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

Ruling: Q1: Can your client claim a deduction for personal superannuation contributions made to a complying superannuation fund in the 2010-11 income year? | A1: No.


Relevant legislative provisions: Subsection 26-55(2) Income Tax Assessment Act 1997 | Section 290-150 of the Income Tax Assessment Act 1997 | Subsection 290-150(1) of the Income Tax Assessment Act 1997 | Subsection 290-150(2) of the Income Tax Assessment Act 1997 | Subsection 290-150(3) of the Income Tax Assessment Act 1997 | Section 290-155 of the Income Tax Assessment Act 1997 | Section 290-160 of the Income Tax Assessment Act 1997 | Section 290-165 of the Income Tax Assessment Act 1997 | Section 290-170 of the Income Tax Assessment Act 1997 | Subsection 290-170(1) of the Income Tax Assessment Act 1997 | Subsection 290-170(3) of the Income Tax Assessment Act 1997 | Subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997 | Section 12 of the Superannuation Guarantee (Administration) Act 1992 | Subsection 12(11) of the Superannuation Guarantee (Administration) Act 1992

Reasons for decision: Summary: On the basis of the information provided, your client will not be eligible to claim a deduction for the personal superannuation contributions made to their superannuation fund as the 'maximum earnings as employee condition' under section 290-160 of the ITAA 1997 for deductibility will not be met for the 2010-11 income year. | Detailed Reasoning - Detailed reasoning: 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. These will each be considered. | 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. In this case, you have advised your client has contributed an amount to a complying superannuation fund and intends to contribute a further amount to the fund in the 2010-11 income year. Therefore in the absence of evidence to the contrary, this condition will be satisfied. | Detailed Reasoning - 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: · their assessable income for the income year, · their reportable fringe benefits total for the income year · 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). Subsection 12(1) of the SGAA provides that the terms 'employer' and 'employee' have their ordinary meaning. Under subsection 12(1), a worker will be an employee for superannuation guarantee (SG) purposes if he or she is a common law employee. However for the purposes of the SGAA, subsections 12(2) to 12(11) expand the meaning of those terms and make particular provision to avoid doubt as to the status of certain persons. In particular, subsection 12(3) of the SGAA expands the ordinary meaning of the term employee to include persons who are contracted wholly or principally for their labour. If a person works under such a contract, then the person is an employee of the other party to the contract. Superannuation Guarantee Ruling 2005/1 (SGR 2005/1) explains when an individual is considered to be an 'employee' under section 12 of the SGAA and discusses the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term. Under paragraph 9 of SGR 2005/1, the Commissioner explains that whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered. | Detailed Reasoning - Whether a party to a contract is an employee or an independent contractor.: The relationship between employee and employer is said to be a contract of service, and has been referred to as a master/servant relationship. Such a relationship is typically contrasted with the independent contract/principal relationship which is said to be one for services. An independent contractor contracts to achieve a result whereas an employee contracts to provide his or her labour, or personal exertions of some other kind (typically to enable the employer to achieve a result). Some of the key indicators required to be examined in order to determine whether your client is an employee for the purposes of the SGAA are as follows: | Detailed Reasoning - Terms and circumstances of the formation of the contract: Paragraph 31 of SGR 2005/1 states that the circumstances surrounding the formation of the contract may assist in determining the true character of the contract. Thus if a contract comes into existence because the contractor advertises their services to the public in the ordinary course of carrying on a business or as a result of a successful tender application, the existence of a principal/independent contractor relationship is more likely. Conversely, the existence of an employer/employee relationship is more likely where a contract is formed as a result of a job vacancy advertisement or through the services of a placement agency. In your client's case, they have contracted their services to a labour hire firm (entity 1), who then subcontracted their services to another entity (entity 2). From the facts presented, it can be seen that your client performs work for entity 2 through their contract with the intermediary entity (entity 1) and there may not be an employer-employee relationship between your client and entity 2. However, in this case your client is regarded as the employee of the intermediary entity (entity 1) as evidenced by the terms of the agreement which was to provide services for entity 2 (the client named on the agreement). In paragraph 13 of SGR 2005/1, the Commissioner states that where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. However, the