Private ruling: Deduction for personal superannuation contributions
Published: February 2012
Ruling period: Year ended 30 June 2010. Year ended 30 June 2011.
Date scheme commenced: 1 July 2009.

Ruling: Q1: 1 . Does your client need to satisfy the maximum earnings as an employee condition under subsection 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2010-11 income year? 2. Will the superannuation contributions be deductible under section 290-150 of the ITAA 1997 for the 2009-10 and 2010-11 income years? | A1: 1. No. 2. Yes, to the extent the deductions do not add to or create a loss.

Relevant facts and circumstances: Your client is over 55 years of age. Your client made personal superannuation contributions to his complying superannuation fund during both the 2009-10 and 2010-11 income years. Your client wishes to claim a tax deduction for the abovementioned contributions in the respective income year tax returns. You have stated that valid notices under section 290-170 of the ITAA 1997 have been lodged with the trustee of your client's superannuation fund and that the trustee of that superannuation fund has acknowledged them for both income years. Your client is a consultant for en entity (Entity 1) which is non resident company that provides services. You have provided the breakup of income in the respective year as follows: 2009-10 Income year Superannuation lump sum payments x% Dividends y% Foreign contract income xx% 2010-11 income year Superannuation lump sum payments yy% Dividends x% Foreign contract income yy% Your client does not receive any superannuation contributions from Entity 1. The engineering services subcontract (the contract) between Entity 1 and your client (the Engineer) outlines the following: o Entity 1 engages the Engineer to perform engineering services to its customers on its behalf; o The contract is effective from the 2010-11 income year; o All services provided by Engineer shall be performed as an independent contractor and shall meet with Entity 1's approval, but the detailed manner of performing the services shall be under the control of the engineer, Entity 1 being interested only in the results obtained.'; o All the Engineer's services are to be performed as an independent contractor and neither he, his employees, agents, contractors nor subcontractors may be considered employees or agents of Entity 1; o Entity 1 will provide all the tools necessary to perform the services required. This includes reimbursement for any customs duties, fees and taxes on equipment shipped to location by the Engineer; o The Engineer will have accommodation, meals and laundry facilities provided whilst on the location. Otherwise it is at the Engineers cost; o As the Engineer is an independent contractor, Entity 1 will not withhold income tax, social security or any other amounts normally withheld by employers from the pay of their employees; o Further, the Engineer is not eligible for regular group or travel insurance, employee incentive bonus, vacation, pension or any other employee benefit; o The Engineer shall not assign or subcontract all or any part of this agreement without Entity 1's prior written consent; o All documents received or prepared by the Engineer will remain the sole property of Entity 1; o The Engineer shall have the benefit of any indemnity provisions in agreements between Entity 1 and its customers which expressly inure to the benefit of subcontractors of Entity 1. o Otherwise, the Engineer shall defend, indemnify and hold Entity 1 and its customers and employees, harmless from and against any and all other claims, causes of action and liabilities of any kind. o Liability insurance coverage shall be furnished by Engineer to support his indemnity obligations where required by law and, to the extent necessary. o The Engineer is paid a service fee (US $X) per engineer day; You have advised that although the contract is dated in the 2010-11 income year, the terms and conditions of your client's engagement were identical in the 2009-10 income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 290-150. | Income Tax Assessment Act 1997 Subsection 290-150(1). | Income Tax Assessment Act 1997 Subsection 290-150(2). | Income Tax Assessment Act 1997 Subsection 290-150(3). | Income Tax Assessment Act 1997 Section 290-155. | Income Tax Assessment Act 1997 Section 290-160. | Income Tax Assessment Act 1997 Section 290-165. | Income Tax Assessment Act 1997 Section 290-170. | Income Tax Assessment Act 1997 Subsection 290-170(1). | Income Tax Assessment Act 1997 Subsection 290-170(3). | Income Tax Assessment Act 1997 Section 292-15. | Income Tax (Transitional Provisions) Act 1997 Subsection 292-20(2). | Superannuation (Excess Concessional Contributions Tax) Act 2007 ) Section 4. | Superannuation (Excess Concessional Contributions Tax) Act 2007 ) Section 5. | Superannuation Guarantee (Administration) Act 1992 Section 12 | Superannuation Guarantee (Administration) Act 1992 Subsection 12(11) | Taxation Administration Act 1953 Subsection 357-110(1)

