Assessability of long service leave accrued overseas by a foreign resident while employed by an Australian resident company

Is the lump sum payment for long service leave, accrued overseas by a foreign resident taxpayer while employed by an Australian resident company, assessable income under subsection 6-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The lump sum payment for long service leave, accrued overseas by a foreign resident taxpayer while employed by an Australian resident company, is not assessable income under subsection 6-10(5) of the ITAA 1997 as it is exempt under paragraph 23(r) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of South Africa and a non resident of Australia for income tax purposes.

The taxpayer was employed by an Australian resident entity in South Africa.

Upon termination of the contract of employment, the taxpayer received a lump sum payment for unused long service leave attributable to the period of employment with the company in South Africa. .

Subsection 6-10(5) of the ITAA 1997 provides that a foreign resident taxpayer's assessable income includes statutory income from all Australian sources and other statutory income included by a provision on a basis other than having an Australian source. Subsection 995-1(1) of the ITAA 1997 defines foreign resident to mean a person who is not a resident of Australia for the purposes of the ITAA 1936

Generally, Australian courts have held that the source of employment income is where the employee performs their duties ( Commissioner of Taxation (NSW) v. Cam and Sons Ltd (1936) 36 SR (NSW) 544; 4 ATD 32 and Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 7 AITR 76; (1957) 11 ATD 288).

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 26AD of the ITAA 1936 which provide that any amount paid to a taxpayer in lump sum in consequence of termination of employment, being an amount that is paid in respect of unused long service leave, is to be included in their assessable income.

However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is paragraph 23(r) of the ITAA 1936 which provides that income derived by a non-resident taxpayer from sources wholly out of Australia, except income included as assessable under a specific provision of the Act on a basis other than having an Australian source, will be exempt from income tax.

Therefore, in determining the liability to tax on income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

Schedule 42 to the Agreements Act contains the tax treaty between Australia and the Republic of South Africa (the South African Agreement). The South African Agreement operates to avoid the double taxation of income received by Australian and South African residents.

Article 15(1) of the South African Agreement provides that salaries, wages and other similar remuneration derived by an individual who is a resident of South Africa in respect of an employment shall be taxable only in South Africa unless the employment is exercised in Australia. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in Australia.

As the taxpayer is a resident of South Africa and the employment was exercised in South Africa, the portion of the unused long service leave payments received by the taxpayer is taxable only in South Africa.

Accordingly, the unused long service payments received by taxpayer while employed in South Africa is exempt from tax under paragraph 23(r) of the ITAA 1936.