Turner and Commissioner of Taxation
[2011] AATA 693
•6 October 2011
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 693
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2010/3728
TAXATION APPEALS DIVISION ) Re PAUL TURNER Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Egon Fice, Senior Member Date6 October 2011
PlaceMelbourne
Decision The Tribunal affirms the reviewable decision dated 29 June 2010.
..........[sgd] Egon Fice.............
Senior Member
TAXATION – Assessable income – Salary sacrifice arrangement – Salary sacrifice contributions – Effective salary sacrifice – Australian Public Service – Public Ruling –Pre-payment of salary – Retirement – Annual Leave – Long service leave – Cessation of employment
Administrative Appeals Tribunal Act 1975 (Cth) s 37J
Income Tax Assessment Act 1936 (Cth) ss 19, 26(d)
Income Tax Assessment Act 1997 (Cth) ss 6-5, 83-10, 83-80
Long Service Leave (Commonwealth Employees) Act 1976 (Cth)
Public Service Act 1999 (Cth) s 22
Taxation Administration Act 1953 (Cth) Schedule 1, 358-1
Long Service Leave (Commonwealth Employees) Regulations 1976
Commonwealth Taxation Board of Review in Case No 76 (reference number M.36/1957)
Taxation Ruling TR 2001/10
Taxation Ruling TR 2006/10
REASONS FOR DECISION
6 October 2011 Egon Fice, Senior Member 1. The parties to this application have consented to it being determined without a hearing in accordance with s 34J of the Administrative Appeals Tribunal Act 1975. In my opinion, the issues for determination on review of this decision can be adequately determined in the absence of the parties.
2. Mr Paul Turner was a public servant, being employed by the Treasurer and Commissioner of Taxation (ATO) under s 22 of the Public Service Act 1999. His Australian Public Service (APS) classification was Executive Level 2 (EL2).
3. In 2008 Mr Turner applied for and was granted a 52 week period of annual and long service leave, commencing 1 July 2008. Prior to commencing that leave, in June 2008 Mr Turner’s employer entered into a Salary Sacrifice Arrangement (SSA) with him whereby the employer contributed $2,500 per fortnight to his superannuation fund, the Australian Government Employees Superannuation Trust (AGEST). The arrangement regarding his 52 weeks leave was that Mr Turner’s employer would pay his salary and salary sacrifice contributions which were expected to accrue during his proposed period of leave in advance of commencing his leave. This arrangement was outside the ATO (Executive Level 2) Agreement 2006 (EL2 Agreement) which governed his terms of employment with the ATO.
4. On 10 July 2008 the employer paid to Mr Turner the advance of salary and it also paid to AGEST on 12 July 2008 an amount of $65,000, which was an advance payment of the salary sacrifice amounts agreed to, being 26 fortnightly payments of $2,500.
5. On 25 July 2008 Mr Turner gave the employer notice that he intended to retire from his employment, effective on 11 August 2008. As a result of receiving that notice, the employer terminated the SSA with effect from 7 August 2008, being the fortnightly pay period prior to Mr Turner’s retirement. Although the employer had made a payment to AGEST, of which $65,000 was for Mr Turner’s benefit, it notified AGEST that the payment it made on 12 July 2008 was an overpayment and it sought recovery of initially $55,000, and shortly thereafter, a further $2,500, in respect of the salary sacrifice contribution. That was because his employer determined that only $7,500 of the contribution had, at that point in time, been allocated to Mr Turner’s AGEST account. The remaining $57,500 was treated as assessable income in the hands of Mr Turner as part of his gross salary. Mr Turner was notified on 5 November 2008 of his final entitlements after adjustments had been made for overpayments by reason of advance payments made by his employer at the commencement of his intended leave period; and payments for his annual and long service leave which became due and payable to him as a consequence of his resignation. His net entitlements amounted to $81,927.57 which was paid into his bank account on 3 November 2008.
6. The Commissioner of Taxation (the Commissioner) issued a Notice of Assessment to Mr Turner on or about 6 November 2009 indicating his taxable income for the year ended 30 June 2009 was $166,093. That income included salary and wages in the amount of $78,126. Mr Turner claimed that $57,500 of that amount was not assessable income because it was paid as a contribution to his superannuation fund under an effective SSA. Mr Turner lodged an objection to that assessment on 25 December 2009. On 29 June 2010 the Commissioner notified Mr Turner that his objection had been disallowed. Mr Turner then lodged an application for review by this Tribunal on 30 August 2010.
7. The only issues which I am required to determine are whether:
(a)the amount of $57,500 was, properly understood, a payment in respect of entitlement to annual leave, long service leave and ordinary salary; or
(b)the $57,500 paid to AGEST for the benefit of Mr Turner by his employer was in accordance with an effective SSA as that expression is defined in Taxation Ruling TR 2001/10.
