Edited version of private ruling

Authorisation Number: 1011806120973

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deductibility of employer superannuation contributions

Issue 1

Questions

1. Can the Company make deductible superannuation contributions for the taxpayer, a non-resident director, in the 2010-11, 2011-12 and 2012-13 income years?

2. Does the Company have to pay the taxpayer in order to claim the deduction in the 2010-11, 2011-12 and 2012-13 income years?

3. Can the Company borrow money to make superannuation contributions in respect of the taxpayer in the 2010-11, 2011-12 and 2012-13 income years?

4. Can the Company make deductible superannuation contributions for the taxpayer, a non-resident director, in the 2013-14, 2014-15 and 2015-16 income years?

Answers:

1. No.

2. Yes.

3. Yes.

4. The Commissioner declines to rule.

Issue 2

Question

Will the non-residency status of the taxpayer be affected if the Company makes the superannuation contributions?

Answer:

No.

This ruling applies for the following periods

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

A company (the Company) is a resident Australian company.

The Company's business activities involve its Directors, the taxpayer and the taxpayer's spouse, providing services to individual clients.

The taxpayer provides certain services and the taxpayer's spouse provides certain other services.

In relation to the remuneration of Directors it is reviewed regularly based on the Company's performance. Further, the Company uses the 'Replaceable Rules' in the Corporations Act 2001.

Since 1 July 2010 the taxpayer commenced a fixed term contract in an overseas country where the taxpayer is a permanent resident, and a tax resident, for the duration of the contract.

The overseas contract is with an overseas organisation for the provision of services similar to those the taxpayer provided in Australia.

The contract with the overseas organisation was taken up by the taxpayer after the taxpayer completed a contract with an Australian employer and there were no employment prospects in Australia.

There is no relationship between the Company and the overseas organisation nor are there any payments flowing between them.

The taxpayer plans to make short trips to Australia during the Christmas period.

The taxpayer continues to be a director of the Company and is active in the Company decision making. Further, the taxpayer is in constant dialogue with the Company's Australian resident director and the taxpayer's resident Australian accountant.

The Company's business at present continues to operate in relation to the services by the taxpayer's spouse but those services which the taxpayer conducts may resume upon the taxpayer's return.

The taxpayer is not receiving any remuneration from the Company.

In each of the 2010-11, 2011-12 and 2012-13 income years the Company intends to make concessional contributions to a complying superannuation fund, on behalf of the taxpayer.

The taxpayer is over 50 years of age.

Assumptions

None.

Relevant legislative provisions

Corporations Act 2001 Section 202A.

Income Tax Assessment Act 1997 Section 26-80.

Income Tax Assessment Act 1997 Subsection 26-80(1).

Income Tax Assessment Act 1997 Subsection 26-80(2).

Income Tax Assessment Act 1997 Section 290-60.

Income Tax Assessment Act 1997 Subsection 290-60(1).

Income Tax Assessment Act 1997 Subsection 290-60(2).

Income Tax Assessment Act 1997 Subsection 290-60(3).

Income Tax Assessment Act 1997 Subsection 290-60(4).

Income Tax Assessment Act 1997 Subsection 290-65(1).

Income Tax Assessment Act 1997 Section 290-70.

Income Tax Assessment Act 1997 Paragraph 290-70(aa).

Income Tax Assessment Act 1997 Paragraph 290-70(a).

Income Tax Assessment Act 1997 Paragraph 290-70(b).

Income Tax Assessment Act 1997 Section 290-75.

Income Tax Assessment Act 1997 Section 290-80.

Superannuation Guarantee (Administration) Act 1992 Section 12.

Superannuation Guarantee (Administration) Act 1992 Subsection 12(2).

Taxation Administration Act 1953 Section 357-110(1) of Schedule 1.

Reasons for decision

Issue 1

Summary

The Company is not eligible to claim a deduction for superannuation contributions made to a complying superannuation fund in respect of the taxpayer.

In order to claim a deduction, the Company, in a general meeting, would need to resolve to pay remuneration to the taxpayer in respect of the taxpayer's services as a director. There is no evidence that such a resolution has occurred in relation to the 2010-11 income year.

