• Retirement – Establishing whether gainful employment has ceased

    Case study scenario

    Charlie is 57 years old and a beneficiary of the Crackle discretionary trust (Crackle). Crackle carries on a smash repairs business. Charlie has been an employee of Crackle for nearly 20 years. For the 2016 income year, Charlie ceases his employment with Crackle. He is paid out any accumulated leave entitlements owed to him.

    Charlie no longer has an employment contract with either Crackle or any other entity (related party or arm’s length). The directors of the corporate trustee of the SMSF of which Charlie is a member, are satisfied he never intends to be gainfully employed on either a full-time or a part-time basis. Charlie’s SMSF commences to pay Charlie an account-based pension.

    However, after Charlie’s employment has ceased, Charlie continues to perform substantive duties for Crackle (much the same as when he was an employee). Charlie receives distributions of trust income from Crackle.

    Analysis

    • The superannuation definition of ‘retirement’ for a person under the age of 60 is determined by establishing whether they have ceased to (and never intend to again) be gainfully employed.
    • Passive investment income (such as the receipt of rent, trust distributions or dividends) would not normally affect the retirement definition, as the income received is not a direct result of actions or exertion by the member in a particular task.
    • However, where a business is operated through a family trust or private company, like in Charlie’s example, we may need to have a closer look at the arrangement before we can determine that Charlie has satisfied the retirement condition of release. This is because any evidence that he was still performing substantive duties for Crackle could indicate there is an on-going relationship between the two.

    It's unusual for a business like Crackle to allow someone who is not employed or contracted to assist in running the business, without an agreement or understanding in place. If Charlie's work leads to increased turnover for the business, resulting in larger trust distributions or a disproportionate increase in dividends, the Commissioner could take a view that the arrangement under which Charlie was ‘gainfully employed’ has not ‘come to an end’ as he is still receiving 'gain or reward' from distributions from the Crackle Discretionary Trust.

    As each business and arrangement is different, it would always have to be decided on a case-by-case basis what ‘substantive duties’ would entail. However, the following factors may be taken into consideration:

    • the time spent by Charlie assisting the business – the trustee must be satisfied Charlie does not intend to work more than 10 hours a week in the future
    • the expectation/understanding/agreement that Charlie will receive “reward” for his efforts, even if it not in the traditional form of salary and wages
    • whether the amount received is linked to Charlie’s direct or indirect performance
    • whether the payments received are referred to in Crackle’s trust deed
    • whether the business would be able to operate (or earn as much income) if Charlie was not performing these duties

    Result

    Although Charlie’s employment contract was terminated and he has been paid his leave entitlements, the fact he continues to assist Crackle, performing essentially the same duties he did as an employee, warrants further consideration. Based on the facts available, the Commissioner cannot be certain Charlie has satisfied the retirement condition of release.

    How this may affect you

    If you are under the age of 60 and thinking of starting a super pension, extra care should be taken to ensure you have satisfied your trustee (and if required, the ATO) that you have ceased to be gainfully employed and do not intend to be gainfully employed in the future.

      Last modified: 06 Apr 2016QC 48668