A controlling interest superannuation scheme has the following characteristics.
- A taxpayer is a director or employee at common law engaged in producing assessable income of a company in which they have a greater that 50% voting interest. As a result the individual is regarded as both an eligible employee and a taxpayer who has a controlling interest in that company. The taxpayer may take out a loan to finance a superannuation contribution.
- The taxpayer makes the contribution for themselves to a complying or non-complying superannuation fund.
- The taxpayer's contribution may be reimbursed by the employer company.
- Often the complying or non-complying fund invests the contribution in an entity associated with the controlled entity or in term deposits with the company that lent the funds to the taxpayer to make the contribution.
The tax mischief
No tax obligations are purported to arise from the scheme, so a tax mischief stems from a legislative weakness in section 82AAA.
The taxpayer's legal perspective:
- The taxpayer claims deductions under sections 82AAC or 82AAE for the contributions made to the fund (unless they are reimbursed by the employer) as they are an eligible employee.
- They claim deductions under subsection 51(1) of the Income Tax Assessment Act 1936 or section 8-1 of the Income Tax Assessment Act 1997 for any interest expense incurred on any loan to finance the contribution.
- They claim that the contribution does not constitute a fringe benefit for the purposes of the Fringe Benefits Tax Assessment Act 1986 where it is made to a complying superannuation fund or non-complying superannuation fund. Where the contribution is reimbursed by the employer any such fringe benefit has no (or minimal) fringe benefits taxable value.
- It is asserted that the contribution to the superannuation fund is not a taxable contribution as defined in section 274 of the Income Tax Assessment Act 1936. This is because the contribution is not made for the purpose of making provision for superannuation benefits for another person. The contribution is made for the purpose of making superannuation benefits for the individuals themselves.
- It is asserted that the contribution does not constitute a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997.
Our legal perspective
The Commissioner's view is that, depending on the facts, one or more of the following applies:
- deductions under sections 82AAC or 82AAE for a contribution are not allowable, either because the contributions were not made for the purpose of providing superannuation benefits or because the controlling individual is not an eligible employee deductions under subsection 51(1) of the Income Tax Assessment Act 1936 or section 8-1 of the Income Tax Assessment Act 1997 for the interest expense (if any) incurred by the taxpayer in relation to a loan to finance a contribution are not allowable.
Court decision
Prebble
Full Federal Court dismissed the taxpayer's appeal in relation to whether the controller of a company, of which the controller was also an employee, could claim deductibility for contributions he or she made to a superannuation fund. As the Court concluded that an earlier favourable decision of the Full Court on the same issue in the Harris case was not plainly wrong, they decided not to overturn that decision.
Elias
Federal Court handing down its judgment on the Commissioner's decision not to further remit general interest charge held that, the Commissioner's decision to disallow deduction for contributions to a controlling interest superannuation fund was within discretion. The Court also held that there were good reasons put forward for discriminating between taxpayers involved in mass marketed schemes and those involved in employee benefit arrangements.
Harris
Full Federal Court handed down its judgment in which it considered the deductibility of superannuation contributions made under a controlling interest superannuation scheme. The Court held deductions were not available where employer contributions were made to a superannuation fund by the controller of a company for the controller's own benefit, and that in fact there must be a contribution by an employer for an employee (who must be a different person). Further, the Court held the legislative history supported the Commissioner's view and supported the view put by the primary judge that any other outcome would be extraordinary or at least anomalous.
The legislation was amended in 2000 so that there could be no doubt that controlling interest superannuation schemes are no longer effective. On 14 March 2003 we announced changes to our position on certain Employee Benefit Arrangements including some types of controlling interest superannuation schemes. For more information please refer to our media release on Employee benefit arrangements.
For more information contact the Tax Office on 1800 177 006.
Last Modified: Sunday, 1 April 2012