The Company can borrow money to make superannuation contributions in respect of the taxpayer. However, The Company cannot claim a deduction for the financing costs on the loan in connection with the superannuation contribution made or proposed to be made in the 2010-11 income year.

The Commissioner declines to rule in respect of the 2011-12 and 2012-13 income years as he is not prepared to make assumptions about future events.

Detailed reasoning

Deduction for employer contributions

The operative provisions dealing with the deductibility of contributions to a superannuation fund for the benefit of an employee are contained in subdivision 290-B of Division 290 of Part 3-30 of Chapter 3 of the Income Tax Assessment Act 1997 (ITAA 1997). In particular, subsection 290-60(1) states that:

You can deduct a contribution you make to a superannuation fund, or an RSA, for the purposes of providing superannuation benefits for another person who is your employee when the contribution is made …

However, subsection 290-60(2) of the ITAA 1997 requires that the conditions in sections 290-70, 290-75 and 290-80 must also be satisfied in order to claim a deduction in respect of the contribution. Failure to satisfy one condition will result in the inability to claim a deduction under subsection 290-60(1).

Section 290-70 of the ITAA 1997 sets out the employment activity conditions that a person (the employee) must meet to enable a deduction for an employer contribution to be claimed. One of three conditions must be met in order for the deduction to be claimed. Section 290-70 states:

To deduct the contribution, the employee must be:

(aa) your employee (within the expanded meaning of employee given by section 12 of the Superannuation Guarantee (Administration) Act 1992);

(a) engaged in producing your assessable income; or

(b) an Australian resident who is engaged in your business.

As noted in the facts, the taxpayer continues to be a director of the Company and is active in their decision making.

At present the Company's services provided by the taxpayer, have been discontinued and may resume on the taxpayer's return from overseas. The taxpayer is now a non-resident of Australia for tax purposes.

Therefore the taxpayer does not fall under paragraphs 290-70(a) or (b) of the ITAA 1997 as the taxpayer is not involved in producing the company's assessable income and is not a resident of Australia engaged in its business.

We will now consider if the taxpayer falls under paragraph 290-70(aa) of ITAA 1997.

Application to employees etc.

The term 'employee' is not defined in the ITAA 1997 and therefore takes its ordinary meaning. For the purposes of Subdivision 290-B, section 290-65 of the ITAA 1997 extends that meaning to include a person who is an employee under the expanded meaning of 'employee' in subsection 12(2) to (11) of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

Subsection 12(2) of the SGAA deals with members of board of directors, etc. and 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.

The wording of subsection 12(2) of the SGAA requires that the director of a company must also be 'entitled to a payment' for the duties they perform as a director to qualify as an employee under the SGAA.

Taxation Ruling 2010/1, titled 'Income tax: superannuation contributions', provides guidelines to ascertain the meaning of engaged in respect of a person who is an employee only because of the operation of subsections 12(2) to 12(10) of the SGAA.

In particular, paragraphs 237 to 242 of TR 2010/1 state:

237. A person who is an employee only because of the operation of subsection 12(2) to 12(10) of the SGAA automatically satisfies the employment activity condition. As paragraphs 5.72 to 5.76 of the Explanatory Memorandum to Tax Laws Amendment (2007 Measures No. 4) Bill 2007 makes clear, this ensures an employer can claim a deduction for contributions made on behalf of a person who is an employee as defined in those subsections even though that employee is not actually engaged in producing the employer's assessable income or engaged in the employer's business.

238. For example, a company's director is an employee of the company for the purposes of the SGAA if the director is entitled to payment for the performance of duties as a member of the company's executive body.

239. It has long been held that the directors of a company are not entitled to payment for the services they provided 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). In Re George Newman & Co the United Kingdom's 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.

240. However, section 202A of the Corporations Act 2001 states that directors shall be paid such remuneration as is from time to time determined by the company in a general meeting. As this is a replaceable rule for the purposes of that Act, whether a particular director is entitled to remuneration must be determined on a case by case basis.

241. A director entitled to remuneration will satisfy the employment activity test even if not engaged in producing the company's assessable income or its business.

