Private ruling: Superannuation deduction and Part IVA
Published: June 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can an entity that derives personal services income, in relation to a personal services business, claim a superannuation deduction under Subdivision 290-B of the Income Tax Assessment Act 1997 (ITAA 1997) on behalf of an associate who is the non-principal spouse? | A1: Yes. | Q2: Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply if the entity makes superannuation contributions for the non-principal spouse that are in excess of the value of services provided by the non-principal spouse? | A2: No.

Relevant facts and circumstances: The Trust is a trading entity that provides professional services to the general public. The Principal by their personal efforts and skills, derives ordinary income for the Trust. The Trust is a personal services business under section 87-15 of the Income Tax Assessment Act 1997 (ITAA 1997). The Principal is the primary beneficiary of the Trust. All profits of the Trust are allocated to the Principal. The Principal is the sole director and secretary of the corporate Trustee. The Trust employs the Non-principal spouse on a part-time basis to complete various administrative tasks for the Trust's business. The duties of the non-principal spouse include a range of clerical services and administrative tasks. The salary paid to the Non-principal spouse is on arm's length terms with regard to current market rates for similar positions. The superannuation contributions are to be made to the Fund, which is a regulated complying superannuation fund. The members of the Fund are the Principal and the Non-principal spouse. The Directors of the Fund Trustee are the Principal and the Non-principal spouse. The superannuation contribution amount intended to be made for the Non-principal spouse is dependent on the performance of the Trust's business and is essentially based on the excess cash it can produce during each financial year. The dominant purpose of making the contributions is to increase the Non-principal spouse's superannuation benefits on retirement. The Principal and Non-principal spouse are aware of the tax implications of making concessional contributions in excess of the contributions caps. Any potential excess contribution tax assessment liabilities issued to the Principal and/or Non-principal spouse will be paid from their personal resources held outside of their superannuation accounts. The Trust satisfies the requirements to be a personal services business under Division 87 of the ITAA 1997. The income of the Trust has been relatively consistent since its inception. There has not been a large spike in the 2014-15 income year in comparison to earlier years. The contribution pattern in respect of the Principal and Non-principal spouse has been consistent. In previous income years, the Trustee has made superannuation contributions that have not exceeded the applicable age-based limit or concessional contribution cap. The Commissioner has not taken compliance action in respect of the contributions made by the Trustee on behalf of the Principal or Non-principal spouse in any previous year. The assessable income of the Principal and Non-Principal spouse, which includes sources other than the Trust, will not be materially different from the last few years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 290-60 | Income Tax Assessment Act 1997 Subsection 290-60(3) | Income Tax Assessment Act 1997 Section 290-70 | Income Tax Assessment Act 1997 Section 290-75 | Income Tax Assessment Act 1997 Section 290-80 | Superannuation Guarantee (Administration) Act 1992 Section 12 | Income Tax Assessment Act 1936 Section 177 | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Subsection 177A(1) | Income Tax Assessment Act 1936 Subsection 177A(3) | Income Tax Assessment Act 1936 Subsection 177A(5) | Income Tax Assessment Act 1936 Paragraph 177C(1) | Income Tax Assessment Act 1936 Paragraph 177C(1)(a) | Income Tax Assessment Act 1936 Paragraph 177C(1)(b) | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Subsection 177D(2)

Reasons for decision: Summary: The Trust can claim a tax deduction in respect of superannuation contributions it makes on behalf of the Non-principal spouse in the 2014-15 income year provided the Fund is a complying superannuation fund in the 2014-15 income year. Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply if the entity makes superannuation contributions for the Non-principal spouse that are in excess of the value of services provided by the Non-principal spouse. | Detailed Reasoning - Detailed reasoning: The operative provisions dealing with the deductibility of employer contributions to a superannuation fund for the benefit of an employee are contained in subdivision 290-B of Division 290 of the ITAA 1997. An entity can claim a tax deduction in respect of superannuation contributions under section 290-60 of the ITAA 1997 if: • the contribution is made to a superannuation fund or a retirement savings account (RSA); • the contribution is made for the purpose of providing superannuation benefits for another person who is an employee of the entity when the contribution is made; and • the conditions in sections 290-70, 290-75 and 290-80 of the ITAA 1997 are also satisfied. Subsection 290-60(3) of the ITAA 1997 states that the deduction can only be claimed in respect of the income year in which the employer made the superannuation contribution. | Detailed Reasoning - Employee activity conditions: In accordance with section 290-70 of the ITAA 1997, the person for whom the contribution is made must be: • an employee within the expanded meaning of employee given by section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA);or • engaged in producing assessable income of the employer; or • an Australian resident who is engaged in the employer's business. The term employee is defined in section 12 of the SGAA which states the term is given its ordinary meaning unless it is included in the expanded definitions in subsections 12(2) to 12(10) of the SGAA. | Detailed Reasoning - Complying fund conditions: Under section 290-75 of the ITAA 1997 if the contribution is made to a superannuation fund, the fund must be a complying superannuation fund. | Detailed Reasoning - Age related conditions: Section 290-80 of the ITAA 1997 requires that to deduct the contribution, the entity must have made the