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Edited version of your written advice
Authorisation Number: 1012983352241
Date of advice: 14 March 2016
Ruling
Subject: Employment termination payments
Question 1
Does concessional tax treatment apply to the annual leave loading payment you received from your former employer (the Employer) in the relevant income year?
Answer
Yes.
Question 2
Does concessional tax treatment apply to the unused long service leave payment you received from the Employer in the relevant income year?
Answer
Yes.
This ruling applies for the following periods:
Income year ended 30 June 20XX
The scheme commences on:
1 July 20XX
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.
In 19XX, you commenced employment with the Employer.
In the second quarter of 20XX, the Employer terminated your employment on the grounds of ill-health.
Following the termination, you received an employment termination payment from the Employer that includes an invalidity segment.
Also in 20XX, you received a further payment from the Employer comprising of:
(a) an unused long service leave amount; and
(b) an annual leave loading amount
Relevant legislative provisions
Income Tax Assessment Act 1997 section 83-10
Income Tax Assessment Act 1997 section 83-15
Income Tax Assessment Act 1997 section 83-75
Income Tax Assessment Act 1997 section 83-80
Income Tax Assessment Act 1997 section 83-85
Reasons for decision
Summary
You are entitled to a tax offset to ensure that the rate of tax on the annual leave loading payment you received from the Employer does not exceed 30%.
You are entitled to a tax offset to ensure that the rate of tax on the unused long service leave payment you received from the Employer does not exceed 30%.
Detailed reasoning
Taxation of the unused annual leave payment
An 'unused annual leave payment' is included in your assessable income under subsection 83-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997).
According to subsection 83-10(3) of the ITAA 1997, a payment that you receive in consequence of the termination of your employment is an unused annual leave payment if:
(a) it is for annual leave you have not used; or
(b) it is a bonus or other additional payment for annual leave you have not used; or
(c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.
The payment you received from the Employer for leave loading for annual leave that you had accrued, is an additional payment for annual leave you have not used. As such, it is an unused annual leave payment as defined in subsection 83-10(3) of the ITAA 1997. Therefore, it is included in your assessable income in the year it is received.
However, in accordance with section 83-15 of the ITAA 1997, you are entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30%, to the extent that it was made in connection with a payment that includes the invalidity segment of an employment termination payment.
As it has already been established that the employment termination payment that you received from the Employer includes an invalidity segment, the leave loading for annual leave payment that you received is concessionally taxed in the manner outlined above.
Taxation of the unused long service leave payment
According to section 83-75 of the ITAA 1997, a payment received in consequence of the termination of your employment is an 'unused long service leave payment' if:
(a) it is for long service leave you have not used; or
(b) it is for long service leave to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.
The payment which you received from the Employer for unused long service leave that you had accrued is an unused long service leave payment as defined in section 83-75 of the ITAA 1997.
Unused long service leave payment is included in your assessable income under section 83-80 of the ITAA1997.
However, in accordance with section 83-85 of the ITAA 1997, where the payment is made in connection with a payment that includes the invalidity segment of an employment termination payment, you are entitled to a tax offset that ensures that the rate of tax on the amount of the payment does not exceed 30%.
As it has already been established that the employment termination payment that you received from the Employer includes an invalidity segment, the unused long service leave payment that you received will be concessionally taxed in the manner outlined above.