House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)

CHAPTER TWO Unused annual leave and unused long service leave payments

Unused annual leave and unused long service leave payments

2.1 Purpose of amendment: The Bill will amend the Income Tax Assessment Act 1936 to remove the concessional tax treatment that applies to lump sum payments in respect of unused annual leave and unused long service leave made on termination of employment. [Clause 34]

2.2 Lump sum payments in respect of unused annual leave made on or after 18 August 1993 will be included in a taxpayer's assessable income in full and taxed at marginal rates unless the taxpayer's termination of employment is as a consequence of bona fide redundancy or invalidity or is under an approved early retirement scheme. If the taxpayer's termination of employment is as a consequence of bona fide redundancy or invalidity or is under an approved early retirement scheme, payments in respect of unused annual leave will continue to be included in assessable income in full and subject to tax at a maximum rate of 30% plus medicare levy.

2.3 Lump sum payments in respect of unused long service leave made on termination of employment will be taxed as follows:

•

only 5% of that portion of unused long service leave which accrued prior to 16 August 1978 will be included in assessable income and taxed at marginal rates;

•

that portion of unused long service leave which accrued between 16 August 1978 and 17 August 1993 will be included in assessable income in full and subject to tax at a rate not exceeding 30% plus medicare levy; and

•

that portion of unused long service leave which accrued on or after 18 August 1993 will be included in assessable income in full and taxed at marginal rates unless the taxpayer's termination of employment is as a consequence of bona fide redundancy or invalidity or is under an approved early retirement scheme. If the taxpayer's termination of employment is as a consequence of bona fide redundancy or invalidity or is under an approved early retirement scheme, that portion of unused long service leave which accrued on or after 18 August 1993 will be included in assessable income in full and subject to tax at a rate not exceeding 30% plus medicare levy.

2.4 The purpose of the proposed amendments is to ensure that the tax system does not discourage taxpayers from using their leave entitlements for their intended purpose. The proposed amendments will ensure that leave payments will be taxed no differently if they are received during employment than if they are received upon termination of employment. However, they recognise that some taxpayers will have less flexibility than others in using accrued leave entitlements for their intended purpose and ensure that amounts in respect of unused long service leave accrued prior to 18 August 1993 will continue to be taxed on a concessional basis.

2.5 Date of effect: The amendments will apply to payments in respect of unused annual leave made on or after 18 August 1993 and to that portion of payments in respect of unused long service leave that accrued on or after 18 August 1993.

Background to the legislation

Payments in respect of unused annual leave

What is annual leave?

2.6 Annual leave is defined in subsection 26AC(4) of the Income Tax Assessment Act 1936 to mean:

•

leave described as annual leave, recreation leave or annual holidays which a person has an entitlement to under the conditions of employment specified in:

-

a law of the Commonwealth or of a State or Territory;

-

an award, determination or industrial agreement in force under any such law;

-

a contract of employment; or

-

the terms of appointment to an office;

•

leave not described as annual leave, recreation leave or annual holidays which a person has an entitlement to under the relevant conditions of employment but which is essentially the same as annual leave, recreation leave or annual holidays; and

•

leave that is granted as a privilege (rather than an entitlement) which is determined by reference to matters similar to those to which entitlements to annual leave, recreation leave or annual holidays are ordinarily determined.

How are payments in respect of unused annual leave taxed under the current law?

2.7 Lump sum payments made on or after 16 August 1978 in consequence of termination of employment in respect of unused annual leave are included in a taxpayer's assessable income under section 26AC.

What rate of tax applies to unused annual leave payments?

2.8 A rebate is available under section 159SA to ensure that payments in respect of unused annual leave included in a taxpayer's assessable income under section 26AC are taxed at a rate not exceeding 30% plus medicare levy.

How are payments of this nature taxed on the death of an employee?

2.9 If a payment of this nature is made on the death of an employee, no tax is payable on the amount received directly by a beneficiary or by the trustee of the deceased's estate (subsection 101A(2)).

What is the rate of tax instalment deductions on these payments?

