ATO ID 2007/144: Deductibility of superannuation contributions made for directors of a passive investment company
Date of decision: 8 June 2007
Year of income: 30 June 2007
Business line: Superannuation

Issue
Can a family investment company claim a deduction under section 82AAC of the Income Tax Assessment Act 1936 (ITAA 1936) for superannuation contributions made for the benefit of the directors of the company during the 2006-07 year of income in circumstances where the company derived its assessable income from passive investments it held during the year of income?

Decision
Yes. A family investment company can claim a deduction under section 82AAC of the ITAA 1936 for superannuation contributions made for the benefit of the directors of the company during the 2006-07 year of income in circumstances where the company derived its assessable income from passive investments it held during the year of income, provided that the directors are entitled to payment for their services.

Facts
The taxpayer is a family investment company (the company). The current shareholders of the company are the two directors who own one ordinary share each. The directors are also employees of another company (company B) which made superannuation contributions for the directors during the 2006-07 year of income. The company is not an associate of company B. The company derived its assessable income for the 2006-07 year of income from passive investments it held by way of a fixed investment portfolio during the year of income. The investment activities undertaken by the company in the 2006-07 year of income do not constitute a business. The directors did not receive any directors' fees during the 2006-07 year of income. The company made superannuation contributions to a complying superannuation fund during the 2006-07 year of income for the purposes of making provision for superannuation benefits payable for the directors. Under the company's articles of association the directors are to be paid such remuneration as is from time to time determined by the company in general meeting. In a general meeting on 1 May 2007 the company made a determination in accordance with its articles of association to pay directors' fees of $100 to each director for the 2006-07 year of income. The directors' fees for the 2006-07 year of income were paid to the directors on 1 July 2007.

Reasons for decision
Summary: The amount of a contribution made by a taxpayer is allowable as a deduction to the taxpayer for the year of income in which the contribution was made if the conditions in subsection 82AAC(1) of the ITAA 1936 are satisfied. Those conditions are as follows: In the circumstances of this case, the company made contributions for the benefit of its directors in the 2006-07 year of income. The contributions were made: Therefore, the first two limbs of subsection 82AAC(1) of the ITAA 1936 have been satisfied. However, for the company to claim a deduction for the contributions one or more of the three conditions in paragraph 82AAC(1)(c) of the ITAA 1936 must also be satisfied. Relevantly, subparagraph 82AAC(1)(c)(iii) of the ITAA 1936 will be satisfied if the other person was an 'employee' for the purposes of the SGAA. The definition of 'employee' for the purposes of the SGAA is contained in section 12 of that Act. A director of a company is an employee of the company by virtue of subsection 12(2) of the SGAA, which states: A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate. A director of a company is 'a member of the executive body of a body corporate' for the purposes of subsection 12(2) of the SGAA. However, as can be seen by the wording of subsection 12(2), the director of a company must also be 'entitled to payment' for the duties they perform as a director to qualify as an employee under the SGAA. It has long been held that the directors of a company are not entitled to payment for the services they provide as directors unless it is specifically provided for in the company's constitution or approved by shareholders (see Hutton v. West Cork Railway Co (1883) 23 Ch D 654 and Re George Newman & Co [1895] 1 CH 674 ( Re George Newman & Co )). In Re George Newman & Co the UK Court of Appeal said: Directors have no right to be paid for their services, and cannot pay themselves or each other, or make presents to themselves out of the company's assets, unless authorised to do so by the instrument which regulates the company or by the shareholders at properly convened meetings. The shareholders, at a meeting duly convened for the purpose can, if they think proper, remunerate directors for their trouble or make presents to them for their services out of assets properly divisible among the shareholders themselves. In this situation, the director's remuneration is determined by reference to the company's articles of association which state that the directors are to be paid such remuneration as is determined by the company in general meeting. In a general meeting on 1 May 2007 the company made a determination in accordance with its articles of association to pay directors' fees of $100 to each director for the 2006-07 year of income. As the company has made a determination to pay directors' fees of $100 to the directors for the 2006-07 year of income, the directors are 'entitled to payment' in terms of subsection 12(2) of the SGAA and are therefore employees for the purposes of the SGAA. The fact that the directors' fees were not paid until the next financial year (2007-08) does not change this. Accordingly, in the year of income in which the contributions are made, the company will satisfy subparagraph 82AAC(1)(c)(iii) of the ITAA 1936 in respect of the directors. As the company has satisfied one of the three conditions in paragraph 82AAC(1)(c) of the ITAA 1936 (that is, subparagraph 82AAC(1)(c)(iii) of the ITAA 1936), and is only required to satisfy one of the three conditions, the company does not have to satisfy the other two conditions (that is, subparagraphs 82AAC(1)(c)(i) and 82AAC(1)(c)(ii) of the ITAA 1936). By satisfying one of the elements of subsection 82AAC(1)(c) of the ITAA 1936, the company has satisfied the third limb of subsection 82AAC(1) of the ITAA 1936. Since the company has satisfied all three limbs of subsection 82AAC(1), the company is entitled to claim a deduction for the contributions it made for the benefit of the directors in the 2006-07 year of income. In this situation, the fact that the company derived its income from passive investments it held by way of a fixed investment portfolio during the 2006-07 year of income does not prevent the company from claiming a deduction for the contributions. As the company is not an associate of company B, the company can claim a deduction for the amount of the contribution up to the age based deduction limit that applies to each director under subsection 82AAC(2) of the ITAA 1936 for the 2006-07 year of income.

Legislative references: Income Tax Assessment Act 1936 section 82AAC subsection 82AAC(1) paragraph 82AAC(1)(a) paragraph 82AAC(1)(b) paragraph 82AAC(1)(c) subparagraph 82AAC(1)(c)(i) subparagraph 82AAC(1)(c)(ii) subparagraph 82AAC(1)(c)(iii) subsection 82AAC(2)
Case references: Hutton v. West Cork Railway Co [1883] 23 Ch D 654
Subject references: Contributions for employees - allowable deductions Superannuation contributions for employees Superannuation contributions - deductions & rebates