individual may be the employee of the intermediary company or trust, depending on the terms of the arrangement. In addition, the Commissioner states the following at paragraph 11 of SGR 2005/1: 11. For the purposes of subsection 12(3), where the terms of the contract in light of the subsequent conduct of the parties indicate that: · the individual is remunerated (either wholly or principally) for their personal labour and skills; · the individual must perform the contractual work personally (there is no right of delegation); and · 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 that subsection. It can be seen from the terms of the 'Employment Business-Consultant Agreement' that your client is paid at daily rate worked and they perform the duties their specified position on a daily basis. It is also evident they are not paid to achieve a result. In addition, they do not have the power to delegate work to others. Therefore, on this basis, it is considered that the contract is predominantly one of service and is not a contract for services. | Detailed Reasoning - The Control Test: The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is performed. While control is important, it is not the sole indicator of whether or not a relationship is one of employment. It can be seen that your client has an obligation to provide the training to other personnel as required by their contract. You advised that entity 2 provides a project plan listing outcomes to be achieved by your client who is then required to prioritise the importance of tasks to be completed during the course of a day. Although they determine what duties will be performed on any given day, their role requires them to train, supervise or assess the work of other employees/workers including apprentices. They are not subject to quality control checks but are required to meet outcomes in the project plan as set by management. You have stated entity 2 outlined in their project plan how your client's services as supervisor are to be performed to meet the skilling needs of employees/workers of their business operations. As the owner of the business operations, it is evident that entity 2 set out how your client's services are to be conducted in order to manage the needs of the business as the owner sees fit. While the focus of control is important, it is not merely the exercise of control but the right to control. Therefore, based on the above, although it is the case your client had responsibilities under the contract to conduct the training and supervision of staff to meet the operational needs of the business, it is considered that your client had minimal control over the operation of the business itself. | Detailed Reasoning - Results Contracts: In a contract for services, the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the 'result' for which the parties have bargained. Conversely, under a contract of service, payment is not necessarily (but may be) dependent on, and referable to, the completion of specified services. 'Results' contracts are discussed at paragraphs 42 to 43 of SGR 2005/1 as follows: 42. Where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for services. In World Book (Australia) Pty Ltd v. FC of T Sheller JA said: Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor… 43. The phrase 'the production of a given result' means the performance of a service by one party for another where the first-mentioned party 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 services 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. Based on the above, your client's case can be distinguished from a contract that is to achieve a specified result as you have advised they are contracted on a daily rate to perform the duties of 'supervisor' for entity 2 and only receives payment for days actually worked. It is not specified that payment for their services will be made on completion of any services but rather is dependent on the hours the have actually worked. | Detailed Reasoning - Delegation: The power to delegate is an important factor in deciding whether a person is an employee or an independent contractor. An unlimited power to delegate work is an important indication that the service provider is an independent contractor. In your client's case, you have stated they do not have the power to delegate work to others with or without the approval of entity 2 and is only paid for time actively worked. Furthermore, you advise that should their services not be available, another personnel will be hired by entity 2. | Detailed Reasoning - Hours of Work and Mode of Payment: An employee generally works standard or set hours. An independent contractor, on the other hand, generally sets their own hours of work. An employee, unlike an independent contractor, is often reimbursed (or receives an allowance) for expenses incurred in the course of employment, including for the use of their own assets such as a car. In your client's case you have advised they are contracted on a daily rate and only receives payment for days worked. The plant at which your client works is operated on a 24 hours a day/7 days a week basis and they work x hours per day for a maximum period of x days due to safety regulations. They are also required to be on standby should an emergency situation arise and receives reimbursement for mainly travel expenses. | Detailed Reasoning - Business Risk and Expenses: Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out his or her work, he or she is more likely to be an employee. