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Edited version of your written advice
Authorisation Number: 1012810456118
Ruling
Subject: International - Section 23AG and PAYG withholding
Questions and answers
1. Are payments of leave (either long service or annual leave) accrued during an eligible period of Foreign Service under section 23AG of the Income Tax Assessment Act 1936 subject to Pay As Your Go Withholding tax under section 12-35 of Schedule 1 of the Taxation Administration Act 1953?
No.
2. An employee has been posted to an overseas location where they satisfy the section 23AG of the ITAA 1936 requirements to have their foreign service treated as tax exempt. The employee arrives, completes 91 days of continues Foreign Service. When this, due to operational needs, they are unable to use their accrued recreation leave directly after as they are required to return to work in Australia straight away. If the employee, 14 days later takes their 30 days of accrued recreation leave, would the employer be required to withhold tax from the employee's accrued leave?
No.
3. An employee has been posted to an overseas location where they satisfy the section 23AG of the ITAA 1936 requirements to have their foreign service treated as tax exempt. The employee arrives, completes 91 days of continues Foreign Service. When this ends, due to operational needs, they are unable to use their accrued recreation leave directly after as they are required to return to work in Australia straight away. If the employee, 50 days later takes their 30 days of accrued recreation leave, would the employer be required to withhold tax from the employee's accrued leave?
No.
4. An employee has been posted to an overseas location where they satisfy the section 23AG of the ITAA 1936 requirements to have their foreign service treated as tax exempt. The employee arrives, completes 91 days of continues Foreign Service. When this ends, due to operational needs, they are unable to use their accrued recreation leave directly after as they are required to return to work in Australia straight away. If the employee, 50 days later takes their 91 days of accrued recreation leave, would the employer be required to withhold tax from the employee's accrued leave?
No.
5. An employee has been posted to an overseas location where they satisfy the section 23AG of the ITAA 1936 requirements to have their foreign service treated as tax exempt. The employee arrives, completes 91 days of continues Foreign Service. When it ends, due to operational needs, they are unable to use their accrued recreation leave directly after as they are required to return to work in Australia straight away. If the employee, 14 days later cashes in 30 days of accrued recreation leave, would the employer be required to withhold tax from the employee's accrued leave?
No.
6. An employee has been posted to an overseas location where they satisfy the section 23AG of the ITAA 1936 requirements to have their foreign service treated as tax exempt. The employee arrives, completes 91 days of continues Foreign Service. When it ends, due to operational needs, they are unable to use their accrued recreation leave directly after as they are required to return to work in Australia straight away. If the employee, 50 days later cashes in 30 days of accrued recreation leave, would the employer be required to withhold tax from the employee's accrued leave?
No.
7. An employee has been posted to an overseas location where they satisfy the section 23AG of the ITAA 1936 requirements to have their foreign service treated as tax exempt. The employee arrives, completes 91 days of continues Foreign Service. When it ends, due to operational needs, they are unable to use their accrued recreation leave directly after as they are required to return to work in Australia straight away. If the employee, 50 days later cashes in 91 days of accrued recreation leave, would the employer be required to withhold tax from the employee's accrued leave?
No.
8. An employee reached their 10 years of service and wants to take their long service leave. 33 days of their long service was accrued during employment at a location that satisfies the requirements of section 23AG of the ITAA 1936. The employee takes their 33 days of long service leave directly after they return from 91 days. Is the employer required to withhold tax from the employee in respect of their long service leave?
No.
9. An employee reached their 10 years of service and wants to take their long service leave. 33 days of their long service was accrued during employment at a location that satisfies the requirements of section 23AG of the ITAA 1936. The employee takes their 33 days of long service leave 50 days after they return from 91 days. Is the employer required to withhold tax from the employee in respect of their long service leave?
No.
10. An employee reached their 10 years of service and wants to take their long service leave. 91 days of their long service was accrued during employment at a location that satisfies the requirements of section 23AG of the ITAA 1936. The employee takes their 33 days of long service leave 50 days after they return from 91 days. Is the employer required to withhold tax from the employee in respect of their long service leave?
No.
11. An employee reached their 10 years of service and wants to take their long service leave. 33 days of their long service was accrued during employment at a location that satisfies the requirements of section 23AG of the ITAA 1936. The employee cashes in their 33 days of long service leave rather than taking it. Is the employer required to withhold tax from the employee in respect of their long service leave?
No.
12. An employee reached their 10 years of service and wants to take their long service leave. 91 days of their long service was accrued during employment at a location that satisfies the requirements of section 23AG of the ITAA 1936. The employee cashes in their 91 days of long service leave rather than taking it. Is the employer required to withhold tax from the employee in respect of their long service leave?
No.
This ruling applies for the following period
1 July 2014 to 30 June 2015
1 July 2015 to 30 June 2016
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
Depending on the needs of the employer, employees are regularly sent to locations overseas that meet the Income Tax Assessment Act 1936, section 23AG requirements to be eligible for tax exemption.
Generally employees who are sent and receive tax exemptions take their accrued recreation leave directly after return. However, due to employer's needs sometimes the employee is unable to do this and is required to take it at a later date.
Employees are, in limited circumstances, allowed to cash in their leave after returning home. This is not because of termination, resignation or retirement.
Relevant legislative provisions
Taxation Administration Act 1935 Section 12-35
Income Tax Assessment Act 1936 Section 23AG
Reasons for decision
Please note; our response to questions 1 to 12 is combined as there is no difference in the application of the law.
Under section 12-35 of the Taxation Administration Act 1935 it states;
An entity must withhold any amount from salary, wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
Under subsection 23AG(1) of the Income Tax Assessment Act 1936 it states;
Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service are exempt from tax.
Taxation Determination TD 2012/8, at paragraph 81 explains;
Conversely, in some cases an amount of income is exempt under section 23AG even though it is salary or wages for a period during which the person was not engaged in foreign service. For example, this would occur if recreation leave accrued during the period when the person was engaged in foreign service but the person having not taken any of that leave during that period, takes the leave during a later time when they are employed in Australia. If the other requirements of section 23AG are satisfied, the salary or wages paid for that period of leave is exempt because, as the leave accrued during a period of foreign service, the earnings are attributable to the period of foreign service and hence are foreign earnings derived from that foreign service.
Application to your circumstances
An employee has been posted to an overseas location where they satisfy the section 23AG of the ITAA 1936 requirements to have their foreign service treated as tax exempt.
The employee completes 91 days of continues Foreign Service. When the Foreign Service ends, due to the employer's needs, they are unable to use their accrued recreation leave directly after they return home as they are required to return to work in Australia straight away.
Accordingly payments of leave (either long service or annual leave) accrued during an eligible period of Foreign Service under section 23AG of the Income Tax Assessment Act 1936 which are taken or cashed out at a period of time after returning from employment are not subject to pay as you go withholding tax.
Consequently, the employer is not required to withhold tax from the employee's Foreign Service accrued leave or long service leave, whether the leave is taken or cashed out regardless of how long after the Foreign Service the leave is taken or cashed out.
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