold”.

Put simply, employees who had identical wages of, say, $120,000 could end up in different situations under the unfair dismissal laws depending on the amount of their tax-deductible expenses. The Fair Work laws don’t provide for that sort of outcome. The test in “earnings” (including wages) and taxable income doesn’t come into it.

Commissioner McKenna ruled that Mr Read’s income was above the high-income threshold and dismissed the application.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

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