Private ruling: Deductibility of transferred employee leave entitlements
Published: December 2012
Ruling period: 1 July 2012 - 30 June 2013
Date scheme commenced: 20 July 2012

Ruling: Q1: Does section 26-10 of the Income Tax Assessment Act 1997 (ITAA 1997) deny a deduction for 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 of the Sale Agreement? Advice/Answers Yes

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 steel fabrication 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 the amount specified in Schedule 1 of that agreement. The purchase price under the agreement was adjusted by an amount equal to 70% of all accrued annual leave, sick leave and long service leave entitlements. This comprised: · an amount in relation to accrued annual leave · an amount in relation to accrued long service leave, and · an amount in relation to 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 26-10(2) and | Income Tax Assessment Act 1997 subsection 995-1(1). Issue 1 | Question 1 | Summary | There has been no payment made in relation to the transferring employee entitlements and therefore there is no accrued leave transfer payment. No loss or outgoing is deductible for accrued long service leave, annual leave and sick leave. | Detailed reasoning | Subsection 26-10(1) of the ITAA 1997 states the following: | 26-10(1) You cannot deduct under this Act a loss or outgoing for long service leave, annual leave, sick leave or other leave except: | (a) an amount paid in the income year to the individual to whom the leave relates (or, if that individual has died, to that individual's dependant or legal personal representative); or | (b) an accrued leave transfer payment that is made in the income year. | 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. | 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 the net assets of the business. One of the liabilities taken into account in arriving at the net asset position was the 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 9: | …the amount of any provision made in the purchase price of a business in respect of accrued leave entitlement will not be deductible to the vendor. This is due to the fact that subsection 51(3) will only allow a deduction in respect of long service leave, annual, sick or other paid leave where the leave payment is made to the person entitled to take the leave, not to a purchaser who is simply assuming liability for making future leave payments. | Section 26-10 of the ITAA 1997 expresses the same idea as the old provisions contained in section 6G and subsection 51(3) of the ITAA 1936. Section 6G of the ITAA 1936 previously defined an accrued leave transfer payment in terms consistent with subsection 26-10(2) of the ITAA 1997. Subsection 51(3) of the ITAA 1936 provided a deduction would be available in the same circumstances detailed in the current subsection 26-10(1) of the ITAA 1997. | 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 the vendor against all liability for such accrued entitlements. | We note that only a percentage of the accrued leave entitlements were taken into account in adjusting the purchase price. Nevertheless, no payment was made 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. It is unnecessary to consider the further requirements listed in that subsection. | As there is no accrued leave transfer payment in this case, you cannot deduct a loss or outgoing for the accrued long service leave, annual leave or sick leave. | We further note that the agreement provides that should the Commissioner determine the adjustments (or any part of) are assessable to the purchaser and deductible to 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 70%. | Your private ruling application specifically focused on 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 deductible. Under the terms of the agreement there will therefore be no further adjustment to the purchase price.


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