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Edited version of your private ruling
Authorisation Number: 1012517446238
Ruling
Subject: Exempt income - external Australian territory
Question
Is long service leave which accrued during employment on an external Australian territory exempt from tax?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You have been employed with the same employer for a number of years. During the 200X financial year you were posted to an external Australian territory by your employer, where you continue to reside.
During the relevant financial year you retired from your employment and were paid out your accrued long service leave. The full amount of the long service leave was included on your payment summary and was subject to PAYG withholding tax.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 24B
Income Tax Assessment Act 1936 Section 24G
Taxation Administration Act 1953 Schedule 1 Section 12-35
Taxation Administration Act 1953 Schedule 1 Section 12-90
Reasons for decision
Summary
Long service leave accrued during service in an external Australian territory is exempt from tax.
Detailed reasoning
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. However, if an amount is exempt income, it is not included in the assessable income of a taxpayer (section 6-15 of the ITAA 1997).
Section 24G of the Income Tax Assessment Act 1936 (ITAA 1936) provides an exemption from tax in Australia on certain income derived from employment in a prescribed Territory. Section 24B of the ITAA 1936 details those prescribed Territories.
Paragraph 24G(1)(e) of the ITAA 1936 provides that the exemption will apply where income is derived by a person from employment wholly or mainly performed in an external Australian territory for the requisite period. The Commissioner must be satisfied that at the commencement of that employment the taxpayer intended to remain in the external Australian territory for a continuous period of more than 6 months.
In your case, you were employed in an external Australian territory for a period of more than four years. As you intended to remain in the external Australian territory for a continuous period of more than six months, any ordinary income derived from your employment on the external Australian territory is exempt from income tax in Australia. This includes payments for accrued annual leave derived as a result of employment on the external Australian territory regardless of whether it is paid to you while you remain in the external Australian territory or upon your return to the mainland.
As long service leave accrues on a daily basis, the portion attributable to service performed on the external Australian territory can be separated from the portion attributable to service performed in Australia. The long service leave which accrued in relation to your service on the external Australian territory is therefore exempt from tax under section 24G of the ITAA 1936.
Section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA) provides that under the PAYG system an entity must withhold amounts from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
Section 12-90 of Schedule 1 to the TAA states that an entity must withhold an amount from a payment for unused long service leave, to the extent that the payment is included in the recipient's assessable income.
As a portion of the payment of long service leave was accrued during your employment on the external Australian territory and is regarded as exempt income, PAYG would not need to be withheld from the part of the accrued long service leave payment which relates to your service on the external Australian territory This is the case whether it was paid during service on the external Australian territory, on returning to Australia or at termination of employment at either location.