MR TURNER’S EMPLOYMENT AGREEMENT
8. Mr Turner was employed by the ATO under the EL2 Agreement. That agreement covers all EL2 employees of the ATO employed under the Public Service Act 1999 at a classification level listed as the APS classification EL2. There was no dispute about the fact that Mr Turner was employed as an EL2 with the ATO.
9. Clause 45 of the EL2 Agreement provides that an employee may sacrifice up to 50 per cent of his or her salary on the combined total of payments for superannuation and items which are specifically exempt from the Fringe Benefits Tax. Attachment D of the EL2 Agreement sets out a list of approved items for salary packaging for ongoing EL2 employees. The list includes superannuation payments made to a complying superannuation fund on behalf of the ATO employee up to maximum contribution limits shown in the salary packaging manual. Under Clause 45 of the EL2 Agreement an employee may obtain a special concession to enable packaging above the 50 per cent limit for exempt items.
10. The salary packaging manual for ATO employees makes it clear that the employer will only enter into SSAs which comply with Taxation Ruling TR2001/10. It provides that:
The Tax Ruling TR 2001/10 provides guidance to employers on what constitutes an effective salary packaging arrangement. The Tax office will only enter into arrangements that fit within the guidelines in TR 2001/10. Generally this means you will not be able to elect to salary package any remuneration that you have already earned (that is you must have entered into the arrangements before you were actually eligible for the salary/wages/allowance/bonus etc).
11. Public Taxation Ruling TR2001/10 deals with, amongst other things, salary sacrifice arrangements. A Public Taxation Ruling is an expression of the Commissioner’s opinion of the way in which a relevant provision applies, or would apply, to entities generally or a class of entities (s 358-1 of Schedule 1, Taxation Administration Act 1953). A Public Ruling binds the Commissioner if the Public Ruling applies to the entity and the entity relies on it. (TR2006/10).
12. TR2001/10 applies to employers and employees whose personal service relationship is governed by, amongst other things, Enterprise Workplace Agreements or similar agreements. It clearly applies to the EL2 Agreement between the ATO and Mr Turner. The ruling defines a number of terms which apply to Mr Turner’s case. They are as follows:
‘Salary sacrifice arrangement’ – in this Ruling, the term salary sacrifice arrangement means an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of the similar value. The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to pay FBT, if any, on the benefits provided.
‘Effective SSA’ – an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned … the entitlement to receive that amount as salary or wages.
‘Ineffective SSA’ – an ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned is to be paid in a form other than as salary or wages.
‘Entitlement to receive salary or wages that have been earned’ – personal services remuneration arrangements usually provide that the employee is entitled to be paid salary or wages at fixed intervals when he or she has performed services for the employer over a fixed period. To the extent that services for that period have been performed, everything has been done by the employee in earning the entitlement to salary or wages. Personal services remuneration arrangements may also provide that the employee may become entitled to be paid salary or wages such as bonuses or commissions if particular events occur or conditions are satisfied. The condition precedent to earning such variable salary or wages is met when those events occur or those conditions are satisfied. An entitlement to be paid has been earned even if the employee will not be paid until a later time. For annual and long service leave, an entitlement to be paid salary or wages is earned as the leave accrues, being when the relevant qualifying period of service is completed.
13. Following on from the definition of an ineffective SSA, TR2001/10 makes it clear that an attempt to deal with an entitlement to take leave which has already accrued will result in an ineffective SSA. It also explains that the exchange of an entitlement to take leave for another benefit will cause the entitlement to be paid as salary or wage and be derived as ordinary income. On the other hand, leave which will accrue from the provision of future services can be the subject of an effective SSA. Also, the taking of leave which has accrued prior to the commencement of the SSA in the ordinary course of employment will not cause the SSA to be ineffective.
14. TR2001/10 also deals in some detail with leave entitlements where a SSA is involved. It explains that once an employee has completed the relevant qualifying period of employment and has an entitlement to take annual leave, long service leave or sick leave, the employee has an entitlement to be paid salary or wages. An entitlement to take leave is regarded as synonymous with an entitlement to be paid salary or wages because the employee has done everything necessary, apart from taking the leave, to be entitled to be paid. Therefore, according to TR2001/10, it follows that a SSA exchanging an entitlement to take leave that is accruing, or has accrued, for past services performed in return for benefits is ineffective. On the other hand, it is accepted that a SSA exchanging any expected entitlement to leave that will accrue for future services rendered in return for benefits will be effective. The taxation ruling also points out that whether the conditions necessary for the taking of leave have been met is a question of fact.
CONSEQUENCES OF RESIGNATION FROM EMPLOYMENT
15. On 11 August 2008 Mr Turner’s employment with the ATO ceased. At this point in time, Mr Turner had already been paid in advance a gross sum of $44,202.28 for the annual leave and long service leave which he planned to take over the year in question. The sum of $65,000 was also paid to AGEST on his behalf in respect of the leave which he intended to take over the 52 week period. These payments were made in the pay period 26 June 2008 to 9 July 2008.