242. A company cannot deduct a superannuation contribution for a member of the executive body who is not entitled to payment for the performance of duties as a member of the company's executive body.

The applicant has advised that the Company is using the replaceable rules as per the Corporations Act 2001. Consequently, section 202A of the Corporations Act 2001 applies to the Company. Subsection 202A(1) states:

The directors of a company are to be paid the remuneration that the company determines by resolution.

The applicant has also advised that remuneration of directors is reviewed regularly based on the performance of the company and hence it is subject to changes with the changing performance of the company.

In this case the taxpayer is not drawing an entitlement in the 2010-11 income year. There is no evidence that, in a general meeting, it was resolved that the Company would remunerate the taxpayer for the performance of the taxpayer's duties as a director in the 2010-11 income year.

Therefore, as the taxpayer was not entitled to remuneration in the 2010-11 income year, the taxpayer is not considered to be an employee of the Company for the purposes of section 12 of the SGAA. Accordingly, the taxpayer would not be considered to be an employee of the Company for the purposes of section 290-60 of the ITAA 1997.

Consequently, paragraph 290-70(aa) of the ITAA 1997 has not been satisfied.

Complying fund and age related conditions

As noted earlier the conditions in sections 290-70, 290-75 and 290-80 of the ITAA 1997 must be satisfied in order to claim a deduction in respect of an employer superannuation contribution. Failure to satisfy one condition will result in the inability to claim a deduction under subsection 290-60(1).

The condition under section 290-70 of the ITAA 1997 has not been satisfied. Therefore, it is not necessary to consider whether the remaining conditions under sections 290-75 and 290-80 have also been satisfied.

As the condition under section 290-70 of the ITAA 1997 has not been satisfied, the Company is unable to claim a deduction under subsection 290-60(1) in relation to any superannuation contributions made in respect of the taxpayer in the 2010-11 income year.

Financing costs on loans to make superannuation contributions

Section 26-80 of the ITAA 1997 deals with financing costs on loans to pay superannuation contributions and states:

(1) You can only deduct under this Act a financing cost connected with a contribution you make to a superannuation plan if you can deduct the contribution under Subdivision 290-B.

(2) A financing cost connected with a contribution is expenditure incurred to the extent that it relates to obtaining finance to make the contribution, including:

(a) interest, and payments in the nature of interest; and

(b) expenses of borrowing.

Therefore while the Company is able to borrow money to make superannuation contributions, it is not able to deduct the interest on those borrowings where it cannot claim a deduction in respect of those contributions.

As the Company is unable to claim a deduction under subsection 290-60(1) of the ITAA 1997 in the 2010-11 income year, any financing cost connected with that contribution will similarly not be able to be claimed as a deduction under section 26-80.

Decline to rule in respect of the 2013-14, 2014-15 and 2015-16 income years

Under Schedule 1 section 357-110(1) of the Taxation Administration Act 1953, if the correctness of a private ruling would depend on assumptions which are made about a future event or other matter the Commissioner may decline to rule or make appropriate assumptions.

In this case, the Commissioner declines to make a ruling as he would be required to make assumptions about possible legislative changes and factual changes relating to the taxpayer's situation in the 2013-14, 2014-15 and 2015-16 income years. The Commissioner is not prepared to make such assumptions.

Issue 2

Summary

The non-residency status of the taxpayer will not be affected by any superannuation contributions made by the Company in respect of the taxpayer.

Detailed reasoning

The relevant view which applies to determining residency for Australian residents leaving Australia to work overseas is Taxation Ruling IT 2650 entitled 'Income Tax: Residency - Permanent place of abode outside Australia'.

IT 2650 does not state that superannuation contributions being made for a non-Government employee is a relevant consideration in determining his/her residency status. On this basis, the fact that the Company makes superannuation contributions in respect of the taxpayer does not in itself affect the taxpayer's non-residency status.

Further issues for you to consider

There have been amendments to section 23AG of the Income Tax Assessment Act 1936 effective from 1 July 2009 that may affect the assessability in Australia of the taxpayer's earnings overseas if the taxpayer is considered an Australian resident.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).