An employee is being terminated and it is proposed the following termination related payments will be made:
- Unused Annual Leave
- Unused LSL
- Payment in lieu of notice
- Final pay up to termination date
The employee wishes to salary sacrifice some or all of the payment into superannuation. There is no existing salary sacrifice agreement.
Which of the above payments can be sacrificed?
The ATO’s view on salary sacrifice arrangements (SSA) is discussed in TR 2001/10.
1 & 2: Unused annual leave & long service leave
According to TR 2001/10, ‘Benefits provided under an ineffective SSA are assessable income of the employee under section 6-5 or 6-10 of the ITAA 1997 and they are not exempt income under section 23L of the ITAA 1936.
Paragraph 27 of TR 2001/10 states that ‘To deal with an entitlement to take leave that has already accrued will be an ineffective SSA.’ In other words, if the leave accrued before the date of commencement of the salary sacrifice agreement (SSA), the SSA will be ineffective. If the leave accrued on or after the date of commencement of the SSA, the SSA will be effective.
3 & 4: Payment in lieu of notice & Gratuity
TR 2001/10 does not include employment termination payments (ETPs) in its explanations of SSAs (in particular see paragraphs 2 and 19 of the TR). The exclusion of ETPs from TR 2001/10 has been taken to mean that ETPs cannot be subject of a SSA. This view is reflected ATO private binding rulings (for see PBR 1011828468192 and PBR 86099). While you cannot rely on PBRs issued to other taxpayers for your tax affairs, it gives a general idea on the views the ATO has taken to similar matters in the past.
This means that the amounts will be taxable under the normal income tax rules relating to termination payments.
5: Final pay up to termination date
According to TR 2001/10, ‘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.’
Provided an effective SSA is entered into before the final salary is earned, this payment can form part of an effective SSA.
Michael Doran | TaxBanter