16. It should be noted that these payments were not made in accordance with the EL2 Agreement but rather under a subsidiary arrangement with the ATO. Clause 18.9 of the EL2 Agreement deals with salary payments during annual leave. It provides that salary paid to an EL2 employee while on annual leave will be the salary paid as if the EL2 employee was continuing on duty. Long service leave is dealt with under clause 20 of the EL2 Agreement. Entitlement to long service leave and rates of payment of salary are dealt with in the Long Service Leave (Commonwealth Employees) Act 1976 and the Long Service Leave (Commonwealth Employees) Regulations 1976. Clause 18.15 of the EL2 Agreement provides that where an employee ceases duty for any reason, they are entitled to payment in lieu of any unused annual leave credits. Clause 38.1 provides that EL2 employees will be paid fortnightly. There is no provision for advance payments in the EL2 Agreement.
17. On the cessation of Mr Turner’s employment, it is abundantly clear that he was no longer entitled to the entire advance payment or to any benefit in substitution for that payment because that payment was made on the basis of Mr Turner’s ongoing employment and entitlements to leave. By terminating his employment, Mr Turner was in breach of the arrangement with the ATO which allowed him to be paid in advance and he became liable to repay the portion of the advance which was referrable to his ongoing employment. Otherwise, he would have been unjustly enriched. It resulted in Mr Turner becoming liable to repay the prepaid amounts he had received insofar as they related to the period after 11 August 2008. However, what arose at that point in time was an entitlement to be paid a lump sum for accrued annual leave or long service leave.
18. On 5 November 2008 the ATO notified Mr Turner of his final entitlements as at separation date, setting off the advance payments overpaid to Mr Turner as a consequence of his decision to cease employment, against the lump sum payments to which he became entitled as at 11 August 2008 for accrued annual leave and long service leave. The ATO recovered from AGEST $57,500 of prepaid SSA contributions to the Superannuation Trust. As at the time of his resignation from employment, $7,500 had been allocated to AGEST as SSA payments. After deducting the advance payments made to Mr Turner in respect of the period following 11 August 2008 from his gross entitlements to be paid for unused annual leave and long service leave, Mr Turner received the gross amount of $78,129. The Commissioner treated the $78,129 received by Mr Turner as assessable income under s 83-10 and s 83-80 of the Income Tax Assessment Act 1997 (ITAA 97). Mr Turner claimed that $57,500 of the $78,129 was not assessable income in his hands because it was paid under the SSA to AGEST. Mr Turner maintained that this payment was an effective SSA. With respect to Mr Turner, I cannot accept that submission.
19. The salary sacrifice payment of $65,000 was an advance payment based on the assumption at that time that Mr Turner’s employment was ongoing, subject to a period of 52 weeks leave. That situation only existed up until 11 August 2008 when his employment ceased. As at that date, quite plainly Mr Turner was not entitled to continue to receive, either by way of income or by way of benefit under his SSA, any further advance payments in respect of annual leave or long service leave. His employment had ceased to be ongoing. He was in breach of the arrangement under which the advanced payments were made and he was required to repay that portion of the prepaid sum to the ATO to which he was no longer entitled. In substitution for those prepaid amounts, Mr Turner became entitled to a lump sum payment for accrued but unused annual leave and long service leave. Therefore, as the Commissioner contended, after setting off the amounts of prepaid annual leave and long service leave received by Mr Turner against the payment to which he was entitled as a consequence of resignation from his employment, the amount of $78,129 was the taxable income of Mr Turner as that was the amount in fact paid by the ATO to Mr Turner in respect of accrued annual leave, long service leave and ordinary salary for the year ended 30 June 2009. On that basis alone, Mr Turner cannot succeed in his claim.
20. Although this effectively disposes of this matter, the Commissioner made further and alternative submissions regarding the salary sacrifice component. For the sake of completion, I will also deal with those.
EFFECTIVE SALARY SACRIFICE ARRANGEMENT
21. Mr Turner submitted that the $65,000 amount paid to AGEST on his behalf on or about 12 July 2008 had been derived by him from his employment at that time and it was paid to AGEST at his direction. Section 6-5 of the ITAA 97 in fact provides that a person is taken to have received ordinary income as soon as it is applied or dealt with in any way on the person’s behalf or as they direct. In support of his contention, Mr Turner relied on a decision of the Commonwealth Taxation Board of Review in Case No 76 (reference number M.36/1957).
