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Ruling

Subject: personal deductible superannuation contributions

Question 1

Is the taxpayer eligible to claim a deduction under section 290-150 of the Income Tax Assessment Act 1997 (ITAA 1997) for personal superannuation contributions in the 2011-12 income year?

Answer

No.

This ruling applies for the following period:

2011-12 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The taxpayer is over 65 years old.

The taxpayer is employed overseas.

The contract of employment between the taxpayer and the non-Australian resident employer covers the 2011-13 income years, with the option to extend by mutual agreement.

The employer is a non-Australian resident employer and does not provide any superannuation support for the taxpayer.

The majority of the taxpayer's assessable income for the 2011-12 income year will be comprised of foreign salary and wages paid by the non-Australian resident employer.

The taxpayer's assessable income for the 2011-12 income year will also include interest income, gross rental income and Commonwealth Superannuation income.

The taxpayer made a personal superannuation contribution in the 2011-12 income year to a complying superannuation fund (the Fund).

The taxpayer also contributed an amount via a salary sacrifice agreement.

The taxpayer will lodge a valid notice of intent to deduct the contribution within the prescribed time period under subsection 290-170(1) of the ITAA 1997.

The taxpayer is a resident of Australia, as indicated in their income tax return for the year ended 30 June 2011.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 290-150.

Income Tax Assessment Act 1997 section 290-155.

Income Tax Assessment Act 1997 section 290-160.

Income Tax Assessment Act 1997 section 290-165.

Income Tax Assessment Act 1997 section 290-170.

Income Tax Assessment Act 1936 section 23AG

Superannuation Guarantee (Administration) Act 1992 section 12.

Superannuation Guarantee (Administration) Act 1992 section 27.

Reasons for decision

Summary

Based on the information provided, the taxpayer is not entitled to claim a deduction for personal superannuation contributions made in the 2011-12 income year.

Detailed reasoning

Personal superannuation contributions made in the 2011-12 income year

An individual can claim a deduction for personal contributions made to a superannuation fund for the purpose of providing superannuation benefits for themselves under section 290-150 of the Income Tax Assessment Act 1997 (ITAA 1997), provided certain conditions are met.

Subsection 290-150(2) of the ITAA 1997 provides that the conditions in sections 290-155, 290-160 (if applicable), 290-165 and 290-170 of the ITAA 1997 must all be satisfied before the person can claim a deduction for the contributions made in that income year.

It is important to note, that the current test for the deductibility of personal superannuation contributions does not include the level of employer superannuation support a person receives or should have received.

Complying superannuation fund condition

The condition in section 290-155 of the ITAA 1997 requires that where the contribution is made to a superannuation fund, it must be made to a complying superannuation fund for the income year of the fund in which the contribution is made.

In this case, the taxpayer has made a personal superannuation contribution to the Fund. The Fund is a complying superannuation fund and therefore, the requirements of section 290-155 of the ITAA 1997 are satisfied.

Maximum earnings as an employee condition

Section 290-160 of the ITAA 1997 states:

(1) This section applies if:

(a) in the income year in which you make the contribution, you engage in any of these activities:

(i) holding an office or appointment;

(ii) performing functions or duties;

(iii) engaging in work;

(iv) doing acts or things; and

(b) the activities result in you being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (assuming that subsection 12(11) of that Act had not been enacted).

(2) To deduct the contribution, less than 10% of the total of the following must be attributable to the activities:

(a) your assessable income for the income year;

(b) your reportable fringe benefits total for the income year;

(c) the total of your employer superannuation contributions for the income year.

Under section 290-160 of the ITAA 1997, if an individual is engaged in an 'employment' activity in the income year in which the person makes a contribution, they will need to meet the maximum earnings test.

A person will be engaged in an 'employment' activity if they are engaged in an activity in the income year that results in them being treated as an employee for the purposes of the SGAA.

Superannuation Guarantee Ruling 2005/1 entitled Superannuation guarantee: who is an employee? (SGR 2005/1) explains when an individual is considered to be an employee under section 12 of the SGAA.

Paragraph 21 of SGR 2005/1 makes the following comments in relation to who is an 'employee':

The SGAA defines 'employee' in section 12. The definition is both a clarifying and extending provision. Subsection 12(1) defines the term 'employee' as having its ordinary meaning - that is, its meaning under common law. If a worker is held to be an employee at common law, then they will be an employee under the SGAA...

As noted previously, an employee has its ordinary meaning under common law. A person is engaged in an employment activity when they are physically carrying out the obligations and duties of the job or work and receive a payment in the form of salary or wages in return for labour or services.