2.10 Subsection 221C(1AB) allows for tax instalment deductions to be taken out at special rates on amounts representing unused annual leave. Regulation 80 of the Income Tax Regulations specifies that tax instalment deductions are to be taken out of these amounts at a rate of 31.25% (to be increased to 31.4%).

Payments in respect of unused long service leave

What is long service leave?

2.11 Long service leave is defined in subsection 26AD(8) to mean:

•

long service leave, long leave, furlough, extended leave or leave of a similar kind (however described) which a person has an entitlement to under the conditions of employment specified in:

-

a law of the Commonwealth or of a State or Territory;

-

an award, determination or industrial agreement in force under any such law;

-

a contract of employment; or

-

the terms of appointment to an office;

•

leave (other than annual leave) which a person has an entitlement to under a scheme or arrangement which has allowed the employer to secure an exemption from obligations to comply with a law of the Commonwealth or of a State or Territory relating to long service leave, long leave, furlough, extended leave or leave of a similar kind (however described); and

•

leave that is granted as a privilege (rather than an entitlement) which is determined by reference to matters similar to those to which entitlements to long service leave, long leave, furlough, extended leave or leave of a similar kind (however described) are ordinarily determined.

How are payments in respect of unused long service leave taxed under the current law?

2.12 Lump sum payments made on or after 16 August 1978 in consequence of termination of employment in respect of unused long service leave are included in a taxpayer's assessable income under section 26AD. The amount included in assessable income depends on whether or not the eligible service period to which the long service leave relates commenced on or after 16 August 1978.

What is the eligible service period?

2.13 Broadly speaking, eligible service period is defined in subsection 26AD(7) to mean:

•

if the taxpayer has not used any long service leave prior to retirement - the period by reference to which the lump sum amount is calculated; or

•

if the taxpayer has used some of his or her long service leave prior to retirement - the period by reference to which the long service leave used by the taxpayer was calculated and the period on which the lump sum amount is calculated.

How much of an unused long service leave payment is included in assessable income if the eligible service period commenced on or after 16 August 1978?

2.14 If a taxpayer's eligible service period commenced on or after 16 August 1978, the whole amount he or she receives on termination of employment in respect of unused long service leave is included in his or her assessable income (subsection 26AD(2)).

How much of an unused long service leave payment is included in assessable income if the eligible service period commenced before 16 August 1978?

2.15 If a taxpayer's eligible service period commenced before 16 August 1978:

•

the whole amount he or she receives on termination of employment in respect of unused long service leave that accrued on or after 16 August 1978 is included in his or her assessable income (subsection 26AD(3) and subsection 26AD(4)); and

•

5% of any amount he or she receives on termination of employment in respect of unused long service leave that accrued before 16 August 1978 is included in his or her assessable income (subsection 26AD(5)).

What rate of tax applies to unused long service leave payments?

2.16 Ordinary rates of tax apply to 5% of that part of any payment in respect of unused long service leave that accrued before 16 August 1978 which is included in a taxpayer's assessable income under subsection 26AD(5).

2.17 A rebate is available under section 159SA to ensure that payments in respect of unused long service leave that accrued on or after 16 August 1978 which are included in a taxpayer's assessable income under subsections 26AD(2), (3) or (4) are taxed at a rate not exceeding 30% plus medicare levy.

How are payments of this nature taxed on the death of an employee?

2.18 If a payment of this nature is made on the death of an employee, no tax is payable on the amount received directly by a beneficiary or by the trustee of the deceased's estate (subsection 101A(2)).

What is the rate of tax instalment deductions on these payments?

2.19 Subsection 221C(1AB) allows for tax instalment deductions to be taken out at special rates on assessable retirement amounts. Assessable retirement amounts are defined in paragraph 221A(2)(a) to be any amount included in a taxpayer's assessable income under section 26AD. The amount included in assessable income under section 26AD is 5% of any amount accrued before 16 August 1978 and the whole of the amount accrued on or after 16 August 1978. Regulation 80 of the Income Tax Regulations specifies that tax instalment deductions are to be taken out of these amounts at a rate of 31.25% (to be increased to 31.4%).

