ATO Interpretative Decision

ATO ID 2007/144

Superannuation

Deductibility of superannuation contributions made for directors of a passive investment company
FOI status: may be released

Note: the above analysis will only apply until 30 June 2007 as subsection 82AAC(1) of the ITAA 1936 has been repealed by the Superannuation Legislation Amendment Simplification Act (2007). The views in the ATO ID are relevant to decisions involving section 290-60 and paragraph 290-70(aa) or paragraph 290-90(4)(aa) of the ITAA 1997 in the 2007-08 income year and later income years.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Can a family investment company claim a deduction under section 82AAC of the Income Tax Assessment Act 1936 (ITAA 1936) for superannuation contributions made for the benefit of the directors of the company during the 2006-07 year of income in circumstances where the company derived its assessable income from passive investments it held during the year of income?

Decision

Yes. A family investment company can claim a deduction under section 82AAC of the ITAA 1936 for superannuation contributions made for the benefit of the directors of the company during the 2006-07 year of income in circumstances where the company derived its assessable income from passive investments it held during the year of income, provided that the directors are entitled to payment for their services.

Facts

The taxpayer is a family investment company (the company).

The current shareholders of the company are the two directors who own one ordinary share each.

The directors are also employees of another company (company B) which made superannuation contributions for the directors during the 2006-07 year of income.

The company is not an associate of company B.

The company derived its assessable income for the 2006-07 year of income from passive investments it held by way of a fixed investment portfolio during the year of income.

The investment activities undertaken by the company in the 2006-07 year of income do not constitute a business.

The directors did not receive any directors' fees during the 2006-07 year of income.

The company made superannuation contributions to a complying superannuation fund during the 2006-07 year of income for the purposes of making provision for superannuation benefits payable for the directors.

Under the company's articles of association the directors are to be paid such remuneration as is from time to time determined by the company in general meeting.

In a general meeting on 1 May 2007 the company made a determination in accordance with its articles of association to pay directors' fees of $100 to each director for the 2006-07 year of income.

The directors' fees for the 2006-07 year of income were paid to the directors on 1 July 2007.

Reasons for Decision

The amount of a contribution made by a taxpayer is allowable as a deduction to the taxpayer for the year of income in which the contribution was made if the conditions in subsection 82AAC(1) of the ITAA 1936 are satisfied. Those conditions are as follows:

•

the contribution was made to a fund for the purpose of making provision for superannuation benefits payable for another person (whether or not the benefits are payable to a dependant of the other person in the event of the person's death) (paragraph 82AAC(1)(a) of the ITAA 1936)

•

the fund is a complying superannuation fund in the year of income in which the contribution is made (paragraph 82AAC(1)(b) of the ITAA 1936), and

•

one or more of these applies:

i.: the other person was an eligible employee (subparagraph 82AAC(1)(c)(i) of the ITAA 1936)
ii.: the contribution reduces the taxpayer's charge percentage in respect of the other person under section 22 or 23 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) (subparagraph 82AAC(1)(c)(ii) of the ITAA 1936), or
iii: the other person was an employee for the purposes of that Act (subparagraph 82AAC(1)(c)(iii) of the ITAA 1936).

In the circumstances of this case, the company made contributions for the benefit of its directors in the 2006-07 year of income. The contributions were made:

1): to a complying superannuation fund, and
2): for the purpose of providing superannuation benefits for another person (that is, the directors).

Therefore, the first two limbs of subsection 82AAC(1) of the ITAA 1936 have been satisfied.

However, for the company to claim a deduction for the contributions one or more of the three conditions in paragraph 82AAC(1)(c) of the ITAA 1936 must also be satisfied. Relevantly, subparagraph 82AAC(1)(c)(iii) of the ITAA 1936 will be satisfied if the other person was an 'employee' for the purposes of the SGAA.

The definition of 'employee' for the purposes of the SGAA is contained in section 12 of that Act. A director of a company is an employee of the company by virtue of subsection 12(2) of the SGAA, which states:

A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate.

