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Long-service Leave and Holiday Pay

8.51. Both long-service leave and holiday pay are regulated for all employees by either legislation or industrial agreement. There is considerable uniformity in the legislation and awards as to the circumstances in which the leave is payable. The variations between legislation and awards are concerned mainly with the rate at which leave is accumulated and paid. So while the leave requirements are not identical throughout Australia, they are nonetheless uniform to a substantial degree.

8.52. Table 8.A summarises what are understood to be the minimum periods of service to qualify for long-service leave under current State legislation or Federal awards and weeks of leave granted.

8.53. From inquiries made by the Committee it appears that most major employers of labour, and many smaller employers, have established provisions to cover the liability for long-service leave, the liability usually being determined on the basis of the employee's current salary. Inquiries also show that many employers start to make provision after the employee has completed five years' service. Since legislation and industrial awards govern the accrual for long-service leave and require detailed records to be kept of each individual's entitlement to long-service leave, calculation of the provision is made reasonably simple.




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TABLE 8.A: LONG-SERVICE LEAVE ENTITLEMENT

             
N.S.W.  Vic.  Qld  S.A.  W.A.  Tas.  Federal 
1. First entitlement, where entitlement flows principally from termination by the employer or sickness, death or domestic reasons of the employee (years of service)  10  10  10  10 
2. First entitlement, where termination by employee (years of service)  10  15  10  15  15  15 
3. Entitlement vests absolutely (years of service)  15  15  15  10  15  15  15 
4. Amount of leave after entitlement vests absolutely (weeks of leave)  13  13  13  13  13  13  13 
5. Record of entitlement of each employee required to be kept  Yes  Yes  Yes  Yes  Yes  Yes  Yes 
note note  

8.54. The Spooner and Ligertwood Committees, which examined this question, both recommended that provisions for long-service leave be allowable deductions. They had different views, however, on procedure for deductions. The Spooner Committee recommended that a deduction be allowed for the taxpayer's estimate, while the Ligertwood Committee favoured allowing the deduction for employees with ten or more years' service.

8.55. The Committee agrees in principle with the recommendations of its predecessors and accepts the equity of the claim made in numerous submissions that a deduction should be allowed for the value of long-service leave entitlements which have accrued to employees at the end of a financial period. The difficulty lies in determining the entitlement to be used in calculating the figure and the transitional safeguards to be provided to protect the Revenue. There are no reliable figures on the probable total value of employees' long-service leave entitlements accrued in the private business sector, but the figure probably exceeds $1,500 million. Clearly a reduction of taxable income of this order in one financial year could not be contemplated. Transitional arrangements are obviously called for.

8.56. As Table 8.A shows, an employee working under New South Wales legislation and having his services terminated by his employer is entitled to a pro rata payment of long-service leave if he has completed five years' service, though the more general requirement in Australia is that he must have completed ten years' service to qualify. Where, on the other hand, an employee takes the initiative in terminating his service, he need have served for only seven years under South Australian legislation but more generally for fifteen years. In deciding which entitlement should be accrued, most employers and their advisers would feel that the dominant factor should be the period of service after which the employer would be required to make a payment to an employee in the event of his services being terminated by the employer. To omit to make any provision until an entitlement vested absolutely (in the vast majority of cases after fifteen years' service) would be to fail to match income with costs related to that income.




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8.57. The Committee believes that, at the very least, a deduction should be allowed for the total amount, at each year end, of the employees' entitlements to long-service leave which have vested absolutely. This limited deduction would not, however, eliminate the failure to match income with expenditure. Accordingly, the Committee recommends that, subject to transitional provisions, a deduction be allowable for the total amount of employees' entitlements at each year end, calculated according to each employee's entitlement should his services have been terminated by his employer at that date, but only to the extent that a deduction in respect thereof has not been allowed against a taxpayer's income of a prior year. Transitional provisions are considered later.

