Edited version of your written advice

Authorisation Number: 1012687346316

Ruling

Subject: Long service leave income

Question 1

Is long service leave which accrued during employment in Location A exempt from tax?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were employed for approximately four years in Location A.

You will retire during the 2014-15 financial year and will have unused long service leave. A portion of that long service leave accrued in Location A.

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

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 provides that Location A is a prescribed Territory.

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 Location A for the requisite period. The Commissioner must be satisfied that at the commencement of that employment the taxpayer intended to remain in Location A for a continuous period of more than 6 months. 

In your case, you were employed in Location A for a period of approximately four years. As you intended to remain in Location A for a continuous period of more than six months, any ordinary income derived from your employment in Location A is exempt from income tax in Australia. This includes payments for accrued annual leave derived as a result of employment in Location A regardless of whether it is paid to you while you remain in Location A or upon your return to the mainland.

As long service leave accrues on a daily basis, the portion attributable to service performed in Location A can be separated from the portion attributable to service performed in Australia. The long service leave which accrued in relation to your service in Location A 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 in Location A 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 Location A service. This is the case whether it was paid during service in Location A, on returning to Australia or at termination of employment at either location.