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit) the more he or she is likely to be regarded as being an independent contractor. In your client's case, you have stated they do not bear any commercial risk and responsibility for poor workmanship or injury that happened on the job as their role does not provide a product that could be deemed faulty, nor can they be accused of poor workmanship. | Detailed Reasoning - Place of Performance: Workers under a contract of service will generally perform the tasks on the employer's premises using the employer's assets and equipment. A contractor on the other hand, generally provides all their own assets and equipment. You have advised your client is not required to provide their own tools and equipment to perform tasks. Whilst they provide their own reference materials, computer and intellectual property, this is because their role which requires them to train, supervise or assess the work of other employees/workers including apprentices and to the extent as required by the nature of their services as per the contract agreement they signed with the intermediary entity (entity 1). | Detailed Reasoning - Integration: The question of whether the work is integrated into the business is another factor to consider. The presence of other workers doing the same work for the principal would indicate the worker is an integral part of the business. It is therefore necessary to consider whether your client is providing services as part of the principal's business (under a contract of service as an employee) or providing services as part of their own business under a contract for services as an independent contractor. You advised that your client determines what duties will be performed on any given day and that the responsibilities of their role require them to train and supervise other personnel at the site to perform the operational tasks. Although you have stated your client is able to provide their services to other individuals and businesses independently of entity 2, it is predominantly only at times of inactivity with entity 2. Their work schedule infers the times of inactivity is minimal as during the majority of the contract period, their hours of work at the plant is for x hours each day for a maximum period of x days (for safety regulations). The plant is operated on a 24 hours a day/7 days a week basis and your client is also required to be on standby for emergencies. Accordingly, it is considered by providing the services as supervisor to other employees/workers including the provision of training, your client's services is critical in maintaining the efficient operation of the business. As such, your client's services are seen to be an integral part of the business conducted by entity 2. | Detailed Reasoning - Conclusion that it is a contract of service: It is considered that when examining the areas of control, integration, results, business risk and expenses, hours of work and mode of payment, place of performance in totality, your client is clearly not an independent contractor. The indicators point to the fact that your client is providing a contract of service as an employee and has provided their labour or personal exertions to enable entity 2 to achieve a successful business result by maintaining the efficient operation of their business through your client's role. | Detailed Reasoning - Expanded definition: As mentioned earlier, subsections 12(2) to 12(11) of the SGAA expand the meaning of the term 'employee' to avoid doubt as to the status of certain persons. In particular, subsection 12(3) of the SGAA expands the ordinary meaning of the term employee to include persons who are contracted wholly or principally for their labour. If a person works under such a contract, then the person is an employee of the other party to the contract. Therefore subsection 12(3) must be considered where there is no common law employment relationship or where there is doubt as to the common law status of the individual. As discussed earlier in paragraph 11 of SGR 2005/1, the Commissioner's view is that for the purposes of subsection 12(3) of the SGAA, where the terms of the contract in light of the subsequent conduct of the parties indicate that: · the individual is remunerated (either wholly or principally) for their personal labour and skills; · the individual must perform the contractual work personally (there is no right of delegation); and · the individual is not paid to achieve a result, then 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 that subsection. Previous analysis of your client's circumstances indicate the above factors apply and their contract for services is one wholly or principally for their labour. Under these circumstances subsection 12(3) of the SGAA would operate to make them an 'employee'. Paragraphs 79 and 80 of SGR 2005/1 further reinforce the application of subsection 12(3) to your client. These paragraphs deal with arrangements involving labour hire firms. In short, where a contract requires the worker to provide services for the benefit of a third party, that contract between the worker and the labour hire firm is characterised as one wholly or principally for labour. The worker is