Edited version of your written advice

Authorisation Number: 1012786480528

Subject: Deduction-long service leave

Question 1:

Are you entitled to a deduction for voluntary long service leave contributions made to a long service leave fund as a subcontractor?

Answer:

No.

Question 2:

Is the refund of the voluntary long service leave contributions assessable income when they are received?

Answer:

No.

Question 3:

In the interest accrued on the voluntary long service leave contributions assessable income when the interest is credited to your subcontractor account?

Answer:

No.

Question 4:

Are you assessable on interest income paid to your subcontractor account held when you take your long service leave (LSL)?

Answer:

Yes

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commenced on:

1 July 2014

Relevant facts

You commenced employment in the construction industry.

You became a member of a long service leave fund (the LSLF).

The long service leave fund operates as a portable long service leave scheme for Workers and Working Subcontractors in the construction industry.

You decided to operate as a sole trader providing services in the construction industry.

You will provide your services to the general public, especially building contractors (contractors).

Under the terms of your business agreement with the contractors you will undertake the following

• provide a tax invoice to the contractor for your services

• charge an hourly rate for the work undertaken

• supply your own tools and equipment

• be responsible for fixing any defective work arising from the services you provide

• work under your own control in that you can leave one job at any time to attend to another job at a different location

• the contractor is not required to provide holiday, sick, long service leave payment or any other entitlements to you: and

• advertise your services through your contacts within the building and construction industry.

You intend making contributions to LSLF to provide for your own long service leave as a sole trader.

The LSLF provides following information from its website:

• A subcontractor can choose whether or not to make contributions to build up their Long Service Leave (LSL).

• A subcontractor may make quarterly payments into the LSLF fund.

• The interest component of any balance is accrued, calculated and credited to a subcontractor's account monthly.

• Interest is accrued on the whole balance, inclusive of contribution amounts and previously accrued interest balances.

• You can access your entitlements to the fund as soon as you have seven or more years of continuous service recorded with LSLF or seven or more years' continuous service recorded across Australian States and Territories in the building and construction industry.

• When you access your entitlements to the fund you will receive a refund of your voluntary contributions and the interest earned on what has been accrued.

• Approved long service leave payments will be directly credited to workers' bank accounts.

• Where a subcontractor seeks to withdraw their contributions before they can access their entitlements the subcontractor will only receive a refund of their contributions and will not receive any interest that has been accrued on their contributions.

The LSLF is a trust.

The subcontractor is a beneficiary of the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(1).

Income Tax Assessment Act 1997 subsection 6-5(2).

Income Tax Assessment Act 1997 subsection 6-5(4).

Income Tax Assessment Act 1997 section 6-10.

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1 36 section 97.

Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature, or relates to the earning of exempt income.

The entitlement to the long service leave, annual leave, and sick leave payments and other worker entitlements arise as a result of the employer's legal obligations under an industrial instrument or law. Therefore as there is a connection between the business activities being carried on by the employer and the employer's obligation to provide for worker entitlements, a payment by an employer to an employee of an amount due in respect of long service leave, annual leave, sick leave, is deductible to the employer under section 8-1 of the ITAA 1997.

Generally where a person provides services as a sole trader, the person is considered to be an independent contractor rather than an employee as there is no common law employment relationship or entitlement to long service leave, annual leave, and sick leave payment or other worker entitlements.

In your case, you are intending to operate as a sole trader and under the terms of your business agreements with future contractors there is no legal obligation on behalf of the contractor to provide you with long service leave and other entitlements. Instead you will make your own contributions to LSLF for 'long service leave'. In effect you will be setting aside some of the money you have earned as a subcontractor and investing it so that in the future when you take time off from working in your business, you can withdraw those contributions and the interest earned in order to live on during that time off.

Your voluntary contributions are not incurred in order to earn your subcontracting income; they are investments of capital in order to earn interest. Therefore, the voluntary contributions are not deductible under section 8-1 of the ITAA 1997.

Any refund of your voluntary contributions by LSLF to you is considered a return of capital and is not assessable in the year of receipt.

Interest income
Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income includes income according to ordinary concepts, which is called ordinary income. Interest income is income according to ordinary concepts and is therefore assessable pursuant to subsection 6-5(1) of the ITAA 1997.

Interest income is regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997.

Statutory income
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that an Australian resident beneficiary who is presently entitled to a share of the income of a trust estate is assessed on their share of the trust estate's net income.

LSLF interest income
Interest income is generally treated as assessable income if the interest is found to be credited to the account of the investor. The reason for this is that the ordinary income is taken to be received as soon as it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs, refer to subsection 6-5(4) of the ITAA 1997 which states:

In working out whether you have derived an amount of ^*ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct

This is also known as the 'constructive receipt' rule. The question which needs to be answered in your case is whether the crediting of interest to your LSLF account constitutes the constructive receipt of the interest in that income year.

In your case, the facts show that you have invested in a LSLF and that these funds are held in trust and you only have a present entitlement to the interest income upon application to receive your long service leave entitlements. Therefore in this instance subsection 6-5(4) of the ITAA 1997 does not apply given that you are not beneficially entitled to the interest income until you have satisfied the rules of the fund. Accordingly, you are not required to include the interest income when it is credited to your subcontractor's account during the financial year.

However, in accordance with the rules of the fund you will be presently entitled to the interest once you as the beneficiary of the fund have made the application to be paid an amount from the fund as LSL and the trustee has applied the interest to your benefit.

Accordingly, the interest income is will be assessable in the financial year when you take your long service leave under section 97 of the ITAA 1936.