Reasons for decision: Summary: Your client is not engaged in activities that would result in him being considered as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 . Accordingly, the maximum earnings as an employee condition will not apply. Your client will be eligible to claim a deduction for the personal superannuation contributions he made to his nominated superannuation fund as all of the conditions for deductibility were met for both the 2009-10 and 2010-11 income years. | Detailed Reasoning - Deduction for personal deductible superannuation contributions: A person can claim a deduction for personal contributions made to a superannuation fund for the purpose of providing superannuation benefits for themselves (or their dependants after their death) under section 290-150 of the Income Tax Assessment Act 1997 (ITAA 1997). However, the conditions in sections 290-155, 290-160, 290-165 and 290-170 of the ITAA 1997 must also be satisfied for the person to claim the deduction. | Detailed Reasoning - Complying superannuation fund condition: The condition in section 290-155 of the ITAA 1997 requires that where the contribution is made to a superannuation fund, it must be made to a complying superannuation fund for the income year of the fund in which the contribution is made. As your client's nominated superannuation fund is a complying superannuation fund, this requirement is satisfied. Maximum earnings as an employee condition: The condition in section 290-160 of the ITAA 1997 requires that if a taxpayer is engaged in any activities that result in them being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA), then less than 10% of the total of the following must be attributable to those activities: o their assessable income for the income year; o their reportable fringe benefits for the income year; and o the total of their reportable employer superannuation contributions for the income year. Subsection 290-160(1) states: This section applies if: (a) in the income year in which you make the contribution, you engage in any of these activities: (i) holding an office or appointment; (ii) performing functions or appointment; (iii) engaging in work; (iv) doing acts or things; and (b) the activities result in you being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (assuming that subsection 12(11) of that Act had not been enacted). Under subsection 12(1) of the SGAA, if a person is an employee at common law, that person is an employee under the SGAA. Where a common law employment relationship is not established, subsection 12(3) of the SGAA extents the definition to classify as an employee a person who works under contract that is wholly or principally for the labour of the person. Whether a person is an employee is determined by examining the terms and circumstances of the contract, referring to the key indicators expressed in the relevant case law and examining a number of factors within the context of the relationship between the parties. No one indicator, of itself, is determinative and therefore, the totality of the relationship is considered. Superannuation Guarantee Ruling SGR 2005/1 outlines the major indicators of a common law employment relationship to be: o Control. o Integration. o Results. o Delegation. o Risk. o Provision of tools and equipment and payment of business expenses. o Control Paragraph 33 of SGR 2005/1 states that a common law employee is told not only what work is to be done, but how and where it is to be done. It refers to the following statement made by Justice Dixon of the Full High Court in Humberstone v. Northern Timber Mills (1949) 79 CLR 389; (1949) 23 ALJ 584; [1950] VLR 44; [1949] ALR 985 : The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter's order and directions. … In review of the contract provided by you, it appears your client had significant control over the manner in which he can perform his work. This is supported with reference to your client's contract where it states; 'the detailed manner of performing the services shall be under the control of the Engineer.' Whilst the contract indicates the services performed by your client are to be approved by Entity 1, according to paragraph 35 of SGR 2005/1, this does not necessarily imply an employment relationship as a high degree of direction and control is not uncommon in contracts for services. | Detailed Reasoning - Integration: Paragraph 39 of SGR 2005/1 distinguishes between an employee and an independent contractor by identifying the difference between a person serving their employer within their employer's business and a person who is carrying on a trade or business of their own. Further, reference is made to the Full High Court decision in Hollis v. Vabu Pty Ltd [2001] HCA 44; (2001) 106 IR 80; (2001) 75 ALJR 1356; (2001) 181 ALR 263; (2001) 2001 ATC 4508; (2001) 33 MVR 399; (2001) 47 ATR 559; [2001] Aust Torts Reports 81-615; (2001) 50 AILR 4-476; (2001) 207 CLR 21 where the workers were found to be operating within their employer's business as they were not running their own business, nor did they have independence in the conduct of their operations. There is no material evidence to suggest that your client was integrated into Entity 1's business. Rather, specific reference is made to the contract where it states 'all the Engineer's services are to be performed as an independent contractor and neither he, his employees, agents, contractors nor subcontractors may be considered employees or agents of Entity 1.' As such the true nature of the integration indicator can be determined by acknowledging the intensions of both parties. In this case, it appears your client was not intended to be integrated into Entity 1's business. | Detailed Reasoning - Results: Where the nature of the contract is for the worker to produce a given result, there is a strong indicator that they are a contractor. Paragraph 42 of SGR 2005/1 quotes Justice Sheller of the NSW Court of Appeals in World Book (Aust) Pty Ltd v. Federal Commissioner of Taxation (1992) 27 NSWLR 377; (1992) 46 IR 1; (1992) 108 ALR 510; (1992) 23 ATR 412; (1992) 92 ATC 4327 ( World Book ): Undertaking the production for a given result has been considered to be a mark, if not the mark, of an independent contractor. Paragraph 43 goes on to state: The 'production of a given result' means the performance of a service by a person who is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified service is the 'result' for which the parties have bargained. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled the remuneration is usually made for producing a given result. According to the facts, it appears that not only does your client have a degree of flexibility in undertaking his work; there is evidence of him being able to employ his own means in terms of third party labour to carry out his specified duties, albeit subject to written consent of Entity 1. This is confirmed in the contract whereby reference is made to your client's employees or subcontractors. The facts above state that Entity 1 is not concerned with how services are performed but rather is only interested in the results obtained by your client. Further, in contracts to produce a result, payment is often made for a negotiated price as opposed to an hourly rate. In your client's situation, he is paid at a fixed daily rate of US$X. This reflects that a contract price has been negotiated and he is not being remunerated by reference to hours worked. All in all, the facts presented above suggest that the agreement between your client and Entity 1 is a 'contract for service' as opposed to a 'contract of service'. This is more likely to reflect that your client is an independent contractor rather than an employee. | Detailed Reasoning - Delegation: Paragraph 48 of SGR 2005/1 states that if a person is contractually required to personally perform the work, this is an indication that the person is an employee. If an employee has unlimited power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is being engaged as an independent contractor. The agreement between your client and Entity 1 does not expressly require your client to personally perform the contracted services. Instead, it allows for your client to delegate work by way of subcontracting. This indentifies your client's power to delegate work to others and therefore provides a strong indication that your client is being engaged as an independent contractor. | Detailed Reasoning - Risk: Paragraph 51 of SGR 2005/1 states that where a worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. An independent contractor often carries their own insurance and indemnity policies. According to the facts, your client only had the benefit of indemnity provisions in agreements between Entity 1 and its customers provided they were expressed in the contracts. However, the cost of obtaining and maintaining all other insurances, for example, liability insurance coverage, was borne by your client. As your client had to carry his own insurance and indemnity policies for the majority of insurances required of him by law, it is considered your client bore the majority of the risk associated with his work with Entity 1. Provision of tools/equipment and payment of business expenses Paragraph 52 of SGR 2005/1 states that the provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor. Paragraph 57 of SGR 2005/1 goes on to state that an employee, unlike a contractor, is often reimbursed for expenses incurred in the course of employment. The facts above state your client is provided will all tools necessary to provide services to Entity 1's customers. There is also evidence of your client being reimbursed for certain expenses he incurs whilst on location. The above could suggest an employment relationship exists between your client and Entity 1. | Detailed Reasoning - Other indicators: Other indicators of whether an employment relationship exists have been variously stated and have been added to from time to time. These include the right to suspend or dismiss the person engaged, the right to exclusive services of the person engaged, compulsory uniforms, provision of benefits such as annual, sick and long service leave and the provisions of other benefits prescribed under an award for employees. Your client's contract makes specific reference to the fact your client is an independent contractor and as a result is not entitled to the benefits associated with an employee contract. This further suggests an independent contractor relationship exists between your client and Entity 1. Through the analysis of various indicators, SGR 2005/1 identifies when an individual is considered to be an employee under subsection 12(1) of the SGAA. In this case, the indicators of control, integration, results contract, delegation, risk and the provision of tools/equipment and payment of business expenses have been considered. Whilst the provision of tools/equipment and payment of business expenses indicator suggested your client was an contracted as an employee, all other indicators of control, integration, results contract and delegation point towards your client as being engaged as an independent contractor. As such, your client is not considered an employee under common law pursuant to section 12 of the SGAA. However, as stated previously, where a common law employment relationship is not established, subsection 12(3) of the SGAA extents the definition to classify as an employee a person who works under contract that is wholly or principally for the labour of the person. This was to take into account some independent contractors who principally provide their own labour to meet obligations under a contract and to include a person who may not be an employee in the normal sense but who is in fact not very distinguishable from an employee. 