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Ruling

Subject: Deduction for personal superannuation contributions

Question

Can you claim a tax deduction for personal superannuation contributions made to a superannuation fund in the relevant income year under section 290-150 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period

2012-13 income year

The scheme commenced on

1 July 2012

Facts

You were a part owner of a private company.

Your position was that of principal, director and shareholder.

In the X income year, you suffered an illness and as a result you left your employment in the Y income year.

You state that on termination of your employment you received all unused annual leave and long service leave entitlements. You provided a copy of the PAYG payment summary for the Y income year.

You have an income protection insurance policy (the policy) with an insurance company.

You made a claim for payment under the policy.

You commenced receiving monthly payments under the policy in the X income year.

You advised that you are a part owner of a business (the business). You work for this business and derive a small amount of income per month. You salary sacrificed the monthly payment to a complying superannuation fund. You intend to sell the business in the relevant income year. You will not be working for the business after the conclusion of the sale.

You advised that your employment income will not exceed a specified percentage of your total assessable income in the relevant income year.

Your estimated income for the relevant income year is as follows:

· income replacement benefits

· trauma benefits

· interests

· dividends

· reportable employer superannuation contribution

· distribution from the business

You intend to make a maximum contribution including the salary sacrifice amount to a complying superannuation fund and wish to claim a maximum deduction without creating a loss.

You intend to make the contributions for the purpose of providing superannuation benefits for yourself or for your dependants if you die before or after becoming entitled to the benefits.

You will provide the trustee of the superannuation fund the required notice of intent to claim a deduction for your personal contributions and the trustee of the superannuation fund will acknowledge that notice.

You are under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 26-55(2)

Income Tax Assessment Act 1997 Section 290-150

Income Tax Assessment Act 1997 Subsection 290-150(2)

Income Tax Assessment Act 1997 Section 290-155

Income Tax Assessment Act 1997 Section 290-160

Income Tax Assessment Act 1997 Subsection 290-160(1)

Income Tax Assessment Act 1997 paragraph 290-160(1)(a)

Income Tax Assessment Act 1997 paragraph 290-160(1)(b)

Income Tax Assessment Act 1997 Subsection 290-160(2)

Income Tax Assessment Act 1997 Section 290-165

Income Tax Assessment Act 1997 Subsection 290-165(2)

Income Tax Assessment Act 1997 Section 290-170

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 26-55(2)

Reasons for decision

Summary

You will be eligible to claim a deduction in respect of the personal contributions to be made during the relevant income year, provided:

· your employment income does not exceed a certain percentage of your total assessable income;

· you give the trustee of the superannuation fund the required notice of intent to deduct;

· the trustee of the superannuation fund acknowledges that notice; and

· the deduction does not add to or create a loss.

The deduction claimed is a concessional contribution in this income year.

Detailed reasoning

Personal deductible superannuation contributions:

A person can claim a deduction for personal contributions made to a superannuation fund for the purpose of providing superannuation benefits for themselves,(or their dependants after their death) under section 290-150 of the Income Tax Assessment Act 1997 (ITAA 1997).

However, 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 must all be satisfied before the person can claim a deduction for the contributions made in that income year. These conditions are explained in detail in Taxation Ruling TR 2010/1 (TR 2010/1) entitled 'Income Tax: superannuation contributions'.

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, you have advised that you propose to make a contribution to a superannuation fund which is a complying superannuation fund. Therefore, this requirement will be satisfied.

Maximum earnings as an employee condition

Subsection 290-160(1) of the ITAA 1997 operates to apply the maximum earnings as an employee condition only if, in the income year in which the contribution is made, the person is engaged in any of the following activities (paragraph 290-160(1)(a)):

· holding an office or appointment (for example, a director of a company);

· performing functions or duties;

· engaging in work;

· doing acts or things; and

the activities result in that person being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

For those persons who are engaged in any 'employment' activities in the 2012-13 income year, subsection 290-160(2) of the ITAA 1997 prescribes that a deduction for personal contributions can only be claimed where the sum of their:

· assessable income

· reportable fringe benefits total and

· reportable employer superannuation contributions

attributable to the 'employment' activities is less than 10% of the total of that person's assessable income, reportable fringe benefits and reportable employer superannuation contributions. The term 'reportable employer superannuation contributions' includes salary sacrifice contributions made for the person's benefit in that income year. This calculation is referred to as the 'maximum earnings test'.

In TR 2010/1, the Commissioner discusses the operation of the maximum earnings as employee condition.

