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ATO Interpretative Decision

ATO ID 2002/647

Income Tax

Assessability of a payment of unused 'special leave' received upon retirement
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the taxpayer assessable under section 26AC of the Income Tax Assessment Act 1936 (ITAA 1936) on a lump sum payment of unused 'special leave' paid by their employer upon retirement?

Decision

Yes. The taxpayer is assessable under section 26AC of the ITAA 1936 on a lump sum payment of unused 'special leave' paid by their employer upon retirement.

Facts

The taxpayer retired from their employment.

The taxpayer received a lump sum payment from their employer which included an amount for unused 'special leave'. The special leave had accrued to the taxpayer in the period between 15 August 1978 and 18 August 1993.

Under the terms of their employment the taxpayer was entitled to annual leave.

In addition to this however, the taxpayer was given an additional amount of leave called 'special leave'.

The 'special leave' was given by the employer in recognition of the particular demands and rigours of the taxpayer's duties and their impact on the taxpayer and their family. It was intended as additional leave for rest and recreation which was justified by the demands of a particular period of employment.

Reasons for Decision

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 26AC of the ITAA 1936 which deals with lump sum payments received on retirement or termination of employment in lieu of annual leave.

Section 26AC of the ITAA 1936 deals with lump sums paid after 15 August 1978 in consequence of the retirement of a taxpayer after that date being an amount in respect of unused annual leave. The lump sum payment is included in the taxpayer's assessable income (subsection 26AC(2) of the ITAA 1936).

Subsection 26AC(4) of the ITAA 1936 defines the term 'annual leave'. It includes in that term:

•
leave actually called annual leave, recreation leave or annual holidays to which the taxpayer has an entitlement (paragraph 26AC(4)(a) of the ITAA 1936);
•
leave which is differently described to which the taxpayer has an entitlement and is determined on a similar basis to annual leave (paragraph 26AC(4)(b) of the ITAA 1936); and
•
leave that may be made available to a taxpayer as a privilege and is determined on a similar basis to annual leave (paragraph 26AC(4)(c) of the ITAA 1936).

The taxpayer had no entitlement to the additional period of 'special leave'. The leave was provided by the employer as a privilege. The special leave was made available as an additional period for rest and recreation in recognition of the increased demands placed on the taxpayer as a result of the duties they performed. It served a similar purpose to that of annual leave.

The availability of the special leave was determined by reference to matters similar to those matters used to determine entitlement to annual leave. Therefore the payment of special leave falls within the definition of annual leave for the purposes of section 26AC of the ITAA 1936.

Note: As the special leave accrued in the period prior to 18 August 1993, the tax offset available under section 159SA of the ITAA 1936 will apply and the lump sum will be subject to the maximum rate of tax of 30%.

Date of decision:  8 April 2002

Year of income:  Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1936
   section 26AC
   subsection 26AC(2)
   subsection 26AC(4)
   paragraph 26AC(4)(a)
   paragraph 26AC(4)(b)
   paragraph 26AC(4)(c)
   section 159SA

Income Tax Assessment Act 1997
   section 6-10
   section 10-5

Keywords
Lump sum payments for unused annual leave
Lump sum payments

Business Line:  Small Business/Individual Taxpayers

Date of publication:  14 June 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 8 April 2002 Original statement
  27 February 2015 Updated statement
  1 September 2017 Archived

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