Edited version of private ruling

Authorisation Number: 1011727985638

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Question 1

Will the long service leave payments received from another employer be assessable income of a company?

Answer

Yes. Accrued long service leave transfer payments are treated as assessable income under section 15-5 of the Income Tax Assessment Act 1997 ('ITAA 1997').

Facts

The company is a small business with an annual turnover of less than $25m.

The company, has, some years ago, engaged the organisation to employ staff working solely for the company.

Some of the staff have worked directly for the organisation prior to commencing work for the company only, so have accrued benefits from both.

The company reimburses the organisation for the staff members' wages and leave entitlement accruals, including long service leave.

Some of the staff have expressed wishes to be employed directly by the company instead of the organisation.

Some of the staff have verbally requested that their long service leave entitlements be transferred from the organisation to the company to ensure continuity.

The transfer process is:

1. The organisation will pay the amount of long service leave entitlement to the company.

2. A Service Statement will be provided by the organisation to the company stating staff members' service and long service leave history.

3. The company will accept the cash payout and equal amount liability of long service leave, and credit these staff members with exactly the same amount of long service leave entitlement.

In this process no cash payout for long service leave will be made to individual staff members concerned.

The staff members will continue to work for the company at the same location, doing exactly the same work as they were doing prior to the change of employers.

The staff members will continue to accrue long service leave at the company.

When the staff members retire or resign, the company will pay the staff members long service leave entitlements, including entitlements transferred from previous employers (the organisation) and long service leave accrued after the change of employers. The organisation will have no responsibilities for paying the long service leave entitlements at the time of these staff members' retirement.

Ruling

Subject: Accrued leave transfer payments

Section 6-5 of the 'ITAA 1997' provides the definition of assessable income which includes income according to ordinary concepts, referred to as 'ordinary income'. If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Your assessable income also includes some amounts which are not ordinary income. These amounts are known as statutory income - refer section 6-10 of the ITAA 1997. An amount is statutory income because it has been included in assessable income under a provision of the ITAA 1997.

Division 15 of the ITAA 1997 lists some types of assessable income which are not ordinary income but are statutory income. In particular, section 15-5 of the ITAA 1997 states that:

Your assessable income includes an accrued leave transfer payment that you receive.

Meaning of 'accrued leave transfer payment'

'Accrued leave transfer payment' is defined in subsection 26-10(2) of the ITAA 1997 as a payment that an entity makes:

a) in respect of an individual's leave (some or all of which accrued while the entity was required to make payments in respect of the individual's leave, or leave the individual might take); and

b) when the entity is no longer required (or is about to stop being required) to make payments in respect of such leave; and

c) to another entity when the other entity has begun (or is about to begin) to be required to make payments in respect of such leave; and

d) under (or for the purpose of facilitating the provisions of) an Australian law, or an award, order, determination or industrial agreement under an Australian law.

It does not matter whether the leave accrues to the individual as an employee or for some other reason.

Application to your circumstances

In this instance, some employees will have their employment transferred from the organisation to the company. Under the agreement for the transfer of employment, the company will assumed liability for the employees' long service leave entitlements and in return will received amounts from the former employer which represent the employees' long service leave entitlements.

It is considered that the payments received in respect of long service leave entitlements meet the definition of 'accrued leave transfer payments' and therefore will form part of the assessable income of the company in the income year in which they are received.

Deductibility of leave payments

A deduction is available under subsection 26-10(1) of the ITAA 1997 for payments of annual leave, long service leave or other leave if:

§ the payment is made to the individual to whom the leave relates or, if the individual is dead, to his or her dependant or legal personal representative; or

§ the payment is in the form of an accrued leave transfer payment.

The payment is deductible in the income year in which the payment is made.