Edited version of private advice

Authorisation Number: 5010088097103

Date of advice: 16 June 2023

Ruling

Subject: Reportable employer superannuation contributions

Question

Will additional contributions made by XXX on behalf of eligible employees, to cover the cost of premiums and fees for insurance cover be reportable employer superannuation contributions (RESC), pursuant to subsection 16-182 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Summary

The additional contributions to provide insurance cover for eligible employees will be RESC because the employee has the capacity to control the size of the contribution through being able to reduce or cancel the insurance cover.

Facts and circumstances

From 1 May 2022, XXX introduced a new benefit for employees, by arranging Group Life and Total & Permanent Disablement insurance cover.

For FY22 reporting purposes, XXX disclosed the additional superannuation contributions as RESC.

The insurance cover is provided:

a)            To eligible employees, being permanent and fixed term employees (full-time or part-time) who are under the age of 65 and an Australian citizen, permanent resident, or valid Visa holder.

b)            Regardless of the employee's choice (or lack of choice) as to their superannuation fund. Prior to 1 May 2022, the benefit was only offered to employees who chose (by default or otherwise) XXX's default superannuation fund (and such contributions were treated as RESC). They reported the contributions as RESC in line with ATO ID 2010/112.

c)            Through a superannuation fund that offers insurance-only benefits.

The contribution to fund the premiums and fees associated with the insurance cover is calculated by the insurer, based on each eligible employee's membership in the XXX group plan and level of cover. The arrangement is not one where, for example, XXX is offering to make contributions to match premiums for other insurance that may be provided in the employee's chosen superannuation fund.

The additional contributions to cover the cost of premiums and fees is paid by XXX to the separate insurance-only fund. XXX's mandated employer superannuation contributions (and any salary sacrifice contributions) continue to be made to the employee's chosen superannuation fund.

The employee's salary is not reduced as a result of XXX making these additional contributions.

Eligible employees do not have the opportunity to increase or reduce the level of insurance cover.

In accordance with the requirements of the insurance product ruling, employees may opt out of receiving the insurance cover. However, given that this is a free benefit provided to employees as part of XXX's employee benefits package, it is unlikely that employees will cancel their cover. Where an employee does opt out, it will not result in a corresponding increase in the employee's salary or wages.

Detailed reasoning

XXX[1] have explained that they introduced a new policy of contributing an amount in respect of each eligible employee to cover the insurance premiums and fees as part of the employees' benefit package. The insurance is provided through XYZ Group Insurance product[2] which is an insurance-only product. The amount of the premium is calculated by the insurer based on each eligible employee's membership and their level of cover.

An amount contributed for an individual by their employer or an associate of the employer to a complying superannuation fund will be a RESC to the extent that either or both of the following points apply:

•                     the individual has or has had, or might reasonably be expected to have or have had, the capacity to influence the size of the amount;

•                     the individual has or had or might reasonably be expected to have or have had, the capacity to influence the way the amount was, is or will be contributed so that his or her assessable income is reduced.[3]

However, an individual will not be treated as having or to reasonably be expected to have the capacity to influence the size of the amount where:

•                     the employer is required to contribute the amount by an industrial instrument or the rules of a superannuation fund and

•                     the employee did not have the capacity to influence either the requirement to contribute or the size of the amount that was included in the rules or the instrument.[4]

XXX have advised that for the purposes of the ruling request it can be assumed that the policy is not included in the rules of the superannuation fund. A similar assumption was not provided in relation to whether the additional contributions are made under an industrial instrument. They have contended that the policy of including the additional insurance may be considered an industrial agreement. However, for the purposes of the TAA, 'industrial instrument' is defined as:

a)            an Australian law; or

b)            an award, order, determination or industrial agreement in force under an Australian law[5]

which would not include an internal policy document.

An employee cannot increase or reduce the level of insurance cover provided under the policy, however in accordance with the requirements of the insurance product ruling the employee may opt out of receiving the insurance cover.[6] The XYZ Group Insurance product disclosure statement (PDS) indicates that a member may 'reduce or cancel' their cover at any time.

The insurance cover is to be provided to all eligible employees irrespective of whether mandated superannuation contributions (and any salary sacrifice contributions) are paid to the employer's default fund or their chosen fund. The contributions do not reduce the employees' salary.