The maximum earnings as an employee condition will not prevent a deduction for you

The employment activity condition outlined in subsection 290-160(1) of the ITAA 1997 has two parts. To satisfy this condition, therefore, a taxpayer must both:

· engage in any of the employment activities specified in paragraph 290-160(1)(a) of the ITAA 1997, and

· as a result be treated as an employee for the purposes of the SGAA, as specified in paragraph 290-160(1)(b) of the ITAA 1997.

You were a part owner of a private company. You worked for your business. Due to illness, you subsequently terminated this employment in the Y income year.

You have an income protection policy (the policy) with an insurance company. You commenced to receive payments from the policy in the Y income year. In accordance with the terms of the policy, a major trauma benefit will be paid in conjunction with the income replacement benefits. The trauma benefits will be paid as long as you continue to receive the income replacement benefits. The purpose of the trauma benefit is to provide an amount to the inured if the insured suffers a specified medical condition as diagnosed and certified by a registered medical practitioner and agreed to by the insurer.

As stated in the facts, you are also a part owner of a business (the business). You derived income per month from this business. You salary sacrificed the monthly payment to a complying superannuation fund. You will sell your business in the relevant income year. You advised that your employment income from the business will not exceed a certain percentage of your total assessable income for the relevant income year.

You advised that you have previously request a private ruling in respect of the assessability of the trauma benefits. It was determined by the Commissioner, the trauma benefits you received under the policy are not assessable income under subsection 6-5(2) of the ITAA 1997.

It should be noted that although the income protection payments are paid to replace the salary and wages normally earned, they do not, in themselves, represent salary and wages.

Salary and wages are paid as a reward for services performed under a contract of employment. Income protection payments do not relate to the performance of services under a contract of employment but rather are paid under an insurance policy upon the happening of an event specified under the policy in your case, ill-health.

Accordingly, income received from an insurance company under an income protection policy is not income that is attributable to employment as an employee, nor would the payment from the insurance company result in the person being treated as an employee of the insurance company. The person is simply an insurance policy holder and even though the income protection payments are made to replace assessable income, it is merely a pay-out on a policy purchased from an insurance company. There is no employment relationship attached to the payments from the insurance company, and as a result, payments received under an income protection insurance policy would not need to be included in the 10% rule.

In your case, the income replacement benefits and the trauma benefits are excluded from the 10% rule. Consequently, provided your employment income, reportable superannuation contributions and reportable fringe benefits is less than 10% of your total assessable income, section 290-160 of the ITAA 1997 will not operate to prevent you from claiming a deduction for the proposed contribution you intend to make to a complying superannuation fund in the relevant income year.

Age-related conditions:

Under subsection 290-165(2) of the ITAA 1997 the ability to claim a deduction ceases for contributions that are made after 28 days from the end of the month in which the person making the contribution turns 75 years of age.

You meet this age-related condition.

Notice of intent to deduct conditions:

Section 290-170 of the ITAA 1997 requires a person to provide a valid notice of their intention to claim the deduction to the trustee of their superannuation fund. The notice must be given before the earlier of:

· the date you lodge your income tax return for the income year in which the contribution was made; or

· the end of the income year following the year in which the contribution was made.

In addition, you must also have been given an acknowledgement of the notice by the trustee of the superannuation fund.

A notice will be valid as long as the following conditions apply:

· the notice is in respect of the contributions;

· the notice is not for an amount covered by a previous notice;

· at the time when the notice is given:

o you are a member of the fund or the holder of the retirement savings account (RSA);

o the trustee or RSA provider holds the contribution (for example, a notice will not be valid if a partial roll-over of the superannuation benefit which includes the contribution covered in the notice has been made);

o the trustee or RSA provider has not begun to pay a superannuation income stream based on the contribution; or

· before the notice is given:

o a contributions splitting application has not been made in relation to the contribution; and;

o the trustee or RSA provider to which you made the application has not rejected the application.

This condition will be satisfied if you give the trustee of the superannuation fund the required notice of intent to deduct and the trustee of the superannuation fund acknowledges that notice.

Deduction limits:

The allowable deduction is limited under subsection 26-55(2) of the ITAA 1997 to the amount of assessable income remaining after subtracting all other deductions (excluding previous years' tax losses and any deductions for farm management deposits) from a taxpayer's assessable income. Thus a deduction for personal superannuation contributions cannot add to or create a loss in the relevant income year the deduction is to be claimed.

You confirm that the deduction for personal superannuation contributions you intend to claim under section 290-150 of the ITAA 1997 will not add to or create a loss in the relevant income year.

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