Private ruling: Income Tax: Employee leave entitlements - Assessable income
Published: December 2012
Ruling period: 1 July 2012 - 30 June 2013
Date scheme commenced: 20 July 2012

Ruling: Q1: Are the accrued leave entitlements for annual leave, sick leave and long service leave of transferring employees collectively shown as an adjustment to the purchase price in the Asset Sale Agreement included in the assessable income pursuant to section 15-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? Advice/Answers No

Relevant facts and circumstances: Two companies are parties to an Asset Sale Agreement. The Vendor has agreed to sell, and the Purchaser has agreed to purchase, certain assets associated with the business including the associated premises, certain fixtures and fittings, the goodwill and certain other assets relating to the business. The purchase price under the agreement was adjusted by a percentage of all accrued annual leave, sick leave and long service leave entitlements. This amount comprised: · accrued annual leave · accrued long service leave, and · accrued sick leave Upon completion of the agreement the Purchaser assumed the obligation to pay any transferring employees their accrued entitlements as at the completion date when they fell due and indemnified the Vendor against all liability for such accrued entitlements.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-1(1) | Income Tax Assessment Act 1997 section 15-5 | Income Tax Assessment Act 1997 subsection 26-10(2) | Income Tax Assessment Act 1997 subsection 995-1(1) Issue 1 | Question 1 | Summary | As there has been no payment made in relation to the transferring employee entitlements, there is no accrued leave transfer payment and therefore no amount is included in assessable income under section 15-5 of the Income Tax Assessment Act 1997 . Detailed reasoning | Subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that your assessable income consists of ordinary income and statutory income. | Section 15-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states your assessable income includes an accrued leave transfer payment that you receive. Subsection 995-1(1) of the ITAA 1997 directs you to subsection 26-10(2) of the ITAA 1997 for the definition of an 'accrued leave transfer payment'. | Subsection 26-10(2) of the ITAA 1997 defines an 'accrued leave transfer payment'. It states: | 26-10(2) An accrued leave transfer payment is a payment that an entity makes: | (a) in respect of an individuals leave (some or all of which accrued while the entity was required to make payments in respect of the individual's, or leave the individual might take); and | (b) when the entity is no longer required (or is about to stop being required) to make payments in respect of such leave; and | (c) to another entity when the other entity has begun (or is about to begin) to be required to make payments in respect of such leave; and | (d) under (or for the purposes of facilitating the provisions of) and Australian law, or an award, order, determination or industrial agreement under an Australian law. | It does not matter whether the leave accrues to the individual as an employee or for some other reason. | Under subsection 26-10(2) of the ITAA 1997, an entity needs to make a payment. Therefore, we first need to ascertain whether the vendor made a payment to the purchaser before considering the remaining criteria listed in (a) through (d) of subsection 26-10(2) of the ITAA 1997. | Section 26-10 of the ITAA 1997 expresses the same ideas as the previous provisions in section 6G of the ITAA 1936 which provided the definition of an accrued leave transfer payment and subsection 51(3) of the ITAA 1936 which dealt with deductibility. | Taxation Ruling IT 2557 Income Tax: Assessability or deductibility of an amount in respect of accrued leave entitlement taken into account in the purchase price of a business (IT 2557) was issued in consequence of the decision of the Federal Court in TNT Skypak International (Aust.) Pty Ltd v FCT 88 ATC 4279; 19ATR 1067 (Skypak Case). | In the Skypak Case, the purchase price under the purchase agreement was calculated by reference to net assets of the business and, specifically, after taking into account assumed liabilities in respect of accrued annual leave entitlements owing to employees. The Federal Court determined that no amount was to be included in the assessable income of the taxpayer because no amount had been received. | IT 2557 states at paragraph 8: | …where an amount in respect of accrued leave entitlement is taken into consideration in the valuation of the purchase price of the business (so that the purchaser receives the advantage of a reduction in the purchase price), there is no derivation of income by the purchaser. In these circumstances, the purchase price simply reflects the value of the business assets net of liabilities and there would be no payment or setting-off of cross debts relating specifically to the liability for accrued leave entitlement. | Under the agreement, the purchase price of the business was adjusted by an amount equal to a percentage of the monetary value of all accrued entitlements for annual leave, sick leave and long service leave. After completion, the purchaser assumes the obligation to pay to the transferring employees the accrued entitlements and indemnifies vendor against all liability for such accrued entitlements. | We note that in your circumstances less than 100% of the accrued leave entitlements were taken into account in adjusting the purchase price. Nevertheless, the vendor made no payment to the purchaser in respect of that portion of the accrued employee leave entitlements under the agreement. | As no payment has been made, there is no accrued leave transfer payment as defined in subsection 26-10(2) of the ITAA 1997 and it is unnecessary to consider the further requirements listed in that subsection. | No amount is included in the assessable income of the purchaser in respect of that portion of the accrued leave entitlements taken into account in the purchase price under section 15-5 of the ITAA 1997. | We further note that a clause in the agreement provides, broadly, that should the Commissioner determine the adjustments (or any part of) are assessable to the purchaser and deductible to the vendor, the purchaser will be entitled to an adjustment equal to 100% of the monetary value of the accrued leave entitlements and any amount that is not assessable or deductible will remain at the specified percentage. | Your private ruling application specifically related to the accrued leave adjustments to the purchase price. The Commissioner has determined that the accrued leave adjustments as per the terms of the agreement are not included in your assessable income. Under the terms of the agreement there will therefore be no further adjustment to the purchase price.


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