Private ruling: Deduction for personal superannuation contributions
Published: April 2014
Date scheme commenced: 1 July 20YY

Ruling: Q1: 1. Will payments made under a group salary continuance policy be taken into account for the purposes of section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997)? 2. Is your client entitled to claim a deduction under section 290-155 of the ITAA 1997? Advice/Answers 1. No. 2. Yes.

Relevant facts and circumstances: Your client was employed by an employer (the employer). In late 20XX, your client commenced sick leave from your client's employment due to suffering a medical condition. Your client became unfit to return to work due to your client's medical condition and was made redundant from your client's employment and terminated in late 20XX.Your client's employer maintained a group income protection policy (the Policy). Your client made a claim under the Policy for total disability. In a letter dated early 20YY, after assessing your client's claim, the employer confirmed liability and advised that your client's total disability was effective from a specified date. After a qualifying period, the benefit under the Policy would commence for your client on a date specified. The total disability benefit provided to your client under the Policy is a monthly benefit which is increased by the lesser of a specified percentage and the percentage change in the index measured over the previous 12 months and is applied for each year from a date specified. The total disability benefits are only payable while your client is not working in any gainful occupation, and under the continuous care of a registered medical practitioner. Your client was in receipt of leave benefits for a specified period. During this period no disability benefits were made to your client as your client's sick leave benefits exceeded the monthly total disability entitlement provided for under the Policy. You have advised that in the 20YY-ZZ income year your client will not be engaged in any eligible employment that will result in your client being treated as an employee for the purposes of superannuation guarantee. You have advised that as your client has a claim under the Policy, the employer no longer pays premiums on behalf of your client. The insurer has advised that all future communications and directive will be with the insured, that is your client, and not the employer. Your client intends to make personal superannuation contributions to a complying superannuation fund, (the Fund). Your client intends to claim the total contributions made to the Fund as a tax deduction in the 20YY-ZZ income year. Your client intends to provide the trustee of the Fund with a valid notice in the approved form of your client's intention to claim a tax deduction for the personal contributions made in the 20YY-ZZ income year, and the trustee will acknowledge this notice in respect of the personal contributions. Your client's total estimated assessable income will consist of your client's total disability payments made under the Policy. These payments will be made from the income protection insurance indicating that your client will not be gainfully employed as an employee for the 20YY-ZZ income year. Your client is over the age of 49 years in the 20YY-ZZ income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1. | Income Tax Assessment Act 1997 Subsection 26-55(2). | 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. Issue | Question 1 | Summary | There is no employment relationship attached to the total disability payments being made to your client, and as a result, payments received under the group income protection policy (the Policy) are not required to be included in the 10% test. Therefore your client will satisfy the maximum earnings as an employee condition. | Detailed reasoning | Maximum earnings as an employee condition | Subsection 290-160(1) of the Income Tax Assessment Act 1997 (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 duties; | (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). For those persons who are engaged in any 'employment' activities in the 20YY-ZZ income year, subsection 290-160(2) of the ITAA 1997 prescribes that a deduction for personal contributions can only be claimed where the sum of their: | • assessable income | • reportable fringe benefits total and | • reportable employer superannuation contributions | attributable to the 'employment' activities is less than 10% of the total of that person's assessable income, reportable fringe benefits total and reportable employer superannuation contributions. The term 'reportable employer superannuation contributions' includes salary sacrifice contributions made for the person's benefit in that income year. This calculation is referred to as the 'maximum earnings test'. | 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. In Taxation Ruling TR 2010/1 titled ' Income tax: superannuation contributions' , the Commissioner discusses the operation of the maximum earnings as an employee condition. In paragraph 58 of TR 2010/1 the Commissioner states that those persons who have not engaged in an 'employment' activity in the income year in which they make a contribution are not subject to the maximum earnings test. | The employment activity condition outlined in subsection 290-160(1) of the ITAA 1997 has two parts. To satisfy this condition, therefore, a taxpayer must both: | • engage in any of the employment activities specified in paragraph 290-160(1)(a) of the ITAA 1997, and | • as a result be treated as an employee for the purposes of the SGAA, as specified in paragraph 290-160(1)(b) of the ITAA 1997. | persons who although receiving workers' compensation payments are not employed at any time during the year, are not subject to the maximum earnings test. | Furthermore, the Commissioner has given an example which refers to the 'maximum earnings test'. At paragraphs 88 and 89 of TR 2010/1 the Commissioner states: | 88. Caitlin terminates her employment with Bling Pty Ltd on 30 June 2009 