ATO Interpretative Decision

ATO ID 2004/489

Income Tax

Issue

Is the taxpayer, an employer, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for annual leave and long service leave contributions made to a worker entitlement fund?

Decision

Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for annual leave and long service leave contributions made to the worker entitlement fund.

Facts

The taxpayer is required by a proposed industrial instrument to make annual leave and long service leave contributions to the worker entitlement fund nominated in the industrial instrument. The taxpayer intends to make annual leave and long service leave contributions to the nominated worker entitlement fund on behalf of its workers. The leave contributions are placed into actual member accounts by the worker entitlement fund.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings

1.

to the extent to which they are incurred in gaining or producing assessable income

2.

except where the outgoings are capital, private or domestic in nature, or

3.

prevented from being deductible by a provision of the Act.

1. Incurred in gaining or producing assessable income

In carrying on business activities, the taxpayer is required to make the contribution to the proposed worker entitlement fund as a result of their legal obligations under the proposed industrial instrument. There is a connection between the business activities being carried on by the taxpayer and the taxpayer's obligation to provide for worker entitlements.

Under the proposed worker entitlement fund deed, the taxpayer may obtain a reimbursement (up to the amount in the employee's member account) for a payment made to an entitled employee. The taxpayer has no right to a refund of a payment into an employee members account, only a reimbursement.

The contributions to the worker entitlement fund are non refundable payments made directly to actual member accounts. The taxpayer is required to make the contributions to meet its legal obligations in carrying on business activities. As such, the contributions have been incurred by the taxpayer and have a sufficient connection with the income producing activities to give rise to a deduction for the taxpayer.

2. Is the amount capital in nature?

Whether the payment of worker entitlements to the worker entitlement fund are revenue or capital in nature depends on the character of the payment when made by the taxpayer (G.P. International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1).

When the taxpayer makes the contribution/s to the worker entitlement fund, the taxpayer is meeting their recurring legal obligations to make contributions for their workers' entitlements. This obligation is recurrent and is a factor which points toward the amount being revenue in nature.

As stated by Hill J in Walstern v. Federal Commissioner of Taxation [2003] FCA 1428; 2003 ATC 5076; (2003) 54 ATR 423

However it cannot be said that the question whether a payment is a one-off payment or whether it is a recurrent payment is a matter irrelevant to whether the outgoing is capital. In a case such as the present where the payment operates to create the capital of a trust fund the outlay will ordinarily be seen as capital both because of the lasting qualities enjoyed and the fact that what is being made is a final payment to secure future benefits. However, if a contribution is one of a number of 'recurrent' contributions for employees, so that it can be seen to be part of the ordinary flow of business expenditure of a taxpayer, the character of the outlay will take on a different complexion.

The taxpayer is making repetitive contributions as required by the proposed industrial instrument to discharge an immediate obligation, and the obligation is directly connected to the income earning capacity of the business and is part of the immediate ordinary flow of business expenditure. As such, the payment of the contributions is revenue in nature.

3. Is the contribution precluded from deduction by section 26-10?

Section 26-10 of the ITAA 1997 provides that an outgoing for leave is not deductible except where the outgoing is an amount which is paid in the income year to the individual to whom the leave relates (or if the individual is deceased, to their dependant or legal representative), or it is an accrued leave transfer payment that is made in the income year.

The contributions made by the taxpayer to the worker entitlement fund are contributions made to discharge the taxpayer's immediate legal obligations in respect to worker entitlements. While the contribution is calculated with reference to the worker's future leave entitlements, the immediate outgoing of the taxpayer is not an outgoing for leave. As such the taxpayer's contribution to the worker entitlement fund is not affected by the operation of 26-10 of the ITAA 1997.

Year of income:  Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   section 8-1
   section 26-10

Case References:
G P International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation
   (1990) 170 CLR 124
   90 ATC 4413
   (1990) 21 ATR 1

Related ATO Interpretative Decisions
ATO ID 2004/490

Keywords
Annual leave
Deductions & expenses
Long service leave

Siebel/TDMS Reference Number:  3831791; 1-5QEX307

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  11 June 2004
Date reviewed:  2 April 2015

ISSN: 1445-2782