Explanation of the amendments

Unused annual leave payments

2.20 Lump sum payments made on or after 18 August 1993 in consequence of termination of employment in respect of unused annual leave will continue to be included in assessable income under section 26AC.

2.21 In most circumstances unused annual leave payments will be included in a taxpayer's assessable income and taxed at ordinary rates.

2.22 However, if the payment is a bona fide redundancy amount, an early retirement scheme amount or an invalidity amount the rate of tax payable on unused annual leave payments will be limited to a maximum of 30% plus medicare levy. [Clause 35; amended definition of eligible assessable income in section 159S]

Bona fide redundancy amounts

2.23 A payment will be a bona fide redundancy amount if it is paid to a person because of his or her dismissal from employment where:

•

the dismissal was because of the bona fide redundancy of the person. Bona fide redundancy has the same meaning as in section 27F. Broadly speaking, dismissal carries with it the concept that the termination of employment is involuntary on the employee's part - that is, it will be instigated by the employer. However, it also includes the notion of constructive dismissal where an employer places an employee in a position in which the employee has little option but to tender his or her resignation. Redundancy is the situation where an employer no longer requires employees to carry out work of a particular kind or to carry out work of a particular kind at the same location. Redundancy does not extend to the dismissal of an employee for personal or disciplinary reasons or because the employee has been inefficient;

•

the termination time was before the last retirement date in relation to the employment. The last retirement date is defined in subsection 27A(1) to mean the time that, under the conditions of employment, the employee's service would have ordinarily terminated or the employee's 65th birthday, whichever is earlier; and

•

at the time of dismissal there was no agreement between the person and the employer or between the employer and another person to subsequently employ the person.

[Clause 35]

Early retirement scheme amounts

2.24 A payment will be an early retirement scheme amount if it is paid to a person on the termination of employment where:

•

the termination was in accordance with an approved early retirement scheme in terms of section 27E; and

•

the termination time was before the last retirement date in relation to the employment. The last retirement date is defined in subsection 27A(1) to mean the time that, under the conditions of employment, the employee's service would have ordinarily terminated or the employee's 65th birthday, whichever is earlier; and

•

at the time of dismissal there is no agreement between the person and the employer or between the employer and another person to subsequently employ the person.

[Clause 35]

Invalidity amounts

2.25 A payment made to a person before 1 July 1994 will be an invalidity amount if it is paid to the person on termination of employment where that person's employment is terminated because of physical or mental incapacity to engage in that employment.

2.26 A different rule applies if the payment is made on or after 1 July 1994. In this case the person's employment must be terminated because of disability and two legally qualified medical practitioners have certified that the disability is likely to result in the person being unable ever to be employed in a capacity for which he or she is reasonably qualified because of training, education or experience.

2.27 In either case, the termination time must be before the last retirement date (as defined in subsection 27A(1)) in relation to the employment. That is, the employment must be terminated before the date on which the person's employment would necessarily have ended but for the invalidity. [Clause 35]

Date of application of amendments

2.28 The proposed amendments apply to payments made on or after 18 August 1993. Therefore, the tax treatment which applies ordinarily depends on when the payment is made. However, if an employee terminated his or her employment before 18 August 1993 but the employer did not make a payment in respect of unused annual leave until the first normal pay period after that date, the payment will be considered to have been made on the date of termination of employment.

Unused long service leave payments

2.29 Lump sum payments in respect of unused long service leave made in consequence of termination of employment will be taxed as follows:

•

only 5% of that portion of unused long service leave which accrued prior to 16 August 1978 will be included in a taxpayer's assessable income and taxed at marginal rates;

•

that portion of unused long service leave which accrued between 16 August 1978 and 17 August 1993 will be included in a taxpayer's assessable income in full and subject to tax at a rate not exceeding 30% plus medicare levy; and

•

that portion of unused long service leave which accrued on or after 18 August 1993 will be included in a taxpayer's assessable income in full and taxed at marginal rates unless the taxpayer's termination of employment is as a consequence of bona fide redundancy or invalidity or is under an approved early retirement scheme. If the taxpayer's termination of employment is as a consequence of bona fide redundancy or invalidity or is under an approved early retirement scheme, that portion of unused long service leave which accrued on or after 18 August 1993 will be included in assessable income in full and subject to tax at a rate not exceeding 30% plus medicare levy.

