Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)
Amendments Relating to Accrued Leave Transfer Payments
Purpose of amendments:
To provide that leave transfer payments made between employers
- in respect of accrued leave entitlements of an employee when that employee transfers from one employer to another; and
- pursuant to an industry practice to accommodate the transfer of employees pursuant to, or to accommodate the implementation of, an industrial award
will be deductible to the transferring employer (the payer) and assessable to the receiving employer (the payee).
Date of effect: The amendments will come into effect from the date upon which the Bill receives Royal Assent, and will apply retrospectively as if the amendments had been made at the time subsection 51(3) of the Income Tax Assessment Act 1936 was enacted in its original form.
Under the existing law, subsection 51(3) of the Act denies a deduction for a payment made in respect of long service leave, annual leave, sick leave or other leave, except in respect of an amount paid to the person to whom the leave relates, or, if that person is deceased, to their dependant or personal representative.
Following the enactment of subsection 51(3), the Commissioner of Taxation initially adopted the view that any payment in respect of accrued leave entitlements made between employers engaged in an industry, such as the waterfront industry, where employees are transferred regularly between employers, is deductible on the basis that it was a constructive payment by the transferring employer to the employee to whom the leave relates.
The Commissioner also adopted the view that such payments are on revenue account and must be included in the assessable income of the receiving employer, either under subsection 25(1) or paragraph 26(j) of the Act.
Following the decision of the Federal Court of Australia in TNT Skypak International (Aust) v. FC of T 88 ATC 4279, the Commissioner took the view that a deduction was not allowable for any payment in respect of long service or other form of leave that was not paid to the person to whom the leave relates, or to a dependant or personal representative of that person.
It is clear that subsection 51(3) was not designed to apply to payments made between employers in circumstances that exist in the waterfront industry or other industries which have similar working conditions.
It was meant to ensure that employers could not claim a deduction for a mere provision on account of leave which accrues to an employee during a year of income, for which no obligation to pay will arise until the employee actually takes that leave.
In general, employees accrue leave entitlements based only on the period of employment with their current employer. However, in some industries such as the waterfront industry, employees are likely to change employers so often that they could never take leave, but rather would be paid out the value of leave entitlements each time they transfer to a different employer.
In those industries, leave entitlements under the terms of an industrial agreement or award may be based on total service with a number of employers. So employers may be required, or may as a matter of commercial reality decide, to pay one another on account of a transferring employee's accrued leave entitlements.
Consequently, it is necessary to make specific amendments to the Act to ensure that a deduction for such payments is allowable to the transferring employer and is assessable in the hands of the receiving employer.
These amendments will ensure that, where there is an industrial practice for employees to regularly transfer between employers and for payments to be made by the transferring employer to facilitate the transfer of employees pursuant to, or to accommodate the implementation of, an industrial award, any payment made by one employer to another in respect of accrued leave entitlements of a transferring employee will be deductible to the employer who makes the payment and assessable to the employer who receives the payment.
Division 5 of the Bill will amend section 6 [Clause 18] , section 26 [Clause 20] and section 51 [Clause 21] of the Principal Act and will introduce new section 6G [Clause 19] into the Principal Act.
The object of the amendments is to ensure, firstly, that accrued leave transfer payments are included in the assessable income of the employer who receives the payment (the 'payee') [New paragraph 26(ec)] and, secondly, that such payments are an allowable deduction to the employer who makes the payment (the 'payer'). [Substituted subsection 51(3)]
Clause 18 amends section 6 of the Act by inserting the definition of 'accrued leave transfer payment' in subsection (1). That term is defined as having the meaning given by new section 6G of the Act. The term is used in the amended sections 26 and 51 of the Act, which ensure the assessability and deductibility of such payments.
For the purposes of the Income Tax Assessment Act , a payment made by a taxpayer (the 'payer') to another taxpayer (the 'payee') is an accrued leave transfer payment if the payment satisfies certain criteria. [New subsection 6G(1)]
Firstly, the payment must be in respect of long service leave, annual leave, sick leave or other leave entitlements which have accrued to the employee who is to be transferred.
Secondly, the whole or part of the leave accrued when the person to whom the leave relates was an employee of the payer. This covers both the situation where the person commenced employment with the payer and also the situation where the person transferred from a previous employer to the payer.
Thirdly, at the time the payment is made, the person to whom the leave relates has ceased, or is about to cease, to be an employee of the payer, and has become, or is about to become, an employee of the payee, and the payment is made under, or for the purposes of facilitating the provisions of a law of the Commonwealth, a State or a Territory, or an award, order, determination or industrial agreement in force under any such law.
For the purposes of these provisions, 'employee' is defined to include a person who holds an office, appointment or position, or who performs functions or duties, or who engages in any work, or who does any other act or things, and the person is entitled to long service leave, annual leave, sick leave or other leave because of the holding of that office, appointment or position, or because of the performance of those functions or duties, or because of the engaging in of that work, or because of the doing of those other acts or things, as the case requires. [New subsection 6G(2)]
This provision is intended to extend the common law definition of employee to cover any person who is entitled to any form of leave by reason of the office or position they hold, or by reason of the functions, duties or work they perform.
The employee is an employee of anyone from whom they hold an office or position, or for whom they carry out functions, duties, or work.
Clause 20 amends section 26 of the Act so that any amount received by way of an accrued leave transfer payment is included in the assessable income of the employer who receives the payment. [New paragraph 26(ec)]
This will put it beyond any doubt that such payments are on revenue account and must be included in the assessable income of the employer who receives the payment.
The Commissioner of Taxation has always been of the view that such payments are assessable income of the employer who receives the payment. No change in the Commissioner's administration is required by this aspect of the amendments.
Clause 21 amends section 51 of the Act by replacing subsection 51(3) to provide that a deduction is not allowable under subsection 51(1) in respect of long service leave, annual leave, sick leave or other leave except in respect of an accrued leave transfer payment or an amount paid to the person to whom the leave relates or, if that person is dead, to a dependant or personal representative of that person.
This will ensure that any payment in respect of accrued leave entitlements of a transferring employee will be a deduction from the total assessable income of the transferring employer.
Clause 22 provides that subsections 3(2) and (3) of the Income Tax Assessment Amendment Act (No. 3) 1978 have, and are taken to have had, effect as if the amendments made by this Division had been made by subsection 3(1) of that Act.
This provision means that the amendments will have effect as if they had been enacted at the time subsection 51(3) was enacted originally and will have effect from the date upon which subsection 51(3) commenced operation.
The retrospective application of these amendments will not disadvantage any taxpayers, because the amendments give effect to the interpretation of the law which the Commissioner of Taxation has applied from the commencement of subsection 51(3) until 24 August 1989 when, as a result of the decision of the Federal Court of Australia in the TNT Skypak case, the Commissioner changed his earlier interpretation. Since then, affected taxpayers have sought to return to this treatment.
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