Gardening leave and personal services income

I never thought I would read the term “gardening leave” in a tax ruling but it is the main issue in draft taxation determination TD 2014/D15.

The issue is whether the payment you get while you are on gardening leave (which if you don’t know is when you are told to go home, work in the garden, don’t come into the office ever again and don’t work for our competitors) is personal services income.

Given that subsection 85-5(1) states “Your *ordinary income or *statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income)” it would seem that as gardening leave is not for any personal effort or skill (it is often due to a total lack of skill…) so it is not personal services income… And if this is the case this income could be streamed to a company (30% tax rate) or to a discretionary trust and distributed to a non working spouse.

But that’s not what the draft determination concludes.

The draft first concludes annual leave is due to our personal effort and skill (no question there as I earn it by working) and then says the same applies to retainers (being paid so my personal effort and skill is available so it is PSI – and it is specifically mentioned in the 2000 explanatory memorandum).

From this understanding the draft considers gardening leave. The Commissioner concludes that as the person on leave must remain available to work for those that put them on gardening leave this is simply a retainer. Therefore it is PSI.

Oh well…

And for those who learn through examples…

2. Jim is the sole shareholder/director of Services Coy. Services Coy has a contract with Client Coy to make Jim available to provide his skill and expertise to Client Coy from 1 July 2010 to 30 June 2015 as required by Client Coy. The contractual fee is a flat non-contingent $40,000 per month.

3. Jim has a contract of employment with Services Coy to undertake the services for Client Coy on Service Coy’s behalf.

4. On 29 November 2014 a dispute arises between Jim and the management of Client Coy which results in Jim being directed to stay away from the business premises of Client Coy until further advised. The contract between Client Coy and Services Coy expires on 30 June 2015 without Jim being called upon to resume providing services to Client Coy.

5. During the period from 30 November 2014 to 30 June 2015, Client Coy continues to pay the $40,000 monthly fee to Services Coy. The payments made by Client Coy to Services Coy during this period are Jim’s personal services income within the meaning of subsection 84-5(1) notwithstanding that Client Coy did not call upon Jim to undertake any further services.

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
This entry was posted in Income Tax, Legislation, Rulings. Bookmark the permalink.

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