'Labour' includes mental and artistic effort as well as physical toil. The words 'wholly or principally' are used to limit or restrict the types of contracts that will be covered by subsection 12(3) of the SGAA. Paragraph 72 of SGR 2005/1 states that from the decisions reached in Neale (Deputy Commissioner of Taxation) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419; (1955) 29 ALJ 28; (1955) 10 ATD 460; [1955] ALR 426; [1955] HCA 18 and World Book , it is clear that a person who has 'a right to delegate work' (whether or not that right is exercised) does not work under a contract wholly or principally for his or her labour and that a contract for labour must be distinguished from 'a contract to produce a given result'. The ATO view is that some contracts for services will be wholly or principally for the labour of the individual contracted even though the individual is not a common law employee. Paragraph 78 of SGR 2005/1 goes on to state: Where the terms of the contract in light of the subsequent conduct of the parties indicates that: Ÿ the individual is remunerated (either wholly or principally) for their personal labour and skills; Ÿ the individual must perform the contractual work personally (there is no right of delegation); and Ÿ the individual is not paid to achieve a result. the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under subsection 12(3). The above circumstances have already been discussed during the 'results' and 'delegation' indicator analysis. It has been established that your client did have the right to delegate and the agreement between Entity 1 and your client was to provide a contractually specified outcome and therefore a 'result'. As such, the agreement between Entity 1 and your client is not considered to be wholly or principally for the labour of your client but rather an agreement to produce a given result. Therefore, your client is not considered an employee under the extended definition pursuant to subsection 12(3) of the SGAA. | Detailed Reasoning - Conclusion: In light of the foregoing your client would not be considered an employee under section 12 of the SGAA in respect of the agreement with EPC. Accordingly, the maximum earnings as an employee condition under section 290-160 of the ITAA 1997 will not apply to your client for the 2009-10 and 2010-11 income years. | Detailed Reasoning - Age-related conditions:: Under subsection 290-165(2) of the ITAA 1997 the ability to claim a deduction ceases for contributions that are made after 28 days from the end of the month in which the person making the contribution turns 75 years of age. Your client meets this age-related condition. Notice of intent to deduct conditions: Section 290-170 of the ITAA 1997 requires a person to provide a valid notice of their intention to claim the deduction to the trustee of their superannuation fund. The notice must be given before the earlier of: o the date you lodge your income tax return for the income year in which the contribution was made; or o the end of the income year following the year in which the contribution was made. In addition, you must also have been given an acknowledgement of the notice by the trustee of the superannuation fund. A notice will be valid as long as the following conditions apply: o the notice is in respect of the contributions; o the notice is not for an amount covered by a previous notice; o at the time when the notice is given: · you are a member of the fund or the holder of the retirement savings account (RSA); · the trustee or RSA provider holds the contribution (for example, a notice will not be valid if a partial roll-over of the superannuation benefit which includes the contribution covered in the notice has been made); · the trustee or RSA provider has not begun to pay a superannuation income stream based on the contribution; or o before the notice is given: · a contributions splitting application has not been made in relation to the contribution; and; · the trustee or RSA provider to which you made the application has not rejected the application. You have stated that valid notices under section 290-170 of the ITAA 1997 have been lodged with the trustee of your client's superannuation fund and that the trustee of this superannuation fund has acknowledged the notices for both income years. As such, this condition is satisfied. | Detailed Reasoning - Deduction limits:: From 1 July 2007 the previous age based limits on deductions for personal superannuation contributions have been abolished. As a result a person can claim a full deduction for the amount of the contribution made. However, the allowable deduction is limited under subsection 26-55(2) of the ITAA 1997 to the amount of assessable income remaining after subtracting all other deductions (excluding previous years' tax losses and any deductions for farm management deposits) from a taxpayer's assessable income. Thus a deduction for personal superannuation contributions cannot add to or create a loss in the relevant income year the deduction is to be claimed. | Detailed Reasoning - Contribution limits and the concessional contributions cap:: Concessional contributions made to superannuation funds in the 2009-10 and 2010-11 income years are subject to an annual cap of $25,000. Concessional contributions include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions claimed as a tax deduction by a person. A person will be taxed on concessional contributions over the cap at a rate of 31.5% (section 292-15 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2007 ). However, between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply. The transitional concessional contributions cap is $50,000 for the 200-10 and 2010-11 income years for people aged 50 or over (subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997) . As your client was over 50 years of age at the end of the 2009-10 and 2010-11 income year, the concessional contributions cap of $50,000 will apply for both income years. | Detailed Reasoning - Conclusion:: As all of the conditions for deductibility under section 290-150 of the ITAA 1997 have been satisfied in relation to both the 2009-10 and 2010-11 income years, your client is entitled to claim a deduction for the personal superannuation contributions made to their nominated superannuation fund in these years provided they do not add to or create a loss.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.