Edited version of your private ruling

Authorisation Number: 1012445813536

Ruling

Subject: Salary sacrifice and leave

Question 1

Where you have an effective salary sacrifice agreement (SSA) with your employer and subsequently take long service leave at your normal pay rate, will the SSA remain effective, even though some of the leave accrued prior to the commencement of your SSA?

Answer

Yes.

Question 2

Where you vary the rate under your effective SSA with your employer and subsequently take long service leave at your normal pay rate, will the SSA remain effective, even though some of the leave accrued prior to the commencement of your SSA?

Answer

Yes.

Question 3

Where your employer makes a lump sum payment in excess of your normal salary in exchange for your long service leave entitlement, will the lump sum payment into a complying superfund be an effective SSA?

Answer

No.

Question 4

Where you take your long service leave entitlement at double pay, will the double payment into a complying superfund be an effective SSA?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

You have a salary sacrifice agreement with your employer.

You entered into this agreement with your employer several years ago. You are currently salary sacrificing about half of your salary into superannuation.

You can vary the amount you salary sacrifice into superannuation at any time.

You are due to retire in the near future.

You have accumulated long service leave. The unused portion will be paid out when you retire.

You may take some of the long service prior to retiring.

There is no specific clause in your SSA about salary sacrificing leave.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-80.

Reasons for decision

The Commissioner's view on the taxation implications of salary sacrifice arrangements is discussed in Taxation Ruling TR 2001/10.

A salary sacrifice arrangement is an arrangement between an employer and an employee whereby the employee agrees to forgo part of their future remuneration entitlement in return for a benefit of a similar value. The consequence of such an arrangement is that the employee is assessed on the reduced amount of the salary actually received and the employer is liable for any fringe benefits tax payable on the benefit provided.

TR 2001/10 states that an effective salary sacrifice arrangement details the amount of income to be sacrificed, and must be entered into before the employee becomes entitled to be paid.

An ineffective salary sacrifice arrangement involves an employee directing an entitlement to receive salary or wages that has been earned to be paid in a form other than as salary or wages. Benefits provided under an ineffective salary sacrifice arrangement are generally regarded as assessable income.

Paragraph 23 of TR 2001/10 provides clarification as to when an employee earns an 'entitlement to receive salary or wages' and states that personal services remuneration arrangements usually provide that the employee is entitled to be paid salary or wages at fixed intervals when the services have been performed for the employer over a fixed period. An entitlement to be paid has been earned even if the employee will not be paid until a later time.

Once an employee has earned an entitlement to receive an amount of salary or wages, any income later received by the employee from that entitlement or taken to be received on behalf of the employee is derived as salary or wages income (TR 2001/10 paragraph 25).

Leave entitlements

An entitlement to be paid salary or wages for recreation leave or long service leave is earned as the leave accrues, that is, when the relevant qualifying period of service is completed (paragraph 23 of TR 2001/10).

An employee may decide not to take accrued recreation leave or long service leave and to enter into a salary sacrifice arrangement to exchange the remuneration that he or she would have received if he or she had taken the leave for benefits of equal value. If the leave accrued before the date of commencement of the arrangement, the salary sacrifice arrangement will be ineffective. If the leave accrued on or after the date of commencement of the salary sacrifice arrangement, the salary sacrifice arrangement will be effective. (Paragraphs 27, 90 and 91 of TR 2001/10)

Paragraph 92 of TR 2001/10 further explains effective salary sacrifice arrangements involving leave entitlements and states:

Whether the conditions necessary for the taking of leave have been met is a question of fact. Statute, award conditions, individual contracts, enterprise workplace agreements or similar agreements may be relevant to determining whether the conditions have been met. Where there is a lengthy qualifying period which must be completed before any entitlement to leave accrues (as is generally the situation for long service leave entitlements), until that qualifying period has been completed, the conditions have not been met. Most employees must complete a minimum period of service before any entitlement to long service leave accrues. If the employee terminates employment prior to completing the required minimum period of service, the employee has no enforceable right to payment in lieu of long service leave. Some employees' employment conditions give a pro rata entitlement to be paid salary or wages once a lesser period of service has been completed, if employment terminates after that lesser period but before the full qualifying period. An employee who has not completed sufficient service to be entitled to take long service leave or receive a pro rate entitlement of salary or wages on termination of employment can enter into an effective salary sacrifice arrangement. Once the conditions for taking long service leave have been met, the employee can only enter into an effective salary sacrifice arrangement in respect of future entitlements to take long service leave.'

TR 2001/10 was amended on 31 July 2002 to help clarify how the ruling applies to an employee who enters into an effective SSA and subsequently takes leave that accrued prior to the commencement of the SSA.

The following guidance was added to the ruling: 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.

Examples 8 and 9 were also inserted as part of the amendment and state:

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).

In Wood v. FC of T 2003 ATC 2006, it was held that a taxpayer failed to enter into an effective SSA when he directed his employer to pay his accrued performance-related bonuses and long service leave entitlement to a superannuation fund. The taxpayer had merely directed that entitlement to income that had already been earned to be paid in a form other than salary or wages and he remained assessable on that amount.

In Heinrich v FC of T 2011 AATA16 the taxpayer was employed in the aviation industry and had his remuneration packaged in a "salary sacrifice" arrangement, that is, the first $2,000 of his fortnightly remuneration entitlement was paid into a superannuation fund. When the parties entered into the agreement to forgo salary in exchange for superannuation contributions they did not specifically agree to forgo annual and long service leave entitlements. The taxpayer's employment ended on medical grounds whereupon he received a payment in respect of his unused annual and long service leave entitlements.

The taxpayer subsequently sought a ruling that part of the payment he received be treated as it would have been treated had his salary sacrifice arrangement continued. The Commissioner ruled unfavourably, determining that the payments were properly assessable under section 83-10 of the ITAA 1997 for the unused annual leave and section 83-80 of the ITAA 1997 for the unused long service leave.

The taxpayer then sought a review by the AAT. The AAT held that the payment of unused annual leave and long service leave entitlements following the termination of a taxpayer's employment was not covered by an effective salary sacrifice agreement. The AAT held that once the conditions for the taxpayer's entitlement to the payments had been satisfied, the amounts were the taxpayer's assessable income as unused leave payments under sections 83-10 and 83-80 of the ITAA 1997.

In your case, you are entitled to accrued long service leave.

As you have an effective SSA with your employer, where you subsequently take long service leave in the ordinary course of employment, that is, at your normal pay rate, the SSA will remain effective. This is so, even though some of the leave accrued before you entered into your SSA. This is similar to example 8 above. The payments you receive while you are away from work and on long service leave are in the nature of salary and wages and part of the ordinary course of employment.

However, where you choose not to take long service leave, but to have a lump sum payment in lieu of your long service leave entitlement to be deposited into a complying superannuation fund, the SSA is ineffective. As such the contribution of the lump sum to the superfund will be considered to be assessable income.

Similarly, where you choose to take your long service leave at double pay, this rate is above your normal salary and wage rate, and salary sacrificing double the amount into superannuation is not an effective SSA.

Therefore, any lump sum payment of your long service leave or a payment that is double the rate of your normal salary and wage amount are included in your assessable income and are subject to tax under PAYG provisions in the Taxation Administration Act 1953.