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Ruling

Subject: Deduction for contributions returned to employer

Can the successor fund claim a deduction for returned contributions originally made to the predecessor fund?

No.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The successor fund merged with the predecessor fund by way of a successor fund transfer. The members of the predecessor fund together with their accumulated benefits were transferred to the successor fund as a result of the successor fund transfer arrangement.

The employer-sponsor of the predecessor fund and is now an employer-sponsor of the successor fund.

After the successor fund transfer took place the successor fund received correspondence from the employer-sponsor seeking to recover contributions on the basis they were made in error and represented overpayments.

On the basis that the contributions had been received in error by the predecessor fund the trustee of the successor fund agreed to refund the contributions to the employer sponsor.

The trustee of the successor fund also determined that as the predecessor fund had paid the 15% tax on contributions in relation to the overpayment of the contributions, the successor fund would only refund the contributions net of the tax deducted until such time it could be confirmed by the Australian Taxation Office (ATO) that the tax would effectively be refunded to the successor fund by way of a tax deduction.

During the 2009-10 income year the successor fund refunded the overpaid contributions less the 15% tax on contributions to the employer-sponsor.

The predecessor fund cannot lodge an amended tax return to recover the tax on the contributions as it was wound up following the merger.

Accordingly, the successor fund is seeking a tax deduction for the contributions refunded to the employer-sponsor on the basis that the refund of the tax on the contributions was an expense incurred by the successor fund in the process of deriving its assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subdivision 295-G

Income Tax Assessment Act 1997 Section 295-160

Superannuation Industry (Supervision) Act 1993 Part 14

Superannuation Industry (Supervision) Act 1993 Section 117

Reasons for decision

Summary of decision

There are no specific provisions that allow for a deduction in relation to the returned contributions.

Further, as the contributions were originally made to the predecessor fund, the relevant contributions formed part of predecessor fund's assessable income for that financial year. There was no obligation on the successor fund to return the contributions and there is no evidence to suggest that not returning the contributions would affect the relationship with the employer sponsor or the ongoing assessable income of the successor fund.

Therefore, it cannot be said that a return of contributions by the successor fund to the employer-sponsor was an outgoing incurred in gaining or producing the successor fund's assessable income. Hence, the payment does not have a sufficient connection to the gaining or producing of the successor fund's assessable income. Accordingly, the successor fund is not entitled to a deduction under the general principles of deductibility of expenditure.

Detailed reasoning

The Australian Prudential Regulation Authority (APRA) has the general administration of Part 14 of the Superannuation Industry (Supervision) Act 1993 (SISA) other than to the extent it relates to self managed superannuation funds.

Section 117 of Part 14 of the SISA prohibits a trustee of a standard employer-sponsored fund from paying an amount out of the fund to an standard employer-sponsor unless it is paid out under the exceptions listed in that section.

APRA Circular No. II.B.1 (Payments to Standard Employer-Sponsors) provides guidance on the restrictions imposed by section 117 of the SISA. Paragraphs 42 and 43 of the Circular note that a contribution overpaid by an employer due to a clerical error, computer malfunction or other mistake are not considered to be a contribution for the purposes of SISA. Therefore, section 117 of the SISA does not prohibit a payment, made to rectify a mistake by returning the overpayment to the employer-sponsor, in those circumstances. At paragraph 43 of the Circular it states:

The trustee of the fund has a responsibility to determine whether any overpayments have in fact been made in error and to rectify any mistake by returning the excess amounts to the employer-sponsor.

The Circular does not address whether this responsibility will extend to a successor fund which has received the benefits under a transfer arrangement. Without clarification from APRA, it does not appear that there is any obligation specifically imposed on the trustee of the successor fund to make any repayment.

The right to recover an inadvertent contribution to a superannuation fund was addressed by the New South Wales Supreme Court in Personalised Transport Services Pty Ltd v. AMP Superannuation Ltd & Anor [2006] NSWSC 5. It was held that a freight courier was entitled to a refund of superannuation contributions mistakenly paid to a superannuation fund on the basis that they were required to make superannuation contributions on behalf of their workers. Personal Transport Services (PTS) contributed $133,475, to AMP, on behalf of their workers. PTS later received advice that the workers were considered contractors and no superannuation contributions were required, they then sought a refund of the amounts paid to AMP.

