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Edited version of your written advice
Authorisation Number: 1012806129733
Ruling
Subject: Unused long service leave and annual leave payments
Question 1
Do the payments for unused long service leave and unused annual leave form part of your assessable income?
Answer
Yes.
Question 2
Are you entitled to tax offsets in relation to the payments for unused long service leave and unused annual leave accrued prior to 18 August 19XX?
Answer
Yes.
Question 3
Are you entitled to tax offsets in relation to the payments for unused long service leave and unused annual leave accrued after 17 August 19XX?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
You are employed by Entity X which will cease to exist in the 2015-16 financial year.
It's functions will be transferred to Entity Y.
You will be offered employment at Entity Y with the same conditions of employment.
You will be paid your unused annual leave and unused long service leave when the Entity X ceases to exist as you cannot transfer these amounts to Entity Y. Part of the unused leave relates to employment prior to 18 August 19XX.
The payments you receive in association with the cessation of the Entity X do not include:
• a genuine redundancy payment
• an early retirement scheme payment
• the invalidity segment of an employment termination payment (ETP) or superannuation benefit.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 83-10
Income Tax Assessment Act 1997 Section 83-15
Income Tax Assessment Act 1997 Section 83-70
Income Tax Assessment Act 1997 Section 83-80
Income Tax Assessment Act 1997 Section 83-85
Reasons for decision
Unused annual leave and unused long service leave
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.
ATO Interpretative Decision ATO ID 2002/391 states that annual leave and long service leave payments are considered ordinary income as they are paid directly as a result of the personal services an employee renders for their employer.
Section 83-10 of the ITAA 1997 provides that a lump sum payment for unused annual leave is included in a taxpayer's assessable income in the year it is received and taxed at marginal rates. Section 83-80 of the ITAA 1997 provides that a lump sum payment for unused long service leave accrued after 17 August 19XX is included in a taxpayer's assessable income in the year it is received and taxed at marginal rate.
Therefore, under sections 83-10 and 83-80 of the ITAA 1997, you are required to include your lump sum for annual leave and long service leave as assessable income in the year you received it, that is, the 2015-16 financial year.
Entitlement to a tax offset
Sections 83-15 and 83-85 of the ITAA 1997 provide that a tax offset may be available in relation to these lump sums:
• to the extent that it is attributable to long service leave or annual leave accrued prior to 18 August 19XX, or
• if they were paid in connection with a genuine redundancy payment, an early retirement scheme payment or the invalidity segment of an employment termination payment or superannuation benefit.
The payments you will receive are not paid in connection with a genuine redundancy payment, an early retirement scheme payment or the invalidity segment of an employment termination payment or superannuation benefit.
Therefore, you will only be entitled to a tax offset in relation to that part of the unused annual leave or unused long service leave payment which relates to the leave which was accrued prior to 18 August 19XX.
The tax offset will reduce the tax payable on this portion of the payment to 30%. The remaining portion of the payment will be taxed at your highest marginal rate in the year it is received.