Private ruling: Deduction for Personal Superannuation Contributions
Published: January 2012
Ruling period: Year ending 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Q1: Does the income protection payment you receive from an insurance policy in your superannuation fund prevent you from claiming a deduction for personal superannuation contributions? | A1: No.

Relevant facts and circumstances: You resigned from your employment with a previous employer early in the 2009-10 income year. You had suffered an injury at work, and you resigned as a condition of receiving an out of court settlement in relation to your work related injury claim. You have not been employed since that time. You are a member of a superannuation fund (the fund). You lodged a claim for income protection benefits with the fund, under an income protection policy attaching to your member account. Premiums for this income protection policy are deducted from your member account in the fund. The income protection insurance policy is owned by the fund. Your claim was forwarded to the fund's insurer. In a letter sent to you in mid October 2011, the insurer advised you that your claim had been accepted. You were further advised in this letter that a waiting period of several days commencing on the date of your injury applied before benefits commence to be paid under the policy. The date in the 2009-10 income year on which payment of your benefits commenced (the commencement date) was advised in this letter. Your income protection benefits are made up of a monthly income benefit and a monthly superannuation component, and these amounts were also advised in this letter. The policy provided for a benefit escalation when you receive benefits for more than 12 consecutive months. One year after the commencement date, both your monthly income benefit and your monthly superannuation component were increased. Two years after the commencement date, both your monthly income benefit and your monthly superannuation component were further increased. In addition, you were advised in this letter that you were entitled to an income protection payment covering the full benefit period commencing on the commencement date and ending more than two years after the commencement date. This period was made up of a number of separate payment benefit periods. Details of the individual gross income benefits which comprised this payment were set out in this letter. The letter states that your monthly income benefit is reduced if you are receiving other benefits related to your injury such as workers' compensation benefits. The gross income benefit for each payment benefit period was reduced by an offset for workers' compensation benefits received, to arrive at the income benefit payable for each period. The letter further states that the sum of these income benefits payable for the full benefit period is transferred to your nominated bank account. The letter also states that your monthly superannuation component is specified percentage of your monthly income benefit. Details of the individual superannuation components payable for each period were set out in this letter. The letter further states that the sum of the superannuation components payable for the full benefit period is transferred back into your member account in the fund, provided your member account is still open at the time the contribution is paid. A claims payment advice issued by the insurer was enclosed with the letter. The advice discloses that the income protection benefit made up of the sum of the income benefits payable for the full benefit period was paid to you a couple of days before the letter was sent to you. The advice also shows that after tax was withheld, a net amount of the benefit was credited to your bank account. The claims payment advice also discloses that sum of the superannuation components payable for the full benefit period was transferred into your member account with the fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 290-150, | Income Tax Assessment Act 1997 Subsection 290-150(2), | Income Tax Assessment Act 1997 Section 290-155, | Income Tax Assessment Act 1997 Section 290-160, | Income Tax Assessment Act 1997 Subsection 290-160(1), | Income Tax Assessment Act 1997 Paragraph 290-160(1)(a), | Income Tax Assessment Act 1997 Paragraph 290-160(1)(b), | Income Tax Assessment Act 1997 Subsection 290-160(2), | Income Tax Assessment Act 1997 Section 290-165, | Income Tax Assessment Act 1997 Subsection 290-165(2), and | Income Tax Assessment Act 1997 Section 290-170.