His Honour Justice Barrett stated in his judgement:

… Because of the mistake under which the plaintiff was labouring (and even though that mistake was not known to or shared by either the payee or the beneficiaries), the payment will be recoverable unless the money has been on-paid or there has been some other change of position in consequence of the payment: Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662. On the evidence before me, the money remained with the payee for the benefit of the beneficiaries and none of them changed its position in any way after and by reference to the receipt.

The court ruled in favour of PTS and ordered AMP to repay $85,644. His Honour Justice Barrett determined that amount of money could be recovered because it was paid in error and because that amount had not been on-paid to another party.

In this case, the contributions had been on-paid from the original fund to a successor fund.

The rules about the taxation of superannuation entities are set out in Division 295 of the Income Tax Assessment Act 1997 (ITAA 1997). In particular section 295-160 of the ITAA 1997 sets out that the assessable income of a superannuation entity will include a contribution to provide a superannuation benefit for someone else (except a contribution that is a roll-over superannuation benefit). Sections 295-165 to 295-185 of the ITAA 1997 provide exceptions to this rule, however they are not applicable in these circumstances.

Taxation Ruling TR 2010/1 explains the Commissioner's view as to the ordinary meaning of the term 'contribution' in so far as it is used in relation to a superannuation entity for the purposes of the ITAA 1997.

Paragraph 4 of TR 2010/1 states that a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund, or all of the members in general. In this case, it is considered that the payment made by the employer-sponsor to the predecessor fund for the relevant members is considered a contribution for the purposes of the ITAA 1997.

Where a superannuation fund has included an amount in their assessable income as a contribution and the contribution has subsequently been returned as an overpayment to rectify a mistake, it would be in order for that fund to request an amendment to reduce the assessable income of the fund as the increase in that fund's capital has been reversed. However since the contribution has not been included in the assessable income of the successor fund, it is not possible for the successor fund to amend its income tax return in this manner.

Generally, the deductibility of expenditure incurred by a complying superannuation fund is governed by section 8-1 of the ITAA 1997 unless a specific provision applies or the general rule is modified.

Subdivision 295-G of the ITAA 1997 modifies the general principles of deductibility of expenditure in relation to superannuation funds and provides complying funds with specific deductions. There are no specific provisions in Subdivision 295-G that allow for a deduction in relation to returned contributions therefore we will look to section 8-1 of the ITAA 1997.

Expenditure of a superannuation fund which is not of a capital, private or domestic nature, is deductible under section 8-1 of the ITAA 1997 to the extent that:

· it has the essential character of an outgoing incurred in gaining or producing assessable income, or

· it has the character of an operating or working expense of a business or is an essential part of the cost of the fund's business operations.

The trustee for the successor fund contends they should be able to deduct the refunded payments on the basis the repayments were outgoings incurred in gaining or producing their assessable income based on the ongoing relationship with the employer-sponsor and ongoing assessable income in relation to the members.

An outgoing is considered to be incurred in gaining or producing assessable income if there is a sufficient connection between the outgoing and the activities which produce or are expected to produce assessable income. As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it.

According to decisions of the courts, for expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income it must be incidental and relevant to that end. The words 'incurred in gaining or producing assessable income' means in the course of gaining or producing such income.

The employer-sponsor initially made the contributions to the predecessor fund, therefore the relevant contributions formed part of the predecessor fund's assessable income for that financial year. There was no obligation on the successor fund to return the contributions and there is no evidence to suggest that not returning the contributions would affect the relationship with the employer-sponsor or the ongoing assessable income of the successor fund. Therefore, it cannot be said that a return of contributions from the successor fund to the employer-sponsor was an outgoing incurred in gaining or producing the successor fund's assessable income.

The payment from the successor fund to the employer-sponsor has resulted in a reduction of the capital of the successor fund. The payment does not have a sufficient connection to the gaining or producing of successor fund's assessable income. Accordingly, the successor fund is not entitled to a deduction under section 8-1 of the ITAA 1997.

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