ATO Interpretative Decision

ATO ID 2002/730 (Withdrawn)

Superannuation

• This ATOID has been amended to include additional facts in order to clarify the ATO position.
  This ATO ID is withdrawn as the introduction of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 affects the position set out in this ATO ID. Despite its withdrawal, this ATO ID continues to be a precedential view in respect of foreign earnings derived before 1 July 2009 from foreign service performed before 1 July 2009. In relation to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009, the ATO position is set out in ATO ID 2011/29.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a lump sum payment for unused long service leave (LSL) entitlements exempt from income tax for that part of the payment attributable to the amount of days the taxpayer worked overseas?

Decision

Yes. The lump sum payment for unused LSL attributable to the service overseas is exempt from income tax pursuant to subsection 23AG(1) of the Income Tax Assessment Act 1936) (ITAA 1936). The income tax payable on the remaining non-exempt income is calculated pursuant to subsection 23AG(3) of the ITAA 1936.

Facts

The taxpayer worked overseas for a number of years and their service was terminated by the employer sometime after returning to Australia. The taxpayer was a resident of Australia and lodged tax returns in Australia while overseas. Upon termination the taxpayer received lump sum payments for unused LSL from the employer. The taxpayer had been working for the employer before going overseas and the LSL applied to the 'total service period'. The taxpayer's foreign earnings were not exempt from income tax in the foreign country only because of one or more of the reasons listed in subsection 23AG(2) of the ITAA 1936 and therefore subsection 23AG(2) does not apply to deny an exemption to the taxpayer.

Reasons for Decision

The source of salary and wage income is generally accepted to be the place where the services are performed (FC of T v French (1957) 98 CLR 398). As the LSL accrued during service both overseas and in Australia, its source is both overseas and Australia. As LSL accrues on a daily basis the portion attributable to the service performed overseas can be separated from the portion attributable to service performed in Australia.

Generally 'foreign earnings' derived by an Australian resident individual engaged in service in a foreign country for a continuous period of at least 91 days are entirely exempt from Australian tax under section 23AG of the ITAA 1936.

The taxpayer's overseas service was continuous and for more than 90 days. In addition, the payment for unused LSL attributable to the service overseas satisfies the definition of 'foreign earnings' in subsection 23AG(7) of the ITAA 1936 and is accordingly exempt from income tax.

Year of income:  30 June 1999

Legislative References:
Income Tax Assessment Act 1936
   section 23AG

Case References:
FC of T v French
   (1957) 98 CLR 398

Other References:
Previously released as CDS10271

Keywords
Foreign income
Long service leave
Lump sum payments for unused long service leave

Business Line:  Superannuation

Date of publication:  31 July 2002

ISSN: 1445-2782