thus an employee of the labour hire firm under subsection 12(3) of the SGAA. Your client, as an individual, performs work for a third party (entity 2) through another entity (entity 1), a labour hire agency. As such, based on the previous paragraph, your client is regarded as an employee of the labour hire agency under the expanded definition found in subsection 12(3) of the SGAA. | Detailed Reasoning - Eligibility to claim a deduction for person superannuation contributions requires meeting the maximum earnings as employee condition: Part B of Taxation Ruling TR 2010/1 entitled ' Income tax: superannuation contributions' (TR 2010/1) explains some aspects of the rules in Division 290 of the ITAA 1997 that apply if a superannuation contribution for a personal contribution is to be deducted. The relevant paragraphs 57 to 60; 62, 64 to 66 are as follows: | Detailed Reasoning - Deducting personal contributions: Maximum earnings test 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. 59. A person will be engaged in an 'employment' activity if they are engaged in an activity in the income year that results in them being treated as an employee for the purposes of the SGAA. The term 'engaged' is not defined and takes its ordinary meaning. One of several meanings given to engaged is 'busy or occupied; involved.' Another meaning is 'under an engagement' where the ordinary meaning of 'engagement' is given as 'under an obligation or agreement.' 60. Consequently, a person need not be physically engaged in the activity. For example: · a common law employee or office holder will be engaged in the activity while they remain employed or hold the office; · a member of the executive body of a body corporate (for example a director) who is entitled to payment for their services in that capacity will be engaged in the activity while they remain a member of the executive body; · a member of a Parliament of the Commonwealth or a State or of a Legislative Assembly of a Territory will be engaged in the activity while they are a member of the Parliament or Assembly; and · a person who is engaged under a contract wholly or principally for labour is engaged in the activity throughout the duration of the contract. 62. Where the person engages in any 'employment' activities in the income year a deduction can only be claimed where the sum of assessable income, reportable fringe benefits total, and (from 1 July 2009) reportable employer superannuation contributions attributable to the 'employment' activities is less than 10% of the total of the person's assessable income, reportable fringe benefits total and reportable employer superannuation contributions in the income year that the contribution is made. 64. All amounts that are attributable to the 'employment' activity are taken into account as assessable income in the 10% test. These include: · the salary or wages (as used in its ordinary meaning) from the activity; · allowances and other payments earned by an employee; · the other payments, such as commission, director's remuneration and contract payments, that are treated as salary or wages by section 11 of the SGAA for those persons who engage in an 'employment' activity in a capacity other than a common law employee; · an employment termination payment received by a person in consequence of the termination of their employment; and · workers' compensation and like payments made because of injury or illness received by a person while holding the employment, office or appointment the performance of which gave rise to the entitlement to the compensation payments. 65. In the application of the maximum earnings test, the relevant 'employment' activity need not be an activity in Australia. For a non-resident, the income attributable to employment outside Australia is not assessable income in Australia and so will not be counted in the maximum earnings test. A non-resident with Australian sourced income that is not attributable to 'employment' activities may therefore be able to deduct a personal superannuation contribution made to an Australian superannuation provider against their Australian sourced income. 66. However, the 'employment' income of an Australian resident employed overseas by a foreign employer will be counted in the maximum earnings test if the income is assessable income. In view of the above and after examining the key indicators of the contractual relationship, it is the case your client meets the expanded definition of an employee in subsection 12(3) of the SGAA as a person who is contracted wholly or principally for their labour and that they are an employee. As discussed earlier, in order to be eligible to claim a deduction for personal superannuation contributions for the 2010-11 income year, your client is required to meet all of the conditions for deductibility under section 290-150 of the ITAA 1997 in relation to the 2010-11 income year including the 'maximum earnings as employee condition' in subsection 290-160(2). As stated in paragraphs 65 and 66 of TR 2010/1, the Commissioner views the employment income of an Australian resident employed overseas by a foreign employer will be counted in the maximum earnings test if the income is assessable income. As you have stated your client's full details for gross assessable income, reportable fringe benefits and reportable employer superannuation contributions for the 2010-11 income year will be an estimated amount of (X) gross assessable income from their work in country 2 and that there should be no Australian sourced income, it becomes evident your client will not satisfy the 'maximum earnings as employee condition' as all of the income amounts (100%) is attributable to the activities that result in them being treated as an employee for the purposes of the SGAA. As such, they will not be eligible to claim a deduction for the personal superannuation contributions made to a complying superannuation fund in the 2010-11 income year. As your client does not meet the requirements of section 290-160 of the ITAA 1997, there is no need to consider the conditions in sections 290-165 and 290-170.