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Authorisation Number: 1012369854160

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Ruling

Subject: Deduction for personal superannuation contributions - maximum earnings as an employee condition

Question

Are payments for unused annual and long service leave together with a severance payment and payment in lieu of notice counted for the purposes of the maximum earnings as an employee condition under section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

You have stated your client received the following payments from their employer following their position being made genuinely redundant:

You would like to know which amounts count towards 'income from employment' for the purposes of the 'maximum earnings as an employee' condition for the 2011-12 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 290-160.

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-170(2)

Income Tax Assessment Act 1997 Subsection 83-170(3)

Reasons for decision

Summary

The payments for unused annual leave, unused long service leave, salary and reportable employer superannuation contributions will count towards 'income from employment' for the purposes of the maximum earnings as an employee condition for the 2011-12 income year.

Whether the severance payment and payment in lieu of notice your client received count towards 'income from employment' for the purposes of the condition depends on whether the amounts include a tax-free part of a genuine redundancy payment.

Detailed reasoning

Maximum earnings as an employee condition:

The condition in section 290-160 of the ITAA 1997 requires that if a taxpayer is engaged in any activities that result in them being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA), then less than 10% of the total of the following must be attributable to those activities:

· their assessable income for the income year;

· their reportable fringe benefits for the income year; and

· the total of their reportable employer superannuation contributions for the income year.

Paragraph 64 of Taxation ruling 2010/1 (TR 2010/1) details the amounts that are attributable to an 'employment' activity and to be taken into account as assessable income in the maximum earnings as an employee condition. These include:

· the salary or wages (as used in its ordinary meaning) for the activity;

· allowances and other payments earned by an employee;

· the other payments, such as commission, director's remuneration and contract payments, that are treated as salary or wages by section 11 of the SGAA for those persons who engage in an 'employment' activity in a capacity other than a common law employee;

· an employment termination payment received by a person in consequence of the termination of their employment; and

· workers' compensation and like payments made because of injury or illness received by a person while holding the employment, office or appointment the performance of which gave rise to the entitlement to the compensation payments.

Assessable income

Based on the above, the amounts your client received as salary will count towards 'income from employment' for the purposes of the maximum earnings as an employee condition (the condition). Further, as unused annual leave is assessable under section 83-10 of the ITAA 1997 and both payments for unused long service leave are 100% assessable under section 83-80 of the ITAA 1997, these too are counted towards 'income from employment' for the purposes of the condition.

Employment termination payments

Whether the severance payment and payment in lieu of notice your client received count towards 'income from employment' for the purposes of the condition depends on whether the amounts include a tax-free part of a genuine redundancy payment.

If the payments are found to satisfy all of the conditions for genuine redundancy under section 83-175 of the ITAA 1997, they will be accepted as a genuine redundancy payment.

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 2011-12 income year:

Base amount means $8,435;

Service amount means $4,218; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

Any amount in excess of the tax-free cap amount for the 2011-12 income year will be taxed as an employment termination payment and will be counted towards 'income from employment' for the purposes of the condition.

Reportable employer superannuation contributions

The reportable employer superannuation contributions will count towards 'income from employment' for the purposes of the maximum earnings as an employee condition.

Please note, as an individual taxpayer, your client is reporting their income on a cash basis. This means that revenues are reported when received and expenses are claimed when paid. As such, there is no apportionment available for the unused annual leave and long service leave despite part of the amounts having been accrued in prior years.

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