Issue
Is any part of a lump sum payment received on termination of employment for unused long service leave (LSL) exempt from income tax where a part of the payment is attributable to a period when the taxpayer worked overseas?
Decision
Yes. The portion of the lump sum payment for unused LSL attributable to the overseas service is exempt from income tax pursuant to subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is an individual who worked overseas for a continuous period of at least 91 days.
The taxpayer remained a resident of Australia while working overseas.
The taxpayer's service was terminated by the employer after the taxpayer returned to Australia.
Upon termination the taxpayer received a lump sum payment for unused LSL from the employer.
The taxpayer also worked in Australia for the employer, and the payment for unused LSL related to the total period of employment.
The taxpayer's continuous period of foreign service was directly attributable to one of the activities listed in subsection 23AG(1AA) of the ITAA 1936, and therefore subsection 23AG(1AA) does not deny the exemption to the taxpayer.
The taxpayer's foreign earnings were not exempt from income tax in the foreign country only because of one or more of the reasons listed in subsection 23AG(2) of the ITAA 1936, and therefore subsection 23AG(2) does not apply to deny an exemption to the taxpayer.
Reasons for Decision
Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings are exempt from tax where all of the following requirements are satisfied: • the taxpayer is a resident of Australia and a natural person; • the taxpayer is engaged in foreign service; • the foreign service is for a continuous period of at least 91 days; • the taxpayer derives foreign earnings from that foreign service; • the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936; and • the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936.
'Foreign earnings' includes income consisting of salary and wages (including payments for LSL), while 'foreign service' includes service in a foreign country in the capacity as an employee (subsection 23AG(7) of the ITAA 1936).
As LSL accrues on a daily basis, the portion attributable to the service performed overseas can be separated from the portion attributable to service performed in Australia.
Payments for LSL that accrue during a period of foreign service qualify as 'foreign earnings' derived from that foreign service. This will apply regardless of whether a taxpayer takes the LSL during their period of foreign service, takes the LSL after their foreign service has been completed, or does not take the LSL but instead receives a lump sum payment on the termination of their employment for the unused LSL. Providing that the payment (or any part of it) is for LSL that accrued during the period of foreign service, the payment (or the relevant portion of it) is foreign earnings and will be exempt from income tax under subsection 23AG(1) of the ITAA 1936 on condition that all of the other requirements of section 23AG of the ITAA 1936 are satisfied.
In this case, all of the requirements of section 23AG of the ITAA 1936 are satisfied, so the portion of the lump sum payment for unused LSL attributable to the overseas service is exempt from income tax under subsection 23AG(1) of the ITAA 1936.
The taxation treatment of the portion of the lump sum payment received on termination of employment for unused LSL attributable to service performed in Australia is dealt with in Subdivision 83-B of the Income Tax Assessment Act 1997 .
The amount of tax (if any) payable in respect of the remaining, non-exempt, portion of the lump sum payment received on termination of employment for unused LSL, and any other income, is calculated pursuant to subsection 23AG(3) of the ITAA 1936.