A director of a company is 'a member of the executive body of a body corporate' for the purposes of subsection 12(2) of the SGAA. However, as can be seen by the wording of subsection 12(2), the director of a company must also be 'entitled to payment' for the duties they perform as a director to qualify as an employee under the SGAA.

It has long been held that the directors of a company are not entitled to payment for the services they provide as directors unless it is specifically provided for in the company's constitution or approved by shareholders (see Hutton v. West Cork Railway Co (1883) 23 Ch D 654 and Re George Newman & Co [1895] 1 CH 674 (Re George Newman & Co)). In Re George Newman & Co the UK Court of Appeal said:

Directors have no right to be paid for their services, and cannot pay themselves or each other, or make presents to themselves out of the company's assets, unless authorised to do so by the instrument which regulates the company or by the shareholders at properly convened meetings. The shareholders, at a meeting duly convened for the purpose can, if they think proper, remunerate directors for their trouble or make presents to them for their services out of assets properly divisible among the shareholders themselves.

In this situation, the director's remuneration is determined by reference to the company's articles of association which state that the directors are to be paid such remuneration as is determined by the company in general meeting. In a general meeting on 1 May 2007 the company made a determination in accordance with its articles of association to pay directors' fees of $100 to each director for the 2006-07 year of income.

As the company has made a determination to pay directors' fees of $100 to the directors for the 2006-07 year of income, the directors are 'entitled to payment' in terms of subsection 12(2) of the SGAA and are therefore employees for the purposes of the SGAA. The fact that the directors' fees were not paid until the next financial year (2007-08) does not change this.

Accordingly, in the year of income in which the contributions are made, the company will satisfy subparagraph 82AAC(1)(c)(iii) of the ITAA 1936 in respect of the directors.

As the company has satisfied one of the three conditions in paragraph 82AAC(1)(c) of the ITAA 1936 (that is, subparagraph 82AAC(1)(c)(iii) of the ITAA 1936), and is only required to satisfy one of the three conditions, the company does not have to satisfy the other two conditions (that is, subparagraphs 82AAC(1)(c)(i) and 82AAC(1)(c)(ii) of the ITAA 1936).

By satisfying one of the elements of subsection 82AAC(1)(c) of the ITAA 1936, the company has satisfied the third limb of subsection 82AAC(1) of the ITAA 1936. Since the company has satisfied all three limbs of subsection 82AAC(1), the company is entitled to claim a deduction for the contributions it made for the benefit of the directors in the 2006-07 year of income.

In this situation, the fact that the company derived its income from passive investments it held by way of a fixed investment portfolio during the 2006-07 year of income does not prevent the company from claiming a deduction for the contributions.

As the company is not an associate of company B, the company can claim a deduction for the amount of the contribution up to the age based deduction limit that applies to each director under subsection 82AAC(2) of the ITAA 1936 for the 2006-07 year of income.

Date of decision: 8 June 2007

Year of income: 30 June 2007

Legislative References:
Income Tax Assessment Act 1936
   section 82AAC
   subsection 82AAC(1)
   paragraph 82AAC(1)(a)
   paragraph 82AAC(1)(b)
   paragraph 82AAC(1)(c)
   subparagraph 82AAC(1)(c)(i)
   subparagraph 82AAC(1)(c)(ii)
   subparagraph 82AAC(1)(c)(iii)
   subsection 82AAC(2)

Superannuation Guarantee (Administration) Act 1992
   section 12
   subsection 12(2)
   section 22
   section 23

Case References:
Hutton v. West Cork Railway Co
[1883] 23 Ch D 654

Re George Newman & Co
[1895] 1 CH 674

Keywords
Contributions for employees - allowable deductions
Superannuation contributions for employees
Superannuation contributions - deductions & rebates

Siebel/TDMS Reference Number: 5463486

Business Line: Superannuation

Date of publication: 13 July 2007

ISSN: 1445-2782

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