ATO ID 2004/362: GST and transfer of annual leave, annual leave loading, flextime and sick leave entitlements
Date of decision: 26 November 2003
Business line: Indirect Tax

Issue
Does the entity, a government agency employer, make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it receives a payment in respect of a new employee's annual leave, annual leave loading, flextime and sick leave which accrued with the employee's former government agency employer?

Decision
No, the entity employer does not make a taxable supply under section 9-5 of the GST Act as the entity does not make a supply.

Facts
The entity is a government agency employer. The entity employs a person who was previously employed by another government agency. The entity receives a payment from the other government agency that represents the employee's accrued leave and other entitlements. Provisions within the relevant legislation or awards (statute) explain the obligations of government agencies in connection with the transfer of an employee from one government agency to another government agency. When an employee transfers to another government agency, the relevant statute imposes: The relevant statute also imposes an obligation on the former employer to make a payment or contribution to the new employer in respect of leave accrued to the employee at the time of transfer. In other words, the former employer bears a liability to the new employer for the period the employee was employed by the former employer for the following: The transfer of flextime is statutorily covered by separate legislation . The relevant legislation stipulates that a Minister may give directions and issue guidelines requiring the transfer of funds between public sector employers for the purpose of making allowance and appropriate adjustments for the transfer of employees' leave entitlements. There are no separate contractual arrangements between the new and former employers. All that occurs is a payment of money. The entity and the other government agency are registered for goods and services tax (GST).

Reasons for decision
Summary: One of the requirements of a taxable supply is that an entity makes a supply (paragraph 9-5(a) of the GST Act). The term 'supply' is a broad concept for GST purposes and is defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. 'Supply' refers to 'something which passes from one entity to another'. Other jurisdictions have held that the term 'supply' takes its ordinary and natural meaning, being 'to furnish with or provide'. Subsection 9-10(2) of the GST Act provides a list of examples of supplies. In particular subparagraph 9-10(2)(g) of the GST Act includes: an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or iii) to tolerate an act or situation; As the new employer becomes subject to an obligation to do something, that is, to pay annual leave, annual leave loading, flextime and sick leave entitlements, it is necessary to consider whether there is a supply within the meaning of section 9-10 of the GST Act. In the GST Act, the term 'supply' covers not only the subject of the transaction - the thing that passes - but also includes the action by which the thing passes from one entity to another. By use of the word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) of the GST Act, there is a requirement for a supplier to take some action to cause a supply to be made. This means that the new employer must take some action or do something to cause the supply to occur. The obligations referred to in the above Facts are imposed, required and effected by the words of the statute. Neither employer takes any action to enter into these obligations. There is no positive act by the new employer to cause a supply to occur. The effect of the employee accepting employment with the new employer is that the former employer's obligation for any future leave entitlements to the employee is extinguished. The obligation to pay annual leave, annual leave loading, flextime and sick leave always rests with the current employer at the time when the leave is taken. The new employer has not entered into an obligation with the former employer to do anything. The new employer's obligations are to the employee only and these arise from statute, not because of any obligation it enters into with the former employer. There is no supply by the new employer. This means that for the purposes of paragraph 9-5(a) of the GST Act, the new government agency employer has not made a supply of the entry into the obligation. As a supply has not been made by the new employer, it is not necessary to proceed with the balance of paragraph 9-5(a) of the GST Act to ascertain if there is any consideration for a supply. Therefore, there has not been a taxable supply under section 9-5 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 paragraph 9-5(a) subsection 9-10(1) subsection 9-10(2) paragraph 9-10(2)(g)
Related ATO interpretative decisions: ATO ID 2003/1182
Subject references: Goods and services tax GST supplies & acquisitions GST supply