ATO ID 2003/1182: GST and transfer of long service leave entitlements
Date of decision: 17 December 2003
Business line: Indirect Tax

Issue
Does a local Government 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 long service leave entitlements which accrued with the employee's former Local Government 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 Local Government employer. The entity employs a person who was previously employed by another Local Government entity. The entity receives a payment from the other Local Government entity that represents the employee's accrued long service leave entitlement. Long service leave provisions within the relevant State legislation or awards (statute) explain the obligations of Local Government entities in connection with the transfer of an employee from one Local Government entity to another Local Government entity. When an employee transfers to another Local Government entity, 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 the long service 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. 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 Local Government entity 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 provides: As the new employer becomes subject to an obligation to do something, that is, to pay long service 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 long service leave entitlements to the employee is extinguished. The obligation to pay long service 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 local government employer has not made a supply of the entry into an 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) section 9-10 subsection 9-10(1) subsection 9-10(2) paragraph 9-10(2)(g) subparagraph 9-10(2)(g)(i)
Related ATO interpretative decisions: ATO ID 2003/1183
Subject references: Goods and services tax GST supplies & acquisitions GST supply