ATO Interpretative Decision

ATO ID 2002/89 (Withdrawn)

Superannuation

• This ATO ID is withdrawn from the database because it contains a view in respect of Division 14 of Part III of the Income Tax Assessment Act 1936 and Part 5A of the Income Tax Regulations 1936 (the RBL provisions). The RBL provisions do not apply for the 2007-08 income year and later income years. This ATO ID continues to be a precedential view in respect of decisions for income years up to, and including, the 2006-07 income years.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the amounts requested for the relevant three consecutive years reasonable arm's length salaries for the taxpayer and can the taxpayer have arm's length salaries greater than the arm's length salaries previously allowed by the Commissioner?

Decision

The amounts requested for the relevant three consecutive years are reasonable arm's length salaries for the taxpayer and the taxpayer can have arm's length salaries greater than the arm's length salaries previously allowed by the Commissioner.

Facts

The taxpayer applied for the determination of an arm's length salary.

The taxpayer's remuneration package consisted of actual salaries and employer superannuation contributions for the requested three consecutive years. No fringe benefits were received by the taxpayer, in those years. The taxpayer