8.58. An argument commonly made against the kind of proposal being put forward here is that a deduction for a provision calculated by reference to payments in a future year is liable to be excessive unless the provision is calculated by discounting the future payments to their present value. In the Committee's view this discounting is unnecessary. The failure to discount will be offset in part by the calculation of the provision on the basis of the present wages of the employee and not his anticipated remuneration when leave is taken. In most instances promotion and award increases will have lifted his current wages when he takes his leave. For example, a man who at 30 June 1974 had completed ten years' service and whose gross wages at that date were $120 per week would have accrued long-service leave of 8 ? weeks—in money terms, $1,040. If, at 30 June 1975, his gross wage rises to $150 per week—a not unlikely occurrence—the value of his long-service leave accrued at this later date will be $1,430, an increase of 37.3 per cent in one year.

8.59. The rights of employees to receive and the liability of their employer to meet holiday pay appear to be more certain and uniform than the conditions relating to long-service leave. Except in the case of some casual workers where a holiday pay loading is incorporated in weekly rates of pay, legislation requires an employee to be granted paid holidays, now generally at the rate of four weeks' leave for each complete year of service, and payment in cash of a pro rata sum in the event of his ceasing employment at any time. Employment for even one day carries an entitlement to pro rata holiday pay.

8.60. From an employer's viewpoint, the cost of meeting the liability for holiday pay of staff is just as much a cost of labour as the wages or salaries paid regularly. Here too the relevant legislation imposes a requirement to maintain records disclosing the holiday pay entitlement of all employees on an individual basis.

8.61. The Ligertwood Committee concluded that a deduction for accrued holiday pay was not warranted, mainly it seems because of the relatively small sums of money involved. Since it reported in 1961, however, legislation has extended the benefit considerably. Amongst other things, the benefit has increased from two weeks for each year of service to four weeks, and in most cases there is currently a loading of 17½ per cent. The accrued liabilities of employers is now quite a substantial sum and it has become general practice to take the liability to account in computing financial results.

8.62. This Committee has not been able to locate any reliable statistics on the total estimated value, at a given date, of the accrued holiday pay liability of the private business sector. But the figure may well exceed 50 per cent of the total liability for accrued long-service leave.

8.63. The Committee recommends that, after a transitional period aimed at easing the impact on income tax revenue, a deduction be allowed for the total amount at


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each year end of the accrued liability for holiday pay entitlements of employees, calculated according to their vested rights under industrial awards or other legislation. In practice, the deduction allowable from the net income of a year would be limited to the increase in the accrued liability at the year end over the figure at the commencement of that year: a decrease in the liability would result in net income of that year being increased to offset the deduction claimed for holiday pay actually met and forming a component of wages and salaries paid in that income year.

8.64. The need for a transitional period for the implementation of the Committee's recommendations in respect of long-service leave and holiday pay has already been referred to. Of the various alternative courses open, it appears that a gradual introduction of allowances over a period of ten years would be the most appropriate. It is therefore recommended that, in the first year of change, the deduction allowable be restricted to 10 per cent of the accrued liability for each benefit, determined as previously recommended, and at the end of the second year to 20 per cent, and so on. It is further recommended that the right to obtain a deduction for these accruals be subject to an election by the taxpayer. For example, a taxpayer may, through omission or having regard to the smallness of his accrued liability for one of these benefits, elect not to claim a deduction for his accrued liability until, say, the third year of the transitional period. The law should provide that in that year he is entitled to a deduction for the full 30 per cent of his total accrued liability and, if further postponement occurs, to the higher percentages applicable to the following years until he becomes entitled to the full 100 per cent allowance against his net income for the tenth year. A taxpayer who does not elect to claim a deduction for his accrued liability should continue to be entitled to a deduction for the actual payments made in each income year.

8.65. Transitional arrangements along the lines suggested would cushion the impact on income tax revenue arising from allowing deductions for these business costs— costs which clearly should be taken to account to arrive at true net income for a tax accounting period. Special provisions will be needed to ensure that no undue benefit is received by either the vendor or purchaser of a business which changes hands.

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