22. In that case, a teacher employed by the South Australian Education Department applied to be retired on medical grounds and, at the same time, requested long service leave be granted to him. If that long service leave were granted, the taxpayer requested that payment of his salary entitlements for his long service leave be made to him on the expected date of his retirement. However, the Education Department informed him that it was not legally possible to pay him a lump sum for his long service leave at its conclusion. Instead, it credited monthly amounts into his South Australian superannuation fund. At the end of his period of long service leave and upon his retirement, the taxpayer withdrew the sum of £581 from his superannuation account and handed it back to the Education Department for crediting to his savings account. Of the £581 sum, an amount of £62 related to salary which he earned during the financial year in question and the balance, £519, related to the long service leave payments. The taxpayer claimed that £519 was a capital amount of allowances paid to him in a lump sum consequent upon his retirement from employment in accordance with s 26(d) of the Income Tax Assessment Act 1936 (ITAA 36). The Taxation Board of Review disallowed the taxpayer’s claim. It did so relying on s 19 of ITAA 36 which deemed that income had been derived by a person even though none was actually paid to him but which was reinvested, cumulated, capitalised, carried into a new reserve, sinking fund or insurance fund or otherwise dealt with on the taxpayer’s behalf or as he directed.
23. Case No 76 is clearly distinguishable from Mr Turner’s case. In his case the $65,000 payment to AGEST was an advance payment on the understanding that he continued to be employed by the ATO for the following 52 weeks. However, what happened was that rather than continuing his employment, Mr Turner terminated that employment effective on 11 August 2008. The taxpayer in Case No 76 of course did no such thing, but retired at the conclusion of his long service leave. The distinction is significant.
24. Quite plainly, Mr Turner became disentitled to receive fortnightly payments for annual leave and long service leave accrued as at the date of cessation of employment. Furthermore, he became liable to repay all advance payments made to him or to AGEST on his behalf which were in respect of his ongoing employment. Given that the advance payment was conditional upon Mr Turner remaining in his employment during the period covered by the payment, it cannot properly be said that the entire amount had been applied or dealt with in accordance with his direction. In my opinion, only those fortnightly payments to which Mr Turner had become entitled under the EL2 Agreement can be said to fall within the description. The balance was repaid to the ATO by way of set-off against other entitlements.
25. Also, as the Commissioner submitted, cessation of employment necessarily resulted in the cessation of Mr Turner’s salary sacrifice arrangement. That is clearly stated in the ATO salary packaging manual. Up until the date of his resignation, there is no question that Mr Turner’s salary sacrifice arrangement was effective. He was entitled to take annual leave and, possibly, long service leave insofar as those entitlements had accrued prior to his resignation. Had he done so, Mr Turner would have been entitled to fortnightly payments during the course of his leave as if he was in fact at work. However, as soon as Mr Turner’s employment ceased his entitlement to annual leave and long service leave also ceased and instead, Mr Turner became entitled to a lump sum payment for annual leave and long service leave accrued as at the resignation date.
26. As I have pointed out above, TR2001/10 clearly provides that exchanging an entitlement to take leave which is accruing or which has accrued, for past services performed in return for benefits is an ineffective SSA. As at the date of his resignation, Mr Turner had exchanged a right to be paid salary or wages in the future while on annual leave or long service leave for a lump sum payment for leave accrued for past services performed. Therefore, after Mr Turner resigned from his employment, any payments made to him cannot be made as an effective SSA.
CONCLUSION
27. In my opinion, the amount of $57,500 was not an amount paid to Mr Turner under an effective salary sacrifice arrangement. His existing salary sacrifice arrangement with the ATO ceased to be in effect on 11 August 2008. The $57,500 amount, being part of the $65,000 lodged with AGEST, was money recoverable by the ATO because it formed part of an advance payment made to Mr Turner on the agreement that he would remain employed with the ATO, albeit while on annual leave and long service leave.
28. Upon cessation of his employment with the ATO, Mr Turner was no longer entitled to those monies and repayment was properly sought by the ATO. It could not be said that the $57,500 had been applied or dealt with on his behalf or as he directed. Those monies were paid to AGEST for Mr Turner’s benefit contingent upon him being legally entitled to them. That could only occur after each fortnight Mr Turner remained in employment. The recovery of those monies was made by offsetting the $57,500 against amounts to which Mr Turner became entitled upon cessation of his employment. I find that it was properly treated by the ATO as ordinary income of Mr Turner and taxed accordingly. Therefore, I find that the objection decision made by the Commissioner on 29 June 2010 was correct. I affirm that decision.
I certify that the twenty-eight [28] preceding paragraphs are a true copy of the reasons for the decision herein of
Egon Fice, Senior MemberSigned: ........[sgd]....................................................................
E. Montalto, AssociateDates of Hearing Decision on Papers
Date of Decision 6 October 2011
Representative for the Applicant Self RepresentedRepresentative for the Respondent A. Elbourne, Australian Taxation Office Legal Services Branch
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