Reasons for decision: Summary: A person can claim a deduction in respect of personal superannuation contributions provided all the legislative requirements are satisfied. One of these requirements is the 'maximum earnings as an employee' condition. You are not engaged in an employment activity during the 2011-12 income year. In addition, the income protection payment is not counted in the maximum earnings test, because it is not attributable to an employment activity. Provided you do not engage in any new employment activities, you will satisfy the maximum earnings as an employee condition in this income year. Therefore, the income protection payment does not prevent you from claiming a deduction for personal superannuation contributions you make in this income year. | Detailed Reasoning - Personal superannuation contributions made in the 2011-12 income year: 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, subsection 290-150(2) of the ITAA 1997 provides that the conditions in sections 290-155, 290-160 (if applicable), 290-165 and 290-170 must all be satisfied before the person can claim a deduction for the contributions made in that income year. These conditions are explained in detail in Taxation Ruling TR 2010/1 (TR 2010/1) entitled 'Income Tax: superannuation contributions' . One of these conditions is the 'maximum earnings as an employee' condition specified in section 290-160 of the ITAA 1997, often referred to as the '10% test'. | Detailed Reasoning - Maximum earnings as an employee condition: Subsection 290-160(1) of the ITAA 1997 operates to apply the maximum earnings as an employee condition only if, in the income year in which the contribution is made, the person is engaged in any of the following activities (paragraph 290-160(1)(a)): · holding an office or appointment (for example, a director of a company); · performing functions or duties; · engaging in work; · doing acts or things; and · the activities result in that person being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA). For those persons who are engaged in any 'employment' activities in the 2011-12 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'. In TR 2010/1, the Commissioner discusses the operation of the maximum earnings as 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. Example 8 - maximum earnings test in paragraphs 88 and 89 of TR 2010/1 provides an example of the maximum earnings test in the situation where employment is terminated prior to the income year in which a contribution is made, as follows: 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. | Detailed Reasoning - The maximum earnings as an employee condition does not apply to you: 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. The critical factor is whether you are engaged in an employment activity during the 2011-12 income year. In this case, you resigned from your employment with a previous employer early in the 2009-10 income year, as a condition of receiving an out of court settlement in relation to a work related injury claim. You have not been employed since that time. Therefore you are not engaged in an employment activity during the 2011-12 income year. Provided you do not engage in any new employment activities, the maximum earnings as an employee condition not does apply to you in this income year. | Detailed Reasoning - Section 290-160 of the ITAA 1997 and income protection payments: As described in the facts, you lodged a claim for income protection benefits with a superannuation fund (the fund) under an income protection policy attaching to your member account in the fund. Although the premiums for this policy are deducted from your member account, the policy is actually owned by the fund. Your claim was forwarded to the fund's insurer, who accepted your claim. In mid October 2011, an income protection benefit covering the full benefit period of more than two years from the commencement date of the payment of your benefits, was paid to you by the insurer. It should be noted that income received from an insurance company under an income protection policy is not income that is attributable to employment as an employee. Further, the payment from the insurance company would not result in the person being treated as an employee of the insurance company. Even though the income protection payments are made to the person to replace assessable income, the payments are merely a pay-out on an insurance policy. As such, there is no employment relationship attached to these payments from the insurance company. As a result, payments received by a person under an income protection insurance policy are not taken into account in the calculation prescribed in subsection 290-160(2) of the ITAA 1997. In this instance, you are a member of a superannuation fund which is the holder of an income protection insurance policy. The income protection payment you received is a pay-out on a policy the superannuation fund has with the insurer. The payment was made to replace employment income you no longer receive as a result of the injury you suffered during your employment with the previous employer. However no employment relationship between you and the insurer is attached to this income protection payment. Hence you were not engaged in an employment activity with the insurer at the time you received the payment. Accordingly the payment is income that is not attributable to an employment activity. Therefore, the payment is not taken into account in the maximum earnings test. As noted above, the maximum earnings as an employee condition does not apply to you in the 2011-12 income year. In addition, the income protection payment is not counted in the maximum earnings test under section 290-160 of the ITAA 1997. Consequently, section 290-160 of the ITAA 1997 does not apply to you in the 2011-12 income year. | Detailed Reasoning - Deduction for personal superannuation contributions: Provided you do not engage in any new employment activities in the 2011-12 income year, section 290-160 of the ITAA 1997 will not operate to prevent you from claiming a deduction for your personal superannuation contributions, because the income protection payment is not attributable to an employment activity in this income year. In this light, it should be noted that under the conditions in subdivision 290-C of the ITAA 1997, your eligibility to claim the deduction is not determined by the level of superannuation support you receive or should have received from an employer or another entity. However, the complying superannuation fund condition in section 290-155 of the ITAA 1997, the age-related conditions in subsection 290-165(2) of the ITAA 1997, and the notice requirements under section 290-170 of the ITAA 1997, still need to be satisfied in full before you can claim a deduction for any personal contributions you intend to make to a superannuation fund in the 2011-12 income year.

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