Edited version of private ruling

Authorisation Number: 1011732803730

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Ruling

Subject: Foreign income - unused leave entitlements

Question 1

Is the lump sum payment in instalments you will receive in respect of unused leave entitlements from employment services performed in Country A in the relevant period as a foreign resident assessable income in Australia?

Answer:

No.

Question 2

Is the lump sum payment in instalments you will receive in respect of unused leave entitlements from employment services performed in Country A in the relevant period as a foreign resident exempt foreign employment income in Australia?

Answer:

Yes.

Question 3

Is the lump sum payment in instalments you will receive in respect of unused leave entitlements from employment services performed in Country A in the relevant period as a foreign resident exempt foreign employment income in Australia?

Answer:

No.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You have been a resident of Country A for the past 30 years.

You will be a resident of Australia from the relevant date.

Your employer in Country A will be paying you unused annual leave and long service leave by lump sum payment in monthly instalments in the relevant period in respect of your employment in Country A.

You will cease employment in the relevant month

Your unused leave entitlements have accrued over the past 30 years.

Tax was paid in Country A on your employment income.

You were not engaged in work for the Australian government or an Australian charity or relief fund.

Relevant legislative provisions

Income Tax Assessment Act 1936, Section 23(q)

Income Tax Assessment Act 1936, Section 23AG

Income Tax Assessment Act 1936, Subsection 23AG(1)

Income Tax Assessment Act 1936, Subsection 23AG(1AA)

Income Tax Assessment Act 1936, Subsection 23AG(7)

Income Tax Assessment Act 1997, Subsection 6-5(2)

Income Tax Assessment Act 1997, Subsection 6-10(4)

Income Tax Assessment Act 1997, Section 50-5

Income Tax Assessment Act 1997, Section 83-10

Income Tax Assessment Act 1997, Section 83-80

Income Tax Assessment Regulations 1997, Regulation 50-50.02

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that ordinary income derived by an Australian resident directly or indirectly from all sources, whether in or out of Australia, is assessable.

Statutory income from all sources whether in or out of Australia, is also included in the assessable income of an Australian resident's assessable income under subsection 6-10(4) of the ITAA 1997.

Salary and wages, including annual and long service leave payments, are considered ordinary income as it is paid directly as a result of the personal services an employee renders for their employer.

However, unused long service and annual leave are considered statutory income if paid as a result of termination of employment. Unused annual leave payment is dealt with by section 83-10 of the ITAA 1997. Unused long service leave payment is dealt with by section 83-80 of the ITAA 1997.

As the lump sum payment paid by instalments you will receive will be paid as a result of termination then, the payment of unused LSL and annual leave are considered statutory income.

Generally, Australian courts have held that the source of employment income is where the employee performs their duties (Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 7 AITR 76; 11 ATD 288). As the duties of your employment were performed in Hong Kong, the source of the income is from Hong Kong.

As you are an Australian resident you are required to include statutory income from all sources whether in or out of Australia.

Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) was enacted by Act No 51 of 1986, it first applied in the 1987-88 year of income. In 2009 the scope of the exemption was dramatically restricted to a small number of categories of prescribed foreign service (subsection 23AG(1AA) of the ITAA 1936).

It replaced: section 23(q) of the ITAA 1936 which generally exempted overseas income which was not exempt in the source country.

Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less then 91 days, any foreign earnings derived will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity of an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

The payments for unused long service leave and annual leave from service overseas satisfies the definition of 'foreign earnings' in subsection 23AG(7) of the ITAA 1936.

At the time that the leave accrued you were a non-resident of Australia. However, when you receive the payments for unused leave, you had resumed being a resident of Australia. It is a well established principle that salary and wages income, whether for current or past services, is generally derived when received.

Taxation Ruling TR 96/15 addresses the issue of whether section 23AG of the ITAA 1936 can apply where the residential status for Australian tax purposes of an individual taxpayer changes from non-resident to resident and, on or after that date the taxpayer receives foreign earnings in respect of a continuous period of foreign service performed whilst a non-resident.

Paragraph 5 of TR 96/15 states that while it is a requirement for the operation of section 23AG of the ITAA 1936 that the foreign earnings be derived whilst the individual is a resident for Australian taxation purposes, it's not a requirement that the relevant foreign service be performed whilst the individual is a resident for those purposes. Accordingly, exemption from Australian tax as provided under section 23AG may apply subject to the other conditions of section 23AG of the ITAA 1936.

In your case, your overseas service was continuous and for a period of not less than 91 days. In addition, the payment for unused leave was wholly attributable to your foreign service and therefore satisfies the definition of 'foreign earnings' in subsection 23AG(7) of the ITAA 1936.

Consequently, the amount of the lump sum payment for unused leave which is attributable to your periods of foreign employment is exempt from tax under the provisions of section 23AG of the ITAA 1936.

Another change which took effect from 1 July 2009 added subsection 23AG(1AA) of the ITAA 1936. It provides that foreign earnings will not be exempt under section 23AG unless the continuous period of foreign service is directly attributable to:

(a)(  the delivery of Australian official development assistance (ODA) by the person's employer. ODA is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

(b)( the activities of the person's employer in operating a public fund declared by the Treasurer to be a developing country relief fund; or a public fund established and maintained to provide monetary relief to people in a developing country that has experienced a disaster.

(c) the activities of the person's employer, being a prescribed institution that is exempt from Australian income tax , where the employer is a prescribed religious or charitable institution located or pursuing objectives outside Australia which is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the Income Tax Assessment Act 1997. The prescribed organisations are listed in regulation 50-50.02 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

) (d) the person's deployment outside Australia as a member of a disciplined force by the Commonwealth, a State or Territory (or an authority of the Commonwealth, a State or a Territory)

((e)) an activity of a kind specified in the regulations.

You were not involved in any of these activities.

Accordingly leave accrued after 1 July 2009 is not exempt in terms of section 23AG of the ITAA 1936