Heinrich and Commissioner of Taxation [2011] AATA 16 (17 January 2011)

Last Updated: 19 January 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 16

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2010/1764

TAXATION APPEALS DIVISION		)
	Re		ADRIAN HEINRICH

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Mr Frank O’Loughlin, Senior Member

Date 17 January 2011

Place Melbourne

Decision

For the reasons given orally the decision under review is affirmed.

..................[signed]...................
Senior Member

TAXATION Unused annual leave payment

Unused long service leave payment

Salary sacrifice arrangements

Private binding rulings – additional facts on review

Private binding rulings – rephrasing the question ruled upon on review

Income Tax Assessment Act 1997 (C’th): ss.6-10(3), 83-10, 83-80

Taxation Administration Act 1953 (C’th): Schedule 1, s.359-65

A Taxpayer and Commissioner of Taxation [2007] AATA 1759

REASONS FOR DECISION

17 January 2011

Mr Frank O’Loughlin, Senior Member

Introduction

1. In this matter, the Applicant was an employee in the aviation industry whose remuneration package was packaged: the first $2,000 of his fortnightly remuneration entitlement was paid into a superannuation fund in what is referred to in a jargonistic way as a ‘salary sacrifice’ arrangement.
2. The Applicant’s employment ended on medical grounds whereupon he received a payment in respect of his unused annual and long service leave entitlements.
3. The Applicant sought a ruling that part of the payment he received be treated as it would have been treated had his ‘salary sacrifice’ arrangement continued.
4. The Commissioner declined such a ruling.

The Issue

5. The issue for decision is whether part of a cash amount received in discharge of accrued annual and long service leave entitlements can be treated for taxation purposes as if it had been paid under pre-existing ‘salary sacrifice’ arrangements.

The Ruling under review

6. The question ruled upon and the ruling were as follows:

Question:

Can part of your accrued annual and long service leave entitlements which were paid by your employer as a lump sum form part of an effective salary sacrifice arrangement (SSA)?

Answer:

No

7. It will be apparent that the question ruled upon does not, in express terms, call for any decision as to the operation of either the Income Tax Assessment Act 1936 (C’th) or the Income Tax Assessment Act 1997 (C’th) (the 1997 Assessment Act) or any provisions thereof.
8. The Applicant and the Respondent agreed that the question meant and was treated as meaning:

Does part of your accrued annual and long service leave entitlements which were paid by your employer as a lump sum not form part of your assessable income under either s.83-10 or 83-80 on account of being an effective salary sacrifice arrangement (SSA)?

9. The proceeding was conducted on the basis that this question is the question to be answered on review.
10. Changes to the phrasing of the question ruled upon so that it expresses what the parties intended and what each of them acted upon is considered permissible.

The facts

11. The relevant facts are as set out in the notice of private ruling and as supplemented by the evidence given during the hearing.
12. The facts set out in the ruling were:
    • (1) the Applicant was employed by an aviation business;
    • (2) the Applicant had accrued annual and long service leave entitlements during his years of service;
    • (3) five years ago the Applicant entered into an agreement with his employer to forgo part of the salary in exchange for superannuation contributions;
    • (4) the Applicant and his employer did not agree to forgo the Applicant’s annual and long service leave entitlements under the agreement;
    • (5) the Applicant resigned his employment due to medical reasons and his entitlements to the accrued annual and long service leave were paid out in a lump sum in September 2009.
13. The additional facts to be found based on evidence led at the hearing are:
    • (1) had the Applicant continued in employment and taken his leave in the ordinary way, the ‘salary sacrifice’ arrangements would have continued in relation to his remuneration entitlements while he was on leave;
    • (2) upon being forced to retire by reason of his medical condition the Applicant wanted to roll over his payment entitlements for his annual leave and long service leave directly into a superannuation fund;
    • (3) the Applicant made enquiries and was told he could not roll over his payment entitlements;
    • (4) based on this advice the Applicant instructed the finance manager at his employer to calculate a payout figure and pay it after appropriate tax was deducted;
    • (5) after he had given the instructions regarding payment the Applicant realised that he could have ‘salary sacrificed’ a portion of the amount under pre-existing arrangements; and
    • (6) the Applicant decided he would accept the payment and contest the taxation treatment at a later date.
14. Incorporating additional facts that do not change the subject matter ruled upon in a material way can be included in the subject matter ruled upon on review: s.359-65 of Schedule 1 to the Taxation Administration Act 1953 (C’th) and A Taxpayer and Commissioner of Taxation [2007] AATA 1759 at [12] and [13] per Deputy President Hack SC.

