Edited version of your private ruling

Authorisation Number: 1012537688614

Ruling

Subject: Income Tax - long service leave and salary sacrifice

Question 1

Is the total pre-tax amount in respect of unused long service leave, you received at the time of your retirement form part of your assessable income for the year ended 30 June 2014?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

On or after 1 July 2013.

Relevant facts and circumstances

You recently retired after working for the same company for over 40 years.

You accumulated various long service leave entitlements during your employment which you did not wholly exercise.

You entered into various salary sacrifice arrangements with your employer in respect of authorising amounts to be taken from your pre-tax earnings for optional contributions to your superannuation fund.

Salary sacrificed amounts were deducted only from your otherwise normal weekly earnings between the time of you first entering into salary sacrifice arrangements with your employer and the time of your retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 83-80(1),

Income Tax Assessment Act 1997 Paragraph 83-75(a) and

Income Tax Assessment Act 1997 Section 83-70.

Reasons for decision

1. An 'unused long service leave payment' is included in an individual's assessable income in the income year it is received under subsection 83-80(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

2. Paragraph 83-75(a) of the ITAA 1997 states that an 'unused long service payment' is a payment that you have received in consequence of the termination of your employment for long service leave that you have not used.

3. Subsection 83-70 of the ITAA 1997 states, as relevant here, that 'long service leave' includes leave ordinarily known as long service leave or any other leave made available in similar circumstances to that of long service leave.

4. Therefore, the total pre-tax amount in respect of unused long service leave, you received from your employer at the time of your retirement is an unused long service leave payment for the purposes of paragraph 83-75(a) of the ITAA 1997 and, consequently, that amount is to be included in your assessable income under subsection 83-80(1) of the ITAA 1997.

5. It is considered that the above is not affected in any way by the various salary sacrifice arrangements you entered into with your employer before your retirement.

6. The terms of the salary sacrifice arrangements between yourself and your employer do not refer to any future entitlements to long service leave being foregone by you in return for your employer making optional top-up contributions on your behalf to your superannuation fund.

7. You have advised that it was only future ordinary weekly earnings that were actually forgone by you in return for your employer making the optional top-up contributions on your behalf to your superannuation fund.

8. Therefore, no future entitlements to long service leave were actually foregone by you in return for your employer making optional top-up contributions on your behalf to your superannuation fund.

9. All of the optional top-up contributions made on your behalf by your employer to your superannuation fund were made solely in return for you foregoing your future ordinary weekly earnings.

10. Taxation Ruling TR 2001/10 provides the following guidance concerning salary sacrifice arrangements and long service leave:

89. Once an employee has completed the relevant qualifying period of employment and has an entitlement to take...long service...the employee has an entitlement to be paid salary or wages. An entitlement to take leave is synonymous with an entitlement to be paid salary or wages because the employee has done everything necessary, apart from taking the leave, to be entitled to be paid.

90. It then follows that a SSA [salary sacrifice arrangement] exchanging an entitlement to take leave that is accruing, or that has accrued, for past services performed in return for benefits is ineffective...

91. We recognise that a SSA exchanging any expected entitlement to leave that will accrue for future services rendered in return for benefits will be effective...

92. Whether the conditions necessary for the taking of leave have been met is a question of fact...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...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 SSA. Once the conditions for taking long service leave have been met, the employee can only enter into an effective SSA in respect of future entitlements to take long service leave.

11. As explained by TR 2001/10, a purported salary sacrifice arrangement exchanging an entitlement to take leave that has already accrued is ineffective. Your entitlement to long service leave had already accrued by the time of your retirement so such leave cannot now be treated as being available for a valid salary sacrifice.

12. The fact that your entitlement to long service leave may have been accruing at the same time as you were salary sacrificing your future ordinary weekly earnings does not mean, by itself, that your future entitlement to long service leave somehow also became part of that salary sacrifice arrangement.

13. The contractual terms included in a particular salary sacrifice arrangement are determined (save for any applicable industrial law or other legislative requirements) solely between the employer and the employee entering into such an arrangement. In your case, all of the optional top-up contributions made on your behalf by your employer to your superannuation fund were made in return for you foregoing your future ordinary weekly earnings.