contribution on or before 28 days after the end of the month in which the employee turns 75. From the facts as all conditions under section 290-60 of the ITAA 1997 have been satisfied, the Trust may claim a deduction for superannuation contributions made for the Non-principal spouse. In this case, the Trust intends to make superannuation contributions in the 2014-15 income year to a superannuation fund on behalf of the Non-principal spouse who is an employee of the Trust and is less than 75 years of age in the 2014-15 income year. Based on the above, provided the Fund is a complying superannuation fund in the 2014-15 income year, the Trust can deduct any contributions made to the Fund in respect of the Non-principal spouse in the 2014-15 income year. | Detailed Reasoning - Application of Part IVA of the ITAA 1936: Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances if a taxpayer obtains a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. Part IVA of the ITAA 1936 gives the Commissioner the discretion to cancel all or part of a 'tax benefit' that has been obtained or would, but for section 177 of the ITAA 1936 be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. Broadly, Part IVA of the ITAA 1936 applies where: • a taxpayer enters into a 'scheme'; • the taxpayer obtains a 'tax benefit' from the scheme; and • the circumstances indicate that the obtaining of that tax benefit was a dominant purpose of one of the parties to the scheme. Under subsection 177A(1) of the ITAA 1936, a 'scheme' is: (a) any agreement, arrangement, understanding, promise or undertaking, whether express of implied and whether or not enforceable, or intended to be enforceable by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. Section 177A(3) of the ITAA 1936 provides that a reference in the definition of 'scheme' in subsection 177A(1) of the ITAA 1936 to: a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be. Subsection 177A(5) of the ITAA 1997 deals with the concept of 'purpose' and states: A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.' Relevantly, subsection 177C(1) of the ITAA 1936 provides that reference in Part IVA to 'the obtaining by a taxpayer of a tax benefit in connection with a scheme' is to be read as reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or … Section 177D of the ITAA 1936 states that: This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where: (a) a taxpayer (in this section referred to as the relevant taxpayer ) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to: (i) the manner in which the scheme is entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme is entered into and the length of the period during which the scheme will be carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi); it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer … or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme … . Taxation Determination TD 2005/29 (TD 2005/29) deals with the application of Part IVA to arrangements under which the taxpayer who carries on a business (including personal services business) makes superannuation contributions on behalf of an employee that are considerably in excess of the value of the services provided by the employee. TD 2005/29 was released prior to 1 July 2007 and refers to former section 82AAC of the ITAA 1936 in relation to an employer deduction for superannuation contributions. However, it may be argued that the principles in TD 2005/29 are still relevant. It is also noted that TD 2005/29 has not been withdrawn. At paragraphs 1 and 2, TD 2005/29 states: .. . The application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to a particular scheme depends on the particular facts and circumstances of the case. However, in light of the Administrative Appeals Tribunal's (AAT's) decision in Ryan v. Commissioner of Taxation (2004) 56 ATR 1122; 2004 ATC 2181 (Ryan's case), the Tax Office accepts that, absent unusual features (and subject to the qualification in paragraph 2 of this Determination), Part IVA of the ITAA 1936 will not apply to a case where a company, trust, partnership or individual conducting a personal services business (as defined in Division 87 of the Income Tax Assessment Act 1997 (ITAA 1997)) pays superannuation contributions up to the age-based limits (as prescribed in subsection 82AAC(2A) of the ITAA 1936) to a complying superannuation fund in respect of the associate of the main service provider. This is the case even if contributions up to the maximum age-based limits are also provided for the main service provider. 2. The qualification referred to in paragraph 1 of this Determination is that the provision of personal services through the entity or as a sole trader must be commercially justified (for example, because the relevant service acquirers will not contract with individuals but with entities only, or an employment relationship is not otherwise open to the sole trader). (If the use of the entity is not commercially justified, it would be necessary to consider factors such as those considered in Tupicoff v. Federal Commissioner of Taxation (1984) 15 ATR 1262; 84 ATC 4851, Egan v. Federal Commissioner of Taxation (2001) 47 ATR 1180; 2001 ATC 2185 and Federal Commissioner of Taxation v. Mochkin (2003) 52 ATR 198; 2003 ATC 4272.) In this case, the Principal is a specialist in their field of work. Persons who require services of such a specialist would generally select them on the basis of their reputation and skills and would expect that they personally provide services they require. As such, it is highly unlikely that the Principal's service acquirers would not contract with individuals but with entities only or that an employment relationship is not otherwise open to the Principal. Therefore, it may be argued that the provision of personal services through the Trust is not commercially justified in this case. Further, at paragraph 3 of TD 2005/29 states: 3. An example of a case having unusual features of the type referred to in paragraph 1 might include a situation where objectively it is clear that the associate is engaged by the entity or sole trader solely to allow the diversion of superannuation contributions from the main service provider… Based on the above, Part IVA of the ITAA 1936 may apply in this case if it can be established that the proposed arrangement is a scheme to obtain a tax benefit for the Trust; and the circumstances indicate that the dominant