As stated in your private ruling application, the taxpayer:

· is currently employed overseas by a non-Australian resident employer and

· will receive foreign source salary income whilst overseas.

The contract between the employer (the contract) and the taxpayer clearly provides that an offer of employment was made to and accepted by the taxpayer for the 2011-13 income years. This contract clearly identifies the existence of an employer/employee relationship between the taxpayer and the current employer and that the employee will be paid salary or wages for the labour of the taxpayer during the relevant period.

In the application of the maximum earnings test, the relevant employment activity need not be an activity in Australia. Paragraph 251 of Taxation Ruling TR 2010/1 entitled Income tax: superannuation contributions provides:

The SGAA does not contain any territorial nexus that limits which individuals will be treated as employees for the purposes of the SGAA. The practical limits of the application of the SGAA are created through the modification of the meaning of salary or wages in section 27 of the SGAA. That section ensures that amounts received, for example, by a non-Australian resident employee working outside Australia or an Australian resident employed by a non-resident employer to work outside Australia are not taken into account as salary or wages when working out whether an employer has an individual superannuation guarantee shortfall for an employee.

Employment income of an Australian resident employed overseas by a foreign employer will therefore be counted in the maximum earnings test if the income is assessable income.

Based on the above, the taxpayer is clearly engaged in work or other activities that result in the taxpayer being treated as an employee in the 2011-12 income year for the purposes of the SGAA.

The 'maximum earnings test' requires that less than 10% of the total of the contributor's assessable income, reportable fringe benefits total and total reportable employer superannuation contributions for the income year is attributable to their employment related activities.

In this case, income paid by the non-Australian resident employer to the taxpayer is assessable income for the purposes of the maximum earnings test and for the purposes of what constitutes assessable income to be declared in the income tax return of the taxpayer.

It should be noted that, under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), foreign earnings derived from certain activities by an Australian resident taxpayer may be exempt from being included in assessable income. This section however, only applies to a very small category of overseas workers. For example, if the foreign earnings are attributable to Australia's overseas aid program, a relief fund or an exempt institution, the foreign earnings will be exempt.

In this case, as the foreign income derived by the taxpayer is not attributable to any of the exemptions under section 23AG(1AA) of the ITAA 1936, the taxpayer's income derived whilst working for the non-Australian resident employer is not exempt.

As noted previously, when activities result in a taxpayer being treated as an employee for the purposes of the SGAA, then the total of the contributor's assessable income, reportable fringe benefits total and total reportable employer superannuation contributions for the income year attributable to their employment related activities, must be less than 10% of their total assessable income, reportable fringe benefits and reportable employer superannuation contributions in order for the taxpayer to claim a deduction for a personal contribution.

Assessable income

The facts of this case indicate that the taxpayer is an Australian resident. The contract of employment covers the 2011-13 income years.

As indicated on their income tax return for the year ended 30 June 2011, the taxpayer considers they are an Australian resident.

The assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

As stated in your application, the taxpayer will receive income assessable in Australia in the 2011-12 income year, including foreign salary income, superannuation and investment income.

As mentioned previously, the taxpayer also contributed to superannuation via a salary sacrifice agreement.

Therefore, the taxpayer's total assessable income, reportable fringe benefits and reportable employer superannuation contributions has been calculated.

The taxpayer's assessable income, reportable fringe benefits total and total reportable employer superannuation contributions for the income year attributable to their employment related activities has also been calculated.

The percentage of the taxpayer's assessable income, reportable fringe benefits and reportable employer superannuation contributions attributable to his employment related activities for the year exceeds 50%.

As such, the taxpayer's assessable income, reportable fringe benefits total and total reportable employer superannuation contributions for the income year attributable to his employment related activities, is greater than the 10% threshold.

As the taxpayer fails to satisfy the maximum earnings test of subsection 290-160(2) of the ITAA 1997, a deduction for personal superannuation contributions is not available in the 2011-12 income year.

Having failed the maximum earnings test, there is no need to examine whether the conditions of sections 290-165 and 290-170 of the ITAA 1997 would be satisfied by the taxpayer, as the taxpayer must satisfy all the tests specified in section 290-150.

Conclusion:

The taxpayer does not satisfy the maximum earnings test under subsection 290-160(2) of the ITAA 1997 and is not eligible to claim a deduction under section 290-150 of the ITAA 1997 for personal superannuation contributions in the 2011-12 income.

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