2.30 Section 26AD of the Income Tax Assessment Act includes in a taxpayer's assessable income:

•

the whole of any amount received on termination of employment in respect of unused long service leave that accrued on or after 16 August 1978 (subsections 26AD(2), (3) and (4)); and

•

5% of any amount received on termination of employment in respect of unused long service leave that accrued before 16 August 1978 (subsection 26AD(5)).

2.31 The whole of the assessable part of unused long service leave payments is included in a taxpayer's assessable income and taxed at ordinary rates unless it is eligible assessable income as defined in section 159S. A rebate applies to any amount that qualifies as eligible assessable income to limit the rate of tax on such amounts to a maximum of 30% plus medicare levy.

2.32 The definition of eligible assessable income is to be amended so that it includes only the post-15 August 1978 component of unused long service leave included in a taxpayer's assessable income under subsection 26AD(2), (3) or (4) that is:

•

a bona fide redundancy amount , an early retirement scheme amount or an invalidity amount ; or

•

an amount (not being a bona fide redundancy amount , an early retirement scheme amount or an invalidity amount) in relation to unused long service leave that relates to employment which commenced prior to 18 August 1993 that exceeds the post-1993 Budget component of the amount.

[Clause 35; amended definition of eligible assessable income in section 159S]

2.33 The conditions for a payment to qualify as a bona fide redundancy amount, an early retirement scheme amount or an invalidity amount are described above.

2.34 The post 1993 Budget component in relation to the post-15 August 1978 component of an unused long service leave payment (that is, an amount included in an employee's assessable income under subsection 26AD(2), (3) or (4)) is that part, if any, of the total amount received by the employee in respect of unused long service leave that relates to service with the relevant employer on or after 18 August 1993. The amount is calculated by applying the formula in subsection 26AD(3) to the total amount of the payment assuming that the references to 15 August 1978 are references to 17 August 1993. The operation of the provision is demonstrated in the examples at the end of this commentary. [Clause 35; new definition of post-1993 Budget component in section 159S]

Application of the proposed amendments

2.35 The proposed amendments apply to assessments in respect of the 1993-94 year of income and all subsequent years of income. [Clause 36]

2.36 However, as a transitional measure in respect of assessments for the 1993-94 year of income, eligible assessable income will include any amount paid before 18 August 1993 in respect of unused annual leave that is assessable under section 26AC. Such amounts paid on or after 18 August 1993 will be eligible assessable income only if they are bona fide redundancy amounts, early retirement scheme amounts or invalidity amounts. [Clause 37]

Summary of tax treatment of unused leave payments

Taxpayers who receive bona fide redundancy amounts, early retirement scheme amounts or invalidity amounts

2.37 Taxpayers who receive a payment in respect of unused annual leave or unused long service leave paid on termination of employment which includes a bona fide redundancy amount , an early retirement scheme amount or an invalidity amount will be taxed as follows:

•

the whole amount of any unused annual leave payments will be included in assessable income and subject to tax at a rate not exceeding 30% plus medicare levy;

•

5% of the pre-16 August 1978 component of any unused long service leave payment will be included in assessable income and taxed at marginal rates; and

•

the whole amount of the post-15 August 1978 component of any unused long service leave payment will be included in assessable income and subject to tax at a rate not exceeding 30% plus medicare levy.

Example

Abiona accepts an offer from her employer under an approved early retirement scheme. She leaves her employment on 16 August 1994 and receives a payment in respect of unused annual leave of $4 000 and a payment in respect of unused long service leave of $28 000.

She has not used any long service leave in the past. Abiona has been working for the same employer for 26 years. Therefore, she has 10 years service prior to 16 August 1978.

