Edited version of your written advice

Authorisation Number: 1013056619692

Date of advice: 20 July 2016

Ruling

Subject: PAYG Withholding

Question 1

Is the entity required to withhold tax from salary and allowances payable on periods of Recreation Leave and Long Service Leave accrued whilst stationed on a prescribed territory prior to 1 July 2016 but taken or paid in lieu on termination post 1 July 2016 and still residing in the prescribed territory?

Answer

Yes

Question 2

Is the entity required to withhold tax from salary and allowances payable on periods of Recreation Leave and Long Service Leave accrued whilst stationed on a prescribed territory prior to 1 July 2016 but taken or paid in lieu on termination post 1 July 2016 and having returned to the Australian mainland?

Answer

Yes

Question 3

Is the entity required to withhold tax from salary and allowances payable on periods of Recreation Leave and Long Service Leave accrued whilst stationed on a prescribed territory post 1 July 2016 and taken or paid in lieu on termination post 1 July 2016 and still residing in the prescribed territory?

Answer

Yes

Question 4

Is the entity required to withhold tax from salary and allowances payable on periods of Recreation Leave and Long Service Leave accrued whilst stationed on a prescribed territory post 1 July 2016 and taken or paid in lieu on termination post 1 July 2016 and having returned to the Australian mainland?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The entity currently has X employees stationed at their Field Office in a prescribed territory.

Employees are generally employed there for a fixed term of two years with a possible extension of a further year.

The employees accrue Recreation Leave and Long Service Leave.

The prescribed territory is now under Australian taxation law as of 1 July 2016.

Relevant legislative provisions

Taxation Administration Act 1953 subsection 12-1 (1) of Schedule 1

Taxation Administration Act 1953 section 12-35 of Schedule 1

Taxation Administration Act 1953 section 12-90 of Schedule 1

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

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

Income Tax Assessment Act 1997 subsection 6-10 (4)

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 section 6-20

Income Tax Assessment Act 1936 section 24G

Income Tax Assessment Act 1936 section 26AD

Income Tax Assessment Act 1936 paragraph 26 (e)

Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015

Reasons for decision

Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.

Section 12-90 of Schedule 1 to the TAA provides that an entity must withhold an amount from a payment it makes to an individual if the payment is included in the individual's assessable income under section 26AD of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 12-1 (1) of Schedule 1 to the TAA provides that an entity need not withhold an amount under these sections from a payment if the whole of the payment is exempt income of the entity receiving the payment.

Subsections 6-5(2) and 6-10 (4) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that an Australian resident taxpayer's assessable income consists of the taxpayer's ordinary income and statutory income from all sources.

Salary or wages received by a taxpayer are ordinary income of the taxpayer pursuant to subsection 6-5(1) of the ITAA 1997.

Allowances received by a taxpayer in respect of their employment are generally statutory income of the taxpayer pursuant to paragraph 26 (e) of the ITAA 1936.

All or part of a lump sum payment for unused long service leave received by a taxpayer in consequence of their retirement from their employment is statutory income of the taxpayer pursuant to section 26AD of the ITAA 1936.

Section 6-15 of the ITAA 1997 provides that ordinary income or statutory income which is exempt income is not assessable income.

Section 6-20 of the ITAA 1997 provides that ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of the ITAA 1936, the ITAA 1997 or another Commonwealth law.

Previously, Section 24G of the ITAA 1936 exempted from income tax the income derived by a person from their employment if:

• They performed the duties of the employment wholly or mainly in a prescribed territory; and

• At the time they commenced to perform the duties of the employment in the territory

Section 24G and other provisions relating to the External Territories were repealed with effect from 1 July 2016.

From 1 July 2016 all income from an office or employment carried out on the prescribed territory is assessable income.

In relation to your case, as of 1 July 2016, there will be no exemption of the prescribed territory sourced income, even in relation to leave accrued before that date.

Therefore, the entity is required to withhold tax from salary and allowances payable on periods of Recreation Leave and Long Service Leave, accrued both before and after the 1 July 2016, regardless of whether the employee is residing on the prescribed territory or the Australian mainland, as per Section 12-35 of Schedule 1 to the TAA.