1011553679534 | Legal database

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Edited version of private ruling

Authorisation Number: 1011553679534

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Ruling

Subject: Deductibility of payments to director/employee of company

1. Are wages paid under a court order to a director who ceases to work during the period of determining a separation settlement, an allowable deduction to the company?

Yes.

2. Is there a Superannuation Guarantee obligation on those payments?

Yes.

This ruling applies for the following period

For year ended 30 June 2010

The scheme commenced on

1 June 2009

Relevant facts

The company has two directors who have had a marital breakdown. One director has not worked in the business for a period. The other director has been operating the business since then. Prior to separation each director drew wages from the business.

As the dispute between the parties has been long and drawn out, the Court has ordered that the non-working director continue to be paid wages at the same rate as prior to the separation.

There is no anticipated settlement date. This is an interim arrangement where this party is continuing to be paid a wage until settlement is reached. At this stage you do not know when this parties entitlement to profits of the company cease. It is anticipated that ownership of the company will be determined at settlement and it is likely that this will be the other party.

The income of the company is not personal services income of the party that continues to work. The company assets are being used; there are other employees and there are multiple clients.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 8-1

Reasons for decision

Summary

The payments are considered to be salary or wages in consequence of the individual's employment and are therefore deductible to the company. Because there are payments of salary or wages to an employee there is an obligation for the employer to make superannuation contributions.

Detailed reasoning

The term 'employee' is not defined in the Taxation Administration Act 1953 (TAA 1953). For the purposes of withholding under section 12-35 of Schedule 1 to the TAA 1953 the word 'employee' has its ordinary meaning. The totality of the relationship between the parties must be considered.

Section 12-35 of Schedule 1 to the TAA 1953 provides that:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

For the provision to apply, there must be an employee, a payment of salary or wages to an employee as a consequence of his/her employment and finally, the payment must be made by an 'entity'.

Due to a marital breakdown between the two directors of the company, one of the directors has not actively worked in the business for a period. They remain as a director and had previously been paid a wage as an employee. There is an ongoing legal process of determining their entitlements under a settlement. During this process the court has ordered that each of the parties do everything to cause them to each respectively receive a weekly wage (less tax) paid fortnightly.

The payments have not arisen out of a settlement agreement. The payments are being made as a consequence of the individual's employment and are to continue on as if there had been no change, according to the court order. The payments are still considered to be salary or wages and subject to the PAYG Withholding obligations. The payment of the amounts are considered to be deductible to the company under section 8-1 of the Income Tax Assessment Act 1997 as they are necessarily incurred in carrying on the business and are not of a capital or private nature.

The superannuation guarantee (SG) scheme, requires employers to provide a minimum level of superannuation support for each of their employees, subject to limited exemptions. The required percentage of SG contributions is 9% of the employee's ordinary time earnings. For SG purposes, the terms 'employer' and 'employee' have their ordinary common law meanings, but are extended to cover various persons. As discussed above the individual is considered to be an employee in receipt of salary or wages, therefore an obligation would arise for the company to make employer superannuation contributions unless there is a specific applicable exemption.

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