Private ruling: Deduction of personal superannuation contribution
Published: July 2013
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Is the compensation payment received by your client taken into account for the 'maximum earnings as an employee condition' under section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997)? 2. Is the compensation payment made to your client assessable as ordinary income? Advice/Answers 1. No. 2. Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 290-150 | Income Tax Assessment Act 1997 Subsection 290-160(1) | Superannuation Guarantee (Administration) Act 1992 Section 12 Question 1 | Summary of decision | Your client is not an 'employee' for the purposes of the superannuation guarantee legislation. Therefore, your client will not be subject to the maximum earnings as an employee test in order to claim a deduction for personal superannuation contributions. | Detailed reasoning | 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 under section 290-150 of the Income Tax Assessment Act 1997 (ITAA 1997). However, all the applicable conditions in subdivision 290-C of the ITAA 1997 must be satisfied for the person to be able to claim the deduction. | In your client's particular case, the relevant issue to be considered is whether your client is considered an 'employee' in respect to the business, Company A, and the Club. This condition is outlined in section 290-160 of the ITAA 1997 and is examined below. | Maximum earnings as an employee condition | Subsection 290-160(1) of the ITAA 1997 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 has not been enacted). Subsection 290-160(2) of the ITAA 1997 states: | To deduct the contribution, less than 10% of the total of the following must be attributable to the activities: | (a) your assessable income for the year; | (b) your reportable fringe benefits total for the income year. | Where a person is engaged in activities during the income year that would make them an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA) then they will need to satisfy the 10% rule in order to claim a deduction for their personal superannuation contributions. It should be noted that the level of superannuation support by an employer or another person is no longer a relevant factor under this condition. The Commissioner has issued Taxation Ruling TR 2010/1 which deals with, among other matters, deductions for personal superannuation contributions. At paragraphs 57 and 58 of TR 2010/1 the Commissioner states: | 57. Those persons who are engaged in an 'employment' activity in the income year in which they make a contribution need to meet an earnings test if they are to deduct their contribution. | 58. Those persons who have not engaged in an 'employment' activity in the income year in which they make a contribution, such as persons who although receiving workers' compensation payments are not employed at any time during the year, are not subject to the maximum earnings test. | Meaning of employee | The term 'employee' is defined in section 12 of the SGAA and, in particular, subsection 12(1) states: | Subject to this section, in this Act, employee and employer have their ordinary meaning. However, for the purposes of this Act, subsections (2) to (11): (a) expand the meaning of those terms; and | (b) make particular provision to avoid doubt as to the status of certain persons. | Of particular note is subsection 12(3) of the SGAA which states: | If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract. | In the facts provided, you stated that your client performs certain services for the business operated by Trust A. Further, your client and your client's spouse are the directors and shareholders of the corporate trustee for Trust A. | You have also stated that your client carries out certain duties for the Club during summer weekends. Your client did not receive any wages for carrying out those duties. | The issue of whether your client is considered an 'employee' in respect to the two abovementioned entities is discussed below. | The corporate trustee for the Trust | As already noted above, your client performs certain services for the business operated by Trust A. Your client does not receive a salary or wage for the services performed for Trust A. Rather, your client receives an entitlement to the net income of Trust A as a beneficiary of Trust A. Further, your client is not working under a contract that is wholly or principally for labour. | Accordingly, your client would not be an employee for the purposes of the SGAA. | The Club | As noted in the facts provided your client participates in the Club. | You have provided evidence to show that the position occupied by your client is completely honorary. You have also stated that no payments have been made to your client for the duties performed. | It is clearly evident from the facts presented that your client is not engaged in an employment situation that meets the conditions normally evident in a common law employment relationship. As such, we must look for further guidance. | Superannuation Guarantee Ruling SGR 2005/1 entitled 'Superannuation guarantee: who is an employee?' provides the Commissioner's view on when a person may be considered an employee for SGAA purposes. In particular, at paragraph 10 of the ruling, the extension of the ordinary meaning of an 'employee' is discussed as follows: | The classification of a person as an employee for the purposes of the SGAA is not solely dependent upon the existence of a common law employment relationship. While the definition includes persons who at common law would be regarded as employees, it also extends to: | · a