Given that the additional contributions made to provide the insurance cover will not reduce the employee's assessable income[7], are not included in the employees assessable income[8] and were not provided under an industrial agreement or rules of the superannuation fund[9], whether or not the additional contributions to provide insurance cover will be RESC turns solely on whether the individual has, or might reasonably be expected to have or have had, the capacity to influence the size of the amount[10].

ATOID 2010/112[11] considered whether insurance premiums paid for an employee were RESC, however the facts were materially different in that the employer only made the additional contribution where superannuation contributions were made to the employers nominated fund (either by the inaction of the employee or their active choice).[12]

However, it is relevant that the decision reached in ATOID 2010/112 includes the reasoning that it is the individual employee who makes the decision whether the contributions are made to the employer-nominated fund or the fund chosen by the employee, and it is that decision that influences the amount of the contributions made by the employer on the employee's behalf. This is because the level of contribution will be a lower amount as the employer only pays additional contributions where contributions are made to the employer-nominated account. Even though the level of cover is determined between the employer-nominated fund and the employer, the employee has the capacity to influence the size of the contribution through their choice of fund.

That reasoning can be applied equally to the facts of this request. That is, a decision by the employee to reduce their level of cover or opt-out of the insurance cover is a decision that influences the size of the contribution that will be made by the employer. The employee can reduce or cancel their cover at any time by contacting the fund administrator and therefore has the capacity to influence the size of the contribution to be made by the employer.

XXX have contended that an employee 'is generally' considered to have a capacity to influence if they can directly negotiate with the employer the amount of contributions, altering what would otherwise be required to be made under a legislative or legal requirement. This would be relevant in the context of examining an industrial instrument that provided for additional contributions. In that case, a relevant consideration would be whether or not the employee can directly negotiate the amount of the contribution compared to an industrial instrument where the employer makes additional contributions at a set rate for all employees. [13]

There is nothing that would require that the meaning given to 'capacity to influence' in the context of the RESC provision more generally should be interpreted to require direct negotiation with the employer. In line with the reasoning in ATO ID 2010/112, where a decision can be made by the employee that will affect the size of the contributions it would amount to a capacity to influence the size of the contribution.

Further, ATO ID 2010/112 includes additional reasoning for the decision based on particular facts of that case that mirror the facts in this referral, being that, in the event contributions are made to the employer nominated fund, an employee may decrease their level of insurance cover and thereby they will have the capacity to influence the size of the contribution made by the employer.

XXX have also contended that it is unlikely that an employee would cancel the insurance cover as it is a 'free benefit' as part of the employee benefits package. While it is the ability of the employee to reduce or cancel the insurance cover that is relevant, rather than their likelihood of exercising that option, it is noted that there may be reasons that an employee may choose to reduce or cancel their cover. Irrespective of whether the additional contributions are RESC, an employee may consider doing so if the additional contributions would cause the employee to exceed their concessional contributions cap or in the case of a high-income earner, have Division 293 implications.

[1] XXX is a collective reference to five separate employers in the XXX group of companies; separate but identical requests have been made for each of the five entities

[2]The product is for employees of XXX and associated companies

[3] Subsection 16-182(1) of Schedule 1 to the TAA

[4] Subsection 16-182(5) of Schedule 1 to the TAA

[5] Subsection 3AA(3) of the TAA provides that an expression in Schedule 1 has the same meaning as in the ITAA 1997. 'Industrial instrument' is defined subsection 995-1(1) of the ITAA 1997

[6] The requirement that a member have the option to cancel or vary their insurance cover at any time is a commitment under the Insurance in Superannuation Voluntary Code of Practice - see the Introduction and clause 4.18

[7] Paragraph 16-182(1)(d) of Schedule 1 to the TAA

[8] Subsection 16-182(2) of Schedule 1 to the TAA

[9] Subsection16-182(5) of Schedule 1 to the TAA

[10] Paragraph 16-182(1)(c) of Schedule 1 to the TAA

[11] ATO ID 2010/112 Superannuation - Reportable employer superannuation contributions: additional superannuation contributions made by an employer

[12] As per the Background, prior to May 2022 the XXX policy reflected the facts in ATO ID 2010/112

[13] See examples 3.1 and 3.2 of the explanatory memorandum to Tax Laws Amendment (2009 Measures No. 1) Bill 2009

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