Edited version of your private ruling

Authorisation Number: 1012520708107

Ruling

Subject: Transfer of personal leave

Question

Do you have an obligation to withhold amounts under Division 12 of Schedule 1 to the Tax Administration Act 1953 (TAA) in relation to personal leave entitlements donated to a Leave Bank under a gifting of leave program (GLP)?

Answer

No

Do you have an obligation to withhold amounts under Division 12 of Schedule 1 to the TAA in relation to leave payments where the personal leave is sourced from a Leave Bank?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commenced on

1 July 2013

Relevant facts

The organisation is considering the implementation of a GLP.

From time to time, employees of the organisation are injured, have an illness or need to care for a family member, with circumstances necessitating prolonged absence from work.

Such periods may exceed the amount of personal leave available to the employee, potentially leading to loss of income and family hardship.

Other employees (Donors) have personal leave balances and entitlements they consider likely to be excess to their needs, and may like to make these excess balances available to other employees facing extended absence from work.

The organisation has drafted a policy on the GLP (the Policy), which contains a mechanism for personal leave to be donated to a Leave Bank and accessed by employees requiring an extended absence, subject to applying certain criteria and conditions.

Personal leave at the organisation is non-vesting and accrues monthly.

Once leave is gifted by a Donor, it is accounted for in a Leave Bank.

The Leave Bank keeps track of the number of days donated and not the monetary value.

When a Donor makes a gift of leave to the Leave Bank they relinquish all rights to those entitlements.

Any donated leave would be added to a 'general' Leave Bank and the Donor will have no personal discretion as to whom the gifted leave is allocated.

The gifted leave can be used by any eligible employee regardless of their position.

Relevant legislative provisions

Tax Administration Act 1953 Section 12-35 of Schedule 1

Tax Administration Act 1953 Section 10-5 of Schedule 1

Tax Administration Act 1953 Subsection 6-5(2) of Schedule 1

Income Tax Assessment Act 1997 Subsection 6-5

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

Income Tax Assessment Act 1997 Section 6-5(4)

Reasons for decision

Division 6 of Schedule 1 to the TAA requires taxpayers to pay income tax at regular intervals as it is earned during the year. This system of collecting is called Pay As You Go (PAYG), which has two components: PAYG withholding and PAYG instalment. Subsection 6-5(2) of Schedule 1 to the TAA states that:

Under PAYG withholding, amounts are collected in respect of particular kinds of payments or transactions. Usually, someone who makes a payment to you is required to withhold an amount from the payment, and then to pay the amount to the Commissioner.

Section 10-5 of Schedule 1 to the TAA lists a summary of the different kinds of payments that are subject to PAYG withholding.

Section 12-35 in Schedule 1 of the TAA requires an entity to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

However, subsection 12-1(1) of Schedule 1 to the TAA provides you with an exception that in working out the amount to be withheld under Section 12-35, you should disregard so much of the payment as is exempt income of the individuals receiving the payment.

Whether or not there is a withholding requirement in relation to particular employment entitlements will depend on whether those entitlements constitute assessable income and, if so, when and to whom.

Therefore, we need to examine the assessability of the leave entitlements/payments to determine whether there is a withholding obligation.

Personal Leave payments

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.

Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997. Personal leave pay is considered to be salary and wage type income in the hands of the recipient.

The common law concept of income is that income is a flow derived from a source. The point of derivation is of crucial significance, since for inclusion in assessable income in a particular year, amounts must constitute income derived by the taxpayer in that year.

Section 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income (and, if so, when it was derived), a taxpayer is taken to have received the amount as soon as it is applied or dealt with in any way on the taxpayers behalf or as the taxpayer directs. The result of section 6-5(4) is that an amount is treated as having been received as soon as the taxpayer gets the benefit of it.

It is a well established principle of taxation law that once salary or wages have been derived by an employee they cannot be assigned to other parties. This principle has been confirmed by the Courts and appellate tribunal (see Norman v. F.C. of T. (1963) 109 C.L.R. 9; Case U11, 87 ATC 154).

Therefore, it is critical to determine whether the personal leave payments are actually derived when they accrue or is it merely the entitlement to paid personal leave that accumulates. Additionally, if it is determined that it is merely an entitlement does that entitlement to leave equate to the derivation of income if leave entitlements are donated and not utilised?

Non-vesting leave entitlements

An employee of the organisation accrues non vesting personal leave.

Non-vesting personal leave entitlements accumulate in a similar manner to annual leave entitlements but do not vest and are paid only upon a valid claim for sick leave by an employee.

For non vesting personal leave entitlements it is an employee's entitlement to, and not the payments for sick leave that accrues or accumulates on the basis of the employee's period of service or employment with an employer.

This can be contrasted with salary or wages. A payment of salary or wages represents an amount/amounts that have been paid to a taxpayer for work or services that they had already performed in their capacity as an employee. The payment is not contingent upon the occurrence of any other event other than the performance of the work or service.

Whilst an employee's entitlement to personal leave accumulates on the basis of their period of work or service, the payment for personal leave is conditional upon the occurrence of certain events such as the employee being unable to work by reason of injury or illness, or upon the termination of employment. As such, a payment for personal leave does not accrue; rather it is simply the entitlement to unused personal leave that accumulates. An employee of the organisation does not become entitled to a personal leave payment until an agreement between them and the organisation is reached to pay them that amount. No actual payment accrues until that agreement. This would indicate that no assessable income has been earned at this point in time.

A further consideration which supports this conclusion is the fact that the actual monetary value of the leave cannot be determined at the time the leave accrues.

To demonstrate, if the personal leave accrued by the Donor was to be utilised at the time the entitlement arose the resulting payment would be taxed as ordinary income in the year of the entitlement in the hands of the Donor. A dollar value could be attributed to the entitlement under this scenario.

However if a Donor opts to donate their excess leave entitlements rather than utilise them, a dollar value cannot be attributed to the leave entitlements at the time the donated leave accrues as, over time, the dollar value will change. This occurs because there are differences in timing between the accrual and the utilisation of that leave and there are potential differences in salary levels between the Donor and the recipient of that leave.

Therefore, when the leave is ultimately paid there is no direct relationship between the value (in dollar terms) of the leave upon accrual and the value when actually utilised. The value of the leave entitlement paid relates to the current salary of the person who eventually takes the leave.

Consequently, it is considered that while the entitlement to leave may accrue to the Donor in earlier years, the income itself is derived in the year of payment to the final recipient and determined by the recipient's current salary level.

Based on this conclusion, no amount will be required to be withheld from a Donor's salary and wage income in relation to gifted leave as the leave entitlements do not constitute assessable income to them.

There is however an obligation under Division 12 of Schedule 1 to the TAA to withhold an amount from the personal leave payments made to an employee who makes use of the Leave Bank as these payments are considered assessable income.