person who is entitled to payment for the performance of duties as a member of the executive body of a body corporate (subsection 12(2)); | · a person who works under a contract that is wholly or principally for the labour of the person (subsection 12(3)); | · members of the Commonwealth and State Parliament, members of the ACT Legislative Assembly (subsections 12(4) to (7)); | · a person who is paid to perform or present, or to participate in the performance or presentation of, any music, play, dance, entertainment, sport, display or promotional activity or any similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skills (paragraph 12(8)(a)); | · a person who is paid to provide services in connection with any activity referred to in paragraph 12(8)(a); | · a person who is paid to perform services in, or in connection with, the making of any film, tape or disc or of any television or radio broadcast (paragraph 12(8)(c)); | · a person who holds, or performs the duties of, an appointment, office or position under the Constitution or under the law of the Commonwealth, State or Territory (paragraph 12(9)(a)); | · a person who is otherwise in the service of the Commonwealth, of a State or of a Territory, including service as a member of the Defence Force or as a member of the police force (paragraph 12(9)(b)); and | · a person who is a member of an eligible local governing body (subsection 12(9A)). | Based on the facts of the case, the position occupied by your client with the Club does not correspond to the examples provided in the extended meaning of an 'employee'. Consequently, your client is not considered an 'employee' for the purpose of the SGAA. | As neither activity results in your client being considered an 'employee' for the purposes of the SGAA, the maximum earnings as an employee condition under section 290-160 of the ITAA 1997 is not applicable to your client. | Conclusion | As established in the above, your client is not considered to be an 'employee' for the purpose of the SGAA for in respect to both Trust A and the Club. | Consequently, section 290-160 of the ITAA 1997 does not apply to your client in the 2011-12 income year. However, it should be noted that the other conditions set out under sections 290-155, 290-165 and 290-170 must also be satisfied in order for your client to claim the deduction under section 290-150. | Question 2 | Summary of decision | The compensation payment made to your client is assessable as ordinary income as the payments were to compensate for the loss of income due to the injury suffered. | As the payment is considered to be a replacement for lost income, the amount should be included as 'salary and wages' at item 1 of your client's 20XX income tax return. | Detailed reasoning | Compensation payment - assessable as ordinary income | Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). | Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: | · are earned; | · are expected; | · are relied upon; and | · have an element of periodicity, recurrence or regularity. | A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of income, then it will be regarded as ordinary income. If the compensation is paid for the loss of a capital asset or amount, then it will be regarded as a capital receipt and not ordinary income. | In your client's case, your client was unable to work due to an injury. Your client completed the personal injury claim form clearly indicating that your client wished to claim loss of income benefits. | Therefore, while your client was not actually employed by Trust B and did not usually earn income from them, the fact remains that the payment your client received from Trust B was to compensate for the loss of income due to the injury suffered. | Accordingly, the payment is assessed as ordinary income under section 6-5 of the ITAA 1997. | As the payment is considered to be a replacement for lost income (paid under an insurance policy) from which tax was withheld, the amount should be included as salary and wages income at item 1 of your client's 20XX income tax return. | Conclusion | The compensation payment is assessable as ordinary income under section 6-5 of the ITAA 1997 as the payment was to compensate your client for the loss of income due to the injury suffered.


Relevant facts: Your client is a member of a superannuation fund (the Fund). | Your client performs certain services for the business operated by a family trust (Trust A). Your client and your client's spouse are the directors and shareholders of Company A, which is the corporate trustee for Trust A. | A copy of the Deed of Settlement for Trust A has been provided. | Your client is also a member of a sporting club (the Club). During summer weekends, your client carries out certain duties for the Club. Your client did not receive any wages for carrying out these duties. | The Club is part of a company (Company B) which operates as a discretionary trust (Trust B). | In early 20XX, your client was injured while carrying out their duties for the Club. | Your client submitted a Personal Injury Claim form to seek compensation for the injury suffered. The form detailed all the conditions and responsibilities of making compensation payments. A copy of the form has been provided. | Your client received compensation payments from Trust B. A copy of the PAYG payment summary has been provided. | The compensation payment was reported on your client's 20XX income tax return as "salary and wages" under question 1. | Your client has provided a letter from the Fund acknowledging they have received a notice of intent to claim a personal superannuation deduction for the 2011-12 income year.