and was paid unused long service leave and annual leave on 3 July 2009. Caitlin made a contribution of $5,000 to her complying superannuation fund on 9 July 2009. Caitlin was not engaged in any employment activities for the 2009-10 income year. | 89. As Caitlin was not engaged in any employment activities in the 2009-10 income year, she does not need to meet the earnings test in relation to her $5,000 contribution. | Therefore a person is engaged in an employment activity when they are physically carrying out the obligations and duties of the job or work and receive a payment in the form of salary or wages in return for labour or services. | In this case, your client ceased employment with the employer after suffering an illness and was made redundant in late 20XX. You have advised that your client will not be engaged in activities during the 20YY-ZZ income year that would make your client an employee for the purposes of the SGAA. | The income received by your client under the Policy is not income that is attributable to employment as an employee, nor would the payment from the insurance company result in your client being treated as an employee of the insurance company. Your client is simply an insurance policy holder and even though the income protection payments are made to replace assessable income, it is merely a pay-out on a policy purchased from an insurance company. There is no employment relationship attached to the payments from the insurance company, and as a result, payments received under the Policy are not included in the 10% test. | Your client's employment was terminated in late XXand is no longer employed by the employer. Your client will receive total disability payments during the 20YY-ZZ income year. Consequently, your client will not have any assessable income, reportable fringe benefits or reportable employer superannuation contributions attributable to employment activity. | Therefore, the total disability payments being made to your client under the Policy in the 20YY-ZZ income year are not required to be taken into account for the purposes of the 10% rule and are not subject to the maximum earnings test under section 290-160 of the ITAA 1997. | Hence, section 290-160 of the ITAA 1997 does not apply in the income year in which your client will make personal superannuation contributions. | Question 2 | Summary of decision | Your client is entitled to claim a deduction for superannuation contributions made in the 20YY-ZZ income year provided the deduction does not add to or create a tax loss in that income year. | Detailed reasoning | Personal deductible superannuation contributions | A person can claim a deduction for personal contributions made in the 20YY-ZZ income year to a superannuation fund for the purpose of providing superannuation benefits for themselves under section 290-150 of the ITAA 1997. However, the conditions in sections 290-155, 290-160, 290-165 and 290-170 must also be satisfied for the person to claim the deduction. | 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 person made the contribution. | In this case, your client intends to make personal superannuation contributions to a complying superannuation fund (the Fund), in the 20YY-15 income year. Therefore the complying superannuation fund condition is satisfied. | Maximum earnings as an employee condition | As previously noted in this case, your client ceased employment in late 20XX and will not be engaged in an employment activity in the 20YY-ZZ income year that would make your client an employee for the purposes of the SGAA. | Therefore, your client is not required to meet the condition of the 10% rule. | Hence, section 290-160 of the ITAA 1997 does not apply in the income year in which your client will make personal superannuation contributions. | 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. | As your client will be over the age of 49 years in the year the contributions are made, your client will satisfy the age-related conditions. | 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: | • the date their income tax return is lodged for the income year in which the contribution was made; or | • the end of the income year following the year in which the contribution was made. | In addition, they must also have been given an acknowledgement of the notice by the trustee of the superannuation fund. | Your client intends to provide the trustee of the Fund with a valid notice in the approved form of your client's intention to claim a tax deduction for the personal contributions made in the 20YY-ZZ income year. The trustee will then acknowledge receipt of your client's notice in respect of the personal contributions. | Therefore, the notice of intent to deduct conditions under section 290-170 of the ITAA 1997 will be satisfied. | Deduction limits | A person can claim a full deduction for the amount of the contribution made up to the concessional contributions cap. | 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 year's tax losses and any deductions for farm management losses) from a taxpayer's assessable income. Thus a deduction for personal superannuation contributions cannot add to or create a loss. | Contribution limits | The concessional contributions cap for the 20YY-ZZ income year is $35,000 if you are aged 49 years or over on the last day of the previous income year. | Concessional contributions include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions claimed as a tax deduction by a person. | Therefore, as your client is over 49 years of age in the 20YY-ZZ income year, your client can claim a deduction up to the concessional contributions cap of $35,000 . | Conclusion | As your client will satisfy the conditions in sections 290-155, 290-165 and 290-170 of the ITAA 1997 and is not required to satisfy section 290-160, your client will be entitled to claim a deduction of up to $35,000 for concessional superannuation contributions made in the 20YY-ZZ income year provided the deduction does not add to or create a tax loss in that income year.