The Commissioner’s ruling

15. The Commissioner has determined that the payments were properly assessable under ss.83-10 (in the case of the payment for unused annual leave) and 83-80 (in the case of the payment for unused long service leave) of the 1997 Assessment Act. Those sections provide as follows:

83-10 Unused annual leave payment is assessable

Application--annual leave

(1) This section applies to leave (annual leave) of the following types (whether it is made available as an entitlement or as a privilege):

(a) leave ordinarily known as annual leave, including recreational leave and annual holidays;

(b) any other leave made available in circumstances similar to those in which the leave mentioned in paragraph (a) is ordinarily made available.

Unused annual leave payments

(2) Your assessable income includes an * unused annual leave payment that you receive.

(3) 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.

83-80 Taxation of unused long service leave payments

Assessable and tax free parts of unused long service leave payments

(1) If you receive an * unused long service leave payment, your assessable income includes the part of the payment shown in this table:

* Unused long service leave payments
Item	To the extent the payment is attributable to the ...	Your assessable income includes this part of it...
1	* pre-16/8/78 period	5%
2	* pre-18/8/93 period	100%
3	* post-17/8/93 period	100%

(2) The remainder of that part (if any) of an * unused long service leave payment that is attributable to the * pre 16/8/78 period is not assessable income and is not * exempt income.

Note 1: If your employment was wholly full time or wholly part time during a period, see sections 83-95, 83-100 and 83-105 to work out the amount of an unused long service leave payment that is attributable to the period.

Note 2: If your employment was partly full time and partly part time during a period, see section 83-110 to work out the amount of an unused long service leave payment that is attributable to the period.

16. There are two bases for the Commissioner’s position:
    • (1) first, the Commissioner contends that that a ‘salary sacrifice’ arrangement exchanging part of the lump sum payment for other benefits is ineffective because the Applicant’s entitlement to the unused annual and long service leave had already accrued. The Commissioner supported this contention with the proposition that the Applicant did not agree to forgo his annual and long service leave entitlements under the ‘salary sacrifice’ arrangement; and
    • (2) second, the Commissioner contends that the payments had been made and the taxation treatment is fixed.
17. The first basis on which the Commissioner defends his ruling is heavily based on:
    • (1) his ruling TR 2001/10, where he considers effective and ineffective ‘salary sacrifice’ arrangements;
    • (2) the assertion that entitlements had accrued; and
    • (3) the proposition that once entitlements have accrued they cannot be dealt with in a way that escapes the taxing impact. In expansion of this proposition the Commissioner asserts that there isn’t a difference between an accrual of a leave entitlement for an employee whose contractual remuneration entitlements are split between taxable salary and wages and other non taxable benefits on the one hand and someone entitled to cash only on the other. In each case, according to this assertion, there is an accrual of an entitlement to salary and wages which means that any dealing with it upon a termination is receipt or constructive receipt that attracts the taxing provisions.
18. In the present circumstances it is not necessary to explore this contention in detail, but it can be remarked that what accrues from time to time in an employment setting is a right to continue to be remunerated in a particular way without the need for attendance to normal employment duties. In many cases any such entitlement cannot be measured at the time of accrual because periodical remuneration entitlements might change, for example by reason of pay rises caused by promotion or remuneration review. It was clearly this right that was not sacrificed by the Applicant. If a right to be remunerated entails a right to money only, then on termination the accrued right is to salary and wages and such a right cannot be dealt with at the direction of the employee without the taxing criterion being met, for example by operation of s.6-10(3) of the 1997 Assessment Act. However, where the right to be remunerated is split between salary and wages and other, non taxable, benefits and the right on termination is to have the accrued leave entitlement to non taxable benefits discharged by provision of further, non taxable, benefits then there may not be any relevant dealing with accrued rights to salary and wages and there may not be a taxing point. It will be observed that s.6-10(3) requires the right that is dealt with first be statutory income before the product of the dealing is treated as statutory income.
19. In the present case it is not clear what the terms of the entitlements in respect of remuneration for unused leave were to consider this analysis further.
20. The second basis of defence of the ruling is more problematic for the Applicant. He in fact received the payout of his unused leave entitlements.
21. The criterion for ss.83-10 and 83-80 has been attracted. Once attracted the amounts are to be taxed in accordance with the operation of these provisions.
22. For this reason, the decision under review is to be affirmed.
    

I certify that the twenty-two [22] preceding paragraphs are a true copy of the reasons for the decision herein of:

Mr Frank O’Loughlin, Senior Member

Signed: ............................[signed]................................................

Associate Grace Horzitski

Date of Hearing 17 January 2011

Date of Decision 17 January 2011

Advocate for the Applicant Self-represented

Solicitor for the Respondent Mr D. Lane, ATO Legal Services