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: Your client is aged less than 60 years. | They are an Australian resident working overseas. | Under the relevant employment agreement, your client contracted their services to a labour hire agency (entity 1) in a foreign country (country 1), who then subcontracted their services to another entity (entity 2) in another country (country 2). | Under the agreement the nature of the services to be provided by your client is a specified profession for entity 2. | You state the following in relation to your client's subcontracted services to entity 2: | · The contract spans over a period from 2010 to 2011 | · They are taxed at a flat rate in country 2 and does not receive superannuation support. | · They completed a training induction as required for their position working for entity 2. | · They did not complete any training programs as their role with entity 2 requires them to train all the other personnel at the site. | · There was no provision of manuals/guides specific to the work carried out or ongoing training including written or verbal instructions on how to complete jobs/tasks as the agreement required pre-existing competency levels for the contract to be completed. | · The place at which your client works is operated on a 24 hours a day/7 days a week basis and they work x hours per day for a maximum period of x days due to safety regulations. However they are also on standby should an emergency situation arise. | · While they determines on site what duties will be performed on any given day, entity 2 provides a project plan listing outcomes to be achieved by your client who is then required to prioritise the importance of tasks to be completed during the course of a day. | · They are not subject to quality control checks but is required to meet outcomes as set out in the project plan. | · They can refuse to do certain tasks if there is a safety related matter present. | · They do not have the power to delegate work to others with or without the approval of entity 2 and is only paid for time actively worked. Should their services not be available, another personnel will be hired by entity 2. | · They do not bear any commercial risk and responsibility for poor workmanship or injury that happen on the job as in their position, they do not provide a product that could be deemed faulty, nor can he be accused of poor workmanship. | · They are not required to provide their own tools and equipment to perform tasks. Your client provides their own reference materials, computer and intellectual property. | · They receive reimbursement for mainly travel expenses. | · They are engaged as the specified position and do not possess an Australian Business Number (ABN). They are not registered for Goods and services tax (GST). | · They are required to meet with fellow colleagues and contractors as well as with the management and personnel of entity 2 to discuss the current status of the operation. | · They are able to provide their services to other individuals and businesses independently of entity 2 during times of inactivity with entity 2. | · They train, supervise or assess the work of other employees/workers including apprentices. | You state your client "appears to satisfy the 'Maximum earnings as employee condition' under section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997), and that they should be entitled to claim a deduction for personal superannuation contributions". | You state this is because your client is not subject to "the 10% rule" in relation to their assessable income for the purposes of subsection 290-160(2) of the ITAA 1997 as they do not receive employment income. | Your client has (to date) made an amount of personal superannuation contributions to a complying superannuation fund and a further contribution will be made if a favourable ruling is given to allow them to claim the contributions as a tax deduction for the 2010-11 income year. | You confirm that in due course, notification to the trustee will be made in respect of the personal contributions your client wishes to claim as a deduction and acknowledgement of the notice should be made by the trustee. | Your also confirm that the deduction if claimed by your client under section 290-150 of the ITAA 1997 will not add to or create a loss in the 2010-11 income year. | You state your client's full details for gross assessable income, reportable fringe benefits and reportable employer superannuation contributions for the 2010-11 income year will be an estimated amount of (X) gross assessable income from their work in country 2 and that there should be no Australian sourced income.