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Ruling
Subject: Deductibility of accrued leave transfer payment
Question 1:
Is the cost of an accrued leave transfer payment paid to the purchaser of your former business being for accumulated long service leave for an employee, tax deductible to you under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer:
Yes
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You sold a business.
You were required under your state's long service leave laws to pay across to the purchaser the accrued long service leave for one of your employees.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 26-10.
Reasons for decision
Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it was incurred in gaining or producing assessable income and is not:
· capital, private or domestic in nature;
· incurred in gaining or producing exempt income; or
· prevented from being deductible by another provision of the ITAA 1997.
In order for a loss or outgoing to be deductible it must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income.
In carrying on your business you must meet your obligations to your employees as contained within the relevant industrial award in your state. In your case you are legally required to make provision for employees' long service leave.
It is the Commissioner's view that where you are required to make provision for employees' leave as a result of your legal obligations under an industrial instrument, there is a connection between the business activities you carried on and your obligation to provide for worker entitlements.
Under section 8-1 of the ITAA 1997, you cannot claim a deduction for an expense which is capital, private or domestic in nature. The view of the Commissioner is that whether a payment is revenue or capital in nature depends of the character of the payment made. This is supported by G.P. International Pipecoaters Pty Ltd v FCT (1990) ATC 4413 at 4419 where it is stated that:
"The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd. V. F.C. of T. (1938) 61 CLR 337 at p.363"
When you make the accrued leave transfer payment you are meeting a legal obligation under a workplace agreement. As this obligation arose from the former income earning activities of the business and there is no enduring benefit to you, the payment is revenue in nature.
Is the payment precluded from deduction by section 26-10 of the ITAA 1997?
Section 26-10 of the ITAA 1997 provides that an outgoing for leave is not deductible except where the outgoing is an amount which is paid in the income year to the individual to whom the leave relates (or if the individual is deceased, to their dependant or legal representative), or it is an accrued leave transfer payment that is made in the income year.
It is the Commissioner's view that the payment was an accrued leave transfer payment that was made was to discharge your immediate legal obligations in respect to worker entitlements. While the payment is calculated with reference to the worker's future leave entitlements, your immediate outgoing is not an outgoing for leave. As such the accrued leave transfer payment is not precluded from deduction by section 26-10 of the ITAA 1997.
Therefore, you may claim a deduction for the accrued leave transfer payment in respect of your former employee's long service leave under section 8-1 of the ITAA 1997.
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