Edited version of your written advice

Authorisation Number: 1051353451243

Date of advice: 29 March 2018

Ruling

Subject: Salary sacrifice arrangement

Question 1

Does an effective salary sacrifice arrangement (SSA) exist where the employee requests to salary package some or all of the annual and long service leave entitlements, that accrued from the date of commencement of the salary packaging agreement to the date of cessation of employment, and the request is made at the time of cessation?

Answer

No

Question 2

Is the income received from the payments for the long service leave and annual leave entitlements considered to be assessable income?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20EE

The scheme commences on:

1 July 20DD

Relevant facts and circumstances

You commenced work with your employer in 19AA.

You signed an employment contract in 20CC which was effective from 19BB.

This employment contract was current up until the date your employment ceased in 20DD.

You have been unable to obtain copies of previous employment agreements.

You accrued annual leave and long service leave entitlements that were unpaid as at the time of ceasing employment.

The employer has not paid out these entitlements.

The employment agreement provides for a salary sacrifice arrangement.

The agreement permits a salary sacrifice of up to a percentage of your total remuneration package.

The employment agreement does not specify as to what happens on termination of employment.

A clause in the Employment Agreement states

The Board agrees to permit the Officer to convert up to a maximum of a certain percentage of his Remuneration package to packaged benefits as detailed in a supporting schedule to this Agreement.

Schedule of the Employment Agreement provides the following information

ii) Salary Packaging

Salary packaging is a process where the Officer agrees to a reduction of his taxable income, in exchange for the employer paying expenses nominated by him, on his behalf. If the employer agrees, the Officer may elect to salary package the following types of expenses:

● Mortgage loan repayments or private rent;

● Contribute to their superannuation;

● Health insurance;

● Leasing costs;

● School or tertiary fees;

● Child care;

● Self-education expenses;

● Professional membership fees;

● Motor vehicle insurance and registration;

● Financial counselling.

It is important that no payments are made directly to the Officer or any of their dependents. Such payments would be deemed to be received by the Officer and would be therefore be taxed at normal marginal rates.

The Officer may salary sacrifice a certain percentage of the total remuneration package.

In accordance with a clause in the Agreement, the Board agrees that a certain percentage of the Officer’s Total Remuneration Package can be packaged.

All of the unpaid annual leave is taken, for income tax purposes, to have accrued post the date of the employment contract.

There is no unpaid long service leave for income tax purposes for the period up until their services ceased.

It was only at the time of cessation of employment that you requested your accrued leave entitlements be salary packaged.

You had not previously requested your accrued leave entitlements be salary packaged.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Section 11-5 of schedule 1 to the Taxation Administration Act 1953

Reasons for decision

Summary

The SSA is ineffective as it involves dealing with leave after it has been accrued as leave for which salary or wages is payable.

Detailed reasoning

Personal services remuneration arrangements usually provide that the employee is entitled to be paid salary or wages at fixed intervals when he or she has performed services for the employer over a fixed period. To the extent that services for that period have been performed, everything has been done by the employee in earning the entitlement to salary or wages.

Personal services remuneration arrangements may also provide that the employee may become entitled to be paid salary or wages such as bonuses or commissions if particular events occur or conditions are satisfied. The condition precedent to earning such variable salary or wages is met when those events occur or those conditions are satisfied.

An entitlement to be paid has been earned even if the employee will not be paid until a later time. For annual and long service leave, an entitlement to be paid salary or wages is earned as the leave accrues, being when the relevant qualifying period of service is completed.

Income tax implications of SSA

Taxation Ruling TR 2001/10 considers the income tax, fringe benefits tax and superannuation guarantee implications of SSA.

The term salary sacrifice arrangement means an arrangement under which an employee agrees to forego part of his or her total remuneration that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer, providing benefits of a similar value. The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to pay FBT, if any, on the benefits provided.

An effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits, before the employee has earned the entitlement to receive that amount as salary or wages.

An ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned is to be paid in a form other than as salary or wages.

SSAs that involve leave entitlements

In relation to SSA that involve leave entitlements, the Tax Office view is set out at paragraphs 89, 90 and 91 of TR 2001/10:

89. Once an employee has completed the relevant qualifying period of employment and has an entitlement to take annual leave, long service or sick leave, the employee has an entitlement to be paid salary or wages. An entitlement to take leave is synonymous with an entitlement to be paid salary or wages because the employee has done everything necessary, apart from taking the leave, to be entitled to be paid.

90. It then follows that a SSA exchanging an entitlement to take leave that is accruing, or that has accrued, for past services performed in return for benefits is ineffective. Benefits paid under an ineffective SSA are payments of salary or wages and form part of the employee's assessable income under section 6-5 or 6-10 of the ITAA 1997.

91. We recognise that a SSA exchanging any expected entitlement to leave that will accrue for future services rendered in return for benefits will be effective. While benefits provided under an effective SSA may be derived as ordinary or statutory income by the employee (see paragraph 28 above), the income is exempt because of the operation of section 23L of the ITAA 1936.

Payments made under an ineffective SSA to, or on account of, an employee are ordinary or statutory income derived by the employee at the time of payment. An employee does not derive ordinary or statutory income from the provision of personal services until the income has either been received by the employee, or is taken by subsection 6-5(4) or 6-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to have been received when the employer deals with the amount in some other way on behalf of the employee.

Once an employee has earned an entitlement to receive an amount of salary or wages, any ordinary or statutory income later received by the employee from that entitlement, or taken to be received on behalf of the employee, is derived as salary or wages income. By section 11-5 of schedule 1 to the Taxation Administration Act 1953, salary or wages are taken to be paid to the employee when the employer deals with the amount in any way on the employee’s behalf or as the employee directs.

An employee who has not completed sufficient service to be entitled to take long service leave or receive a pro rate entitlement of salary or wages on termination of employment, can enter into an effective SSA. Once the conditions for taking long service leave have been met, the employee can only enter into an effective SSA in respect of future entitlements to take long service leave.

Application to your circumstances

The salary packaging agreement entered into in the 20CC year with an effective date of the 19BB year provides that:

The Board agrees to permit the Officer to convert up to a percentage of his Total Remuneration Package to packaged benefits.

It is accepted that you commenced salary packaging of your salary in 19BB as per the employment agreement provided. However, it was only at the time of cessation of employment that you requested accrued leave entitlements be salary packaged. This was the first time that such a request had been made.

The facts of this arrangement indicate that at the time of making the election, the conditions necessary for the taking of leave had been met. You have accrued the entitlement to take annual and long service leave for which you were entitled, to receive salary or wages which forms part of your assessable income under section 6-5 or 6-10 of the ITAA 1997.

Attempting to salary package leave in this manner is considered to be a situation in which you are dealing with leave after (emphasis added) it has been accrued as leave for which you are entitled to receive salary or wages. Consequently, the packaging of the annual leave and long service leave on cessation of employment is not considered to be part of an effective salary sacrifice arrangement. Benefits paid under an ineffective SSA are payments of salary or wages and form part of your assessable income under section 6-5 or 6-10 of the ITAA 1997.