purpose of one of the parties to the scheme is to obtain a tax benefit. | Detailed Reasoning - The scheme: A scheme may comprise the whole of an agreement, arrangement, etc or one or more steps within the arrangement. The following statement was made by the High Court in Federal Commissioner of Taxation v. Hart [2004] HCA 26; (2004) 78 ALJR 875;in the context of Part IVA of the ITAA 1936 which defines 'scheme' in comparable terms: Th[e] definition is very broad. It encompasses not only a series of steps which together can be said to constitute a "scheme'' or a "plan'' but also (by its reference to "action'' in the singular) the taking of but one step. Thus, the scheme , in this case, may be said to consist of: (a) the establishment of the Trust; (b) the employment of the Principal and the Non-principal spouse by the Trust; (c) the payment by the Trust of superannuation benefits on behalf of the Principal; (d) the payment by the Trust of superannuation benefits on behalf of the Non-principal spouse that exceed the value of the services they provided to the Trust; and (e) deducting from the Trust's assessable income for the relevant year the amount of superannuation contributions made on behalf of the Principal and the Non-principal spouse. Alternatively, the scheme may be said to consists of: (a) the payment by the Trust of superannuation benefits on behalf of the Non-principal spouse that exceed the value of the services they provide to the Trust; and (b) deducting from the Trust's assessable income for the relevant year the amount of superannuation contributions made on behalf of the Non-principal spouse. | Detailed Reasoning - The tax benefit: The tax benefit, in this case, is an allowable deduction for superannuation contributions made in relation to a year of income where the whole or a part of that deduction would not have been allowable to the Trust if the above scheme is not entered into or carried out. | Detailed Reasoning - Dominant purpose: Section 177D of the ITAA 1936 provides that Part IVA applies to any scheme where the relevant taxpayer has obtained a benefit and where, having regard to the eight matters specified in subsection 177D(2) of the ITAA 1936, it would be concluded that the person entering the scheme did so for the purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. In accordance with subsection 177A(5) of the ITAA 1936, that includes a case where the scheme is entered into or carried out by a person for two or more purposes of which the particular purpose is the dominant purpose. The person whose purpose is relevant is the person, or one of the persons who entered into or carried out the scheme or any part thereof. In the present case, the only person whose purpose is relevant is the Trust. Section 177D of the ITAA 1936 is not concerned with the subjective intentions of the parties to the scheme, but with 'ascertaining an objective purpose by having regard to objective facts'. For the purposes of subsection 177A(5) of the ITAA 1936, 'dominant' means 'the ruling, prevailing or most influential' purpose. Accordingly, the question posed by subsection 177D(2) of the ITAA 1936 is whether a reasonable person would conclude that the relevant taxpayer in entering and carrying out the particular scheme had, as their most influential and prevailing or ruling purpose, the obtaining of a tax benefit . With regard to the purpose of the scheme in this case, you have advised the following: • The purpose of making superannuation contributions on behalf of the Principal and the Non-principal spouse is to building their retirement benefits. • The amount of contributions to be made by the Trust will depend on the performance of the Trust's business and will essentially be based on the excess cash the business can produce during each financial year. • Where the Principal and Non-principal spouse exceed the annual concessional contributions caps, they will be subject to the excess contributions tax. However, the Principal and Non-principal spouse are able to meet any excess contribution tax assessment from personal resources, thereby preserving the maximum amount of the contributions in their superannuation accounts for investment purposes to build their retirement benefits. • The Trust will incur an additional expense through the contributions, and the Fund's assets will increase by the net amount of the contributions received. The Principal and Non-principal spouse's financial position will only change, insofar that the contributions will be held by the Fund for their benefit. Furthermore, you have also provided information to support the following: • The Trust satisfies the requirements to be a personal services business under Division 87 of the ITAA 1997. • The income of the Trust has been relatively consistent since its inception. There has not been a large spike in the 2014-15 income year in comparison to earlier years. • The wage paid to the Non-principal spouse is not inconsistent with current market rates for similar positions and it is not in dispute that the Non-principal spouse is an employee for all relevant purposes. • The Non-principal spouse does not receive any other income or distribution from the Trust. • The contribution pattern in respect of the Principal and Non-principal spouse has been consistent. In previous income years, the Trustee has made superannuation contributions that have not exceeded the applicable age-based limit or concessional contribution cap. The Commissioner has not taken compliance action in respect of the contributions made by the Trustee on behalf of the Principal or Non-principal spouse in any previous year. • The assessable income of the Principal and Non-principal spouse, including from sources other than the Trust, will not be materially different from the last few years. Consequently, having regard to the matters set out in subsection 177D(2) of the ITAA 1936 and the particular facts and assumptions listed above, it may be concluded that the dominant purpose of the Trust entering into the arrangement of making superannuation contributions on behalf of the Non-principal spouse that are greater than the value of their services to the Trust is not for obtaining a tax benefit. Therefore, Part IVA of the ITAA 1936 will not apply if the Trust makes superannuation contributions for the Non-principal spouse that are in excess of the value of services provided to the Non-principal spouse to the Trust.