As the amounts paid to Abiona in respect of unused annual leave and unused long service leave are early retirement scheme amounts, she will retain the concessional treatment that applies to the pre-16 August 1978 component of her unused long service leave payment.

She will also be entitled to a rebate to limit the maximum rate of tax payable on the amount included in her assessable income in full to 30% plus medicare levy. Abiona will include the following amounts in her assessable income for the 1993-94 year:

Unused annual leave $4000

Unused long service leave

5% * $10769 (ie, 10/26 x $28000) $538

($28000 - $10769) $17231

Abiona will be entitled to a section 159SA rebate so that the rate of tax payable on the $21231 included in her assessable income in full in respect of unused annual leave and unused long service leave will not exceed 31.4%.

Taxpayers who receive unused leave payments on ordinary termination of employment

2.38 Lump sum payments in respect of unused leave made on termination of employment in all other circumstances will be taxed as follows:

•

the whole amount of any unused annual leave payments will be included in assessable income and taxed at marginal rates;

•

only 5% of that portion of unused long service leave which accrued prior to 16 August 1978 will be included in assessable income and taxed at marginal rates;

•

that portion of unused long service leave which accrued between 16 August 1978 and 17 August 1993 will be included in assessable income in full and subject to tax at a rate not exceeding 30% plus medicare levy; and

•

that portion of unused long service leave which accrued on or after 18 August 1993 will be included in assessable income in full and taxed at marginal rates.

2.39 Tax instalment deductions will continue to be taken out of these amounts at special rates (currently 30% plus medicare levy).

2.40 If a payment in respect of unused leave is made on the death of an employee, it will continue to be tax free in the hand's of the beneficiary or the trustee of the deceased's estate.

2.41 As demonstrated by the following examples, the portion of unused long service leave attributable to service after 15 August 1978 and 17 August 1993 respectively is determined by using the formula A/B[C(B+D)/E-F] where:

•

A is the lump sum amount paid in respect of unused long service leave

•

B is the number of whole days in respect of which the lump sum amount is paid

•

C is the number of days in the eligible service period that occurred after 15 August 1978 and after 17 August 1993 respectively

•

D is the number of days of long service leave accrued in the eligible service period that were used prior to retirement date

•

E ) is the total number of days in the eligible service period

•

F ) is the lesser of:

-

the number of days of long service leave used after 15 August 1978 and 17 August 1993 respectively; and

-

the amount calculated by the formula C(B+D)/E.

Example 1: Retirement after 17 August 1993; No long service leave used; No pre-16 August 1978 service.

Rachael retires on 31 December 1995. The details of the payment she receives in respect of unused long service leave is as follows:

Payment received: $8000

Number of days of unused leave: 40

Total eligible service period: 10 years (3652 days)

RachaelNumber of days in eligible service period after 15 August 1978: 3652

Number of days in eligible service period after 17 August 1993: 866

Number of days of long service leave used after 17 August 1993: 0

Calculation

Rachael's assessable income will include all of the amount she receives in respect of unused long service leave (ie, $8000) under subsection 26AD(2).

Post 1993 Budget component

A/B * [C(B + D)/E - F]
= $8000/40 * [866(40 + 0)/3652 - 0]
= $200 * 9.49 (fraction disregarded - subsection 26AD(3A))
= $1800.


Eligible assessable income

Amount taxable under subsection 26AD(2): $8000

Less post 1993 Budget component: $1800

Eligible assessable income: $6200

Summary

$6200 of Rachael's unused long service leave payment will be included in her assessable income and subject to tax at a rate not exceeding 30% plus medicare levy; and

$1800 will be included in her assessable income and taxed at marginal rates.

Example 2: Retirement after 17 August 1993; No long service leave used; Pre-16 August 1978 service.

