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Ruling

Subject: Salary sacrifice arrangement

Question 1

Will the superannuation contributions that are paid by you whilst on long service leave and personal leave form part of your assessable income?

Answer

No

This ruling applies for the following periods:

Income year ended 30 June 2012

Income year ended 30 June 2013

Income year ended 30 June 2014

The scheme will commence on

6 January 2012

Relevant facts and circumstances

You will commence a Transition to Retirement (TTR) strategy whilst continuing to be employed full time and being paid your usual fortnightly public service salary.

You will be granted approval to take leave for approximately two continuous years - an initial period using accrued long service leave and a second period, contiguous with the first period, using accrued personal leave (carer's leave), at which time when the leave credits are fully drawn you will formally retire.

You have accrued personal leave since commencing employment and all accumulated leave is carried forward as personal leave.

You will commence your leave when you become eligible to take thirteen weeks long service leave.

You wish to salary sacrifice all, or the greater part, of your fortnightly salary to your superannuation fund during the two periods of leave until your retirement date.

You intend to implement the above by entering into a new SSA, as agreed to by your employer, prior to commencing leave.

Relevant legislative provisions

Income Tax Assessments Act 1997 Section 6-5

Income Tax Assessments Act 1997 Section 6-10

Reasons for decision

Question 1

Will the superannuation contributions that are paid by you whilst on long service leave, and

personal leave form part of your assessable income?

The Commissioners view on the taxation and superannuation implications of salary sacrifice arrangements (SSA) is discussed in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements. Also, the Addendum to TR 2001/10 (TR 2001/10A) issued on 31 July 2002 applies on and from 31 July 2002.

Paragraph 19 of TR 2001/10 defines the term 'salary sacrifice arrangement' to mean:

…. an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value. The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to pay FBT, if any, on the benefits provided.

Paragraphs 27 and 28 of TR 2001/10 provide that payments made under an ineffective SSA to, or on account of, an employee are ordinary or statutory income derived by the employee at the time of payment and assessable income of the employee under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Alternatively, payments made under an effective SSA to, or on account of, an employee are not and assessable income of the employee under section 6-5 or 6-10 of the ITAA 1997.

TR 2001/10 defines at paragraphs 21 and 22 two types of SSAs as follows:

21. ' Effective SSA' - an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

22. ' Ineffective SSA' - an ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned (see paragraph 23 of this Ruling) is to be paid in a form other than as salary or wages.

Therefore, to be an effective SSA, the SSA must be prospective. That is, the SSA must be in relation to an employee's future earnings rather than any salary, wages or entitlements that they have already earned.

However, since TR2001/10 was issued on 10 October 2001, the Commissioner's view in relation to the taxation consequences of taking leave entitlements that accrued prior to the commencement of a SSA has been clarified.

TR 2001/10A was issued on 31 July 2002 and made the following amendments to paragraphs 27 and 28:

Ineffective SSA

27. …... The exchange of an entitlement to take leave for another benefit will cause the entitlement to be paid as salary or wage and to be derived as ordinary income.

Effective SSA

28. ..… Similarly, the taking of leave that accrued prior to the commencement of the SSA in the ordinary course of employment will not cause the SSA to be ineffective.

TR 2001/10A also provided the following examples of both an effective and ineffective SSA involving leave entitlements as follows:

Example 8 - effective SSA while taking leave

145. Michelle has had a successful career while employed by her current employer for many years. On promotion to the executive level, Michelle is invited to enter into a SSA. Michelle's SSA includes the provision of a motor vehicle. Seven months after her promotion, Michelle takes long service leave of six weeks. The long service leave had accrued prior to the commencement of the SSA. Michelle uses the motor vehicle to travel interstate whilst on long service leave.

146. Notwithstanding that the long service leave accrued prior to the commencement of her SSA, the SSA remains effective while Michelle is on leave.

Example 9 - dealing with leave that causes a SSA to be ineffective

147. Aaron has accrued an entitlement to take 12 weeks annual leave. Aaron's employer directs him to take a minimum of 8 weeks annual leave. Aaron does not wish to take the leave and receives permission from his employer to enter into a SSA to exchange the remuneration that he would receive if he took 8 weeks leave for a superannuation contribution of equal value. Aaron continues to attend work, however his accrued annual leave has been reduced by 8 weeks.

148. The SSA which has exchanged an entitlement to take leave for a superannuation contribution is ineffective. The whole amount contributed to the superannuation fund is Aaron's salary or wage and forms part of his ordinary income. His employer has a PAYG withholding obligation. Aaron or his employer should ensure that the superannuation fund is aware that the superannuation contribution is an undeducted contribution so that it can be properly accounted for by the superannuation fund (income tax and superannuation surcharge).

Your circumstances are as follows:

· will continue to be employed full time and be paid usual fortnightly public service salary

· will take two years continuous leave being initially accrued long service leave and then the remainder of accrued personal leave (carer's leave)

· will salary sacrifice all or part of your fortnightly salary to your superannuation fund whilst on leave

You will not be foregoing an entitlement to take leave in exchange for another benefit. Your situation is in direct contrast to Example 9 in TR 2001/10 where Aaron entered into a SSA to exchange the remuneration that he would have received, if he took leave his leave, for a superannuation contribution of equal value.

The application of TR 2001/10A was discussed at the FBT Sub-committee of the National Taxation Liaison Group (NTLG) held on 5 August 2002. In the minutes was the following statement made by representatives of the ATO:

When leave is taken that accrued prior to an effective SSA being entered into, the mix of salary and benefits to be paid during the period of leave is the same as the mix applicable under the SSA in place at that time, and not the mix applicable at the time the leave accrued.

Therefore, for an SSA to be effective it will have to be in place prior to you commencing leave.

Conclusion

On the basis that you enter into a new SSA, prior to commencing personal and long service leave, to salary sacrifice all or part of your fortnightly salary to your superannuation fund, the SSA will be effective as you are taking the leave, which accrued prior to the commencement of the SSA, in the ordinary course of business.

Benefits that are provided to you under an effective SSA are not assessable income under section 6-5 or 6-10 of the ITAA 1997.