Blake retires on 31 December 1995. The details of the payment he receives in respect of unused long service leave is as follows:

Payment received: $30000

Number of days of unused leave: 180

Total eligible service period: 20 years (7305 days)

Number of days in eligible service period after 15 August 1978: 6347

Number of days in eligible service period after 17 August 1993: 866

Number of days of long service leave used after 17 August 1993: 0

Calculation

(1)

Amount of post 15 August 1978 unused long service leave to be included under subsection 26AD(3):

A/B * [C(B + D)/E - F]
= $30000/180 * [6347(180 + 0)/7305 - 0]
= $166.67 * 156.39 (fraction disregarded - subsection 26AD(3A))
= $26001.


(2)

Amount of pre 16 August 1978 unused long service leave to be included under subsection 26AD(5):

5% x ($30000 - 26001) = $200.


Post 1993 Budget component

A/B x [C(B + D)/E - F]
= $30000/180 x [866(180 + 0)/7305 - 0]
= $166.67 x 21.34 (fraction disregarded - subsection 26AD(3A))
= $3500


Eligible assessable income

Amount taxable under subsection 26AD(3): $26001

Less post 1993 Budget component: $3500

Eligible assessable income: $22501

Summary

$22501 of Blake's unused long service leave payment will be included in his assessable income and subject to tax at a rate not exceeding 30% plus medicare levy; and

$3700 (ie, $200 + $3500) will be included in his assessable income and taxed at marginal rates.

Example 3: Retirement after 17 August 1993; Small amount of long service leave used after 17 August 1993; Pre-16 August 1978 service.

Christopher retires on 31 December 1995. The details of the payment he receives in respect of unused long service leave is as follows:

Payment received: $22000

Number of days of unused leave: 175

Total eligible service period: 20 years (7305 days)

Number of days in eligible service period after 15 August 1978: 6347

Number of days in eligible service period after 17 August 1993: 866

Number of days of long service leave used after 17 August 1993: 5

Calculation

(1)

Amount of pre 15 August 1978 unused long service leave to be included under subsection 26AD(3):

A/B * [C(B + D)/E - F]
= $22000/175 * [6347(175 + 5)/7305 - 5*]
= $125.71 * [156.39 - 5]
= $125.71 * 151.39 (fraction disregarded - subsection 26AD(3A))
= $18982.


[*F is the lesser of the number of days of leave used (5) and the amount calculated in the formula C(B + D)/E (156.39)]

(2)

Amount of pre 16 August 1978 to be included under subsection 26AD(5):

5% * ($22000 - $18982) = $151.


Post 1993 Budget component

A/B * [C(B + D)/E - F]
= $22000/175 * [866(175 + 5)/7305 - 5*
= $125.71 * [21.34 - 5]
= $125.71 * 16.34 (fraction disregarded - subsection 26AD(3A))
= $2011.


[*F is the lesser of the number of days of leave used (5) and the amount calculated in the formula C(B + D)/E (21.34)]

Eligible assessable income

Amount taxable under subsection 26AD(3): $18982

Less post 1993 Budget component: $2011

Eligible assessable income: $16971

Summary

$16971 of Christopher's unused long service leave payment will be included in his assessable income and subject to tax at a rate not exceeding 30% plus medicare levy; and

$2162 (ie, $151 + $2011) will be included in his assessable income and taxed at marginal rates.

Example 4: Retirement after 17 August 1993; Small amount of long service leave used before 17 August 1993; Pre-16 August 1978 service.

Nicholas retires on 31 December 1995. The details of the payment he receives in respect of unused long service leave is as follows:

Payment received: $25000

Number of days of unused leave: 150

Total eligible service period: 20 years (7305 days)

Number of days in eligible service period after 15 August 1978: 6347

Number of days in eligible service period after 17 August 1993: 866

Number of days of long service leave used before 17 August 1993:5

Number of days of long service leave used after 17 August 1993: 0

Calculation

(1)

Amount of post 15 August 1978 long service leave to be included under subsection 26AD(3):

A/B * [C(B + D)/E - F]
= $25000/150 * [6347(150 + 5)/7305 - 5*
= $166.67 * [134.67 - 5]
= $166.67 * 129.67 (fraction disregarded - subsection 26AD(3A))
= $21500.


[*F is the lesser of the number of days of leave used (5) and the amount calculated in the formula C(B + D)/E (134.67)]

(2)

Amount of pre 16 August 1978 unused long service leave to be included under subsection 26AD(5):

5% * ($25000 - $21500) = $175.


Post 1993 Budget component

A/B * [C(B + D)/E - F]
= $25000/150 * [866(150 + 5)/7305 - 0]
= $166.67 * 18.38 (fraction disregarded - subsection 26AD(3A))
= $3000.


Eligible assessable income

Amount taxable under subsection 26AD(3): $21500

Less post 1993 Budget component: $3000

Eligible assessable income: $18500.

Summary

$18500 of Nicholas's unused long service leave payment will be included in his assessable income and subject to tax at a rate not exceeding 30% plus medicare levy; and

$3175 (ie, $175 + $3000) will be included in his assessable income and taxed at marginal rates.

Example 5: Retirement after 17 August 1993; Large amount of long service leave used after 17 August 1978; Pre-16 August 1978 service.

Saul retires on 31 December 1995. The details of the payment he receives in respect of unused long service leave is as follows:

Payment received: $2000

Number of days of unused leave: 10

Total eligible service period: 20 years (7305 days)

Number of days in eligible service period after 15 August 1978: 6347

Number of days in eligible service period after 17 August 1993: 866

Number of days of long service leave used after 15 August 1978: 170

Number of days of long service leave used after 17 August 1993: 0

Calculation

(1)

Amount of post 15 August 1993 unused long service leave to be included under subsection 26AD(3):

A/B * [C(B + D)/E - F]
= $2000/10 * [6347(10 + 170)/7305 - 156.39*]
= $200 * [156.39 - 156.39]
= $166.67 * 0
= $0


[*F is the lesser of the number of days of leave used (170) and the amount calculated in the formula C(B + D)/E (156.39)]

(2)

Amount of pre 16 August 1978 unused long service leave to be included under subsection 26AD(5):

5% x $2000 = $100


Eligible assessable income

Saul will not have any eligible assessable income.

Summary

$100 of Saul's unused long service leave payment will be included in his assessable income and taxed at marginal rates.

Example 6: Retirement after 17 August 1993; Long service leave used both before and after 17 August 1993; Pre-16 August 1978 service.

Amy retires on 31 December 1995. The details of the payment she receives in respect of unused long service leave is as follows:

Payment received: $20000

Number of days of unused leave: 120

Total eligible service period: 20 years(7305 days)

Number of days in eligible service period after 15 August 1978: 6347

Number of days in eligible service period after 17 August 1993: 866

Number of days of long service leave used before 18 August 1993: 40

Number of days of long service leave used after 17 August 1993: 20

Calculation

(1)

Amount of post 15 August 1978 unused long service leave to be included under subsection 26AD(3):

A/B * [C(B + D)/E - F]
= $20000/120 * [6347(120 + 60)/7305 - 60*]
= $166.67 * [156.39 - 60]
= $166.67 * 96.39 (fraction disregarded - subsection 26AD(3A))
= $16000.


[*F is the lesser of the number of days of leave used (60) and the amount calculated in the formula C(B + D)/E (156.39)]

(2)

Amount of pre 16 August 1978 unused long service leave to be inlcuded under subsection 26AD(5):

5% * ($20000 - $16000) = $200.


Post 1993 Budget component

A/B * [C(B + D)/E - F]
= $20000/120 * [866(120 + 60)/7305 - 20*]
= $166.67 * [21.34 - 20]
= $166.67 x 1.34 (fraction disregarded - subsection 26AD(3A))
= $167


[*F is the lesser of the number of days of leave used (20) and the amount calculated in the formula C(B + D)/E (21.34)]

Eligible assessable income

Amount taxable under subsection 26AD(3): $16000

Less post 1993 Budget component: $167

Eligible assessable income: $15833.

Summary

$15833 of Amy's unused long service leave payment will be included in her assessable income and subject to tax at a rate not exceeding 30% plus medicare levy; and

$367 (ie, $200 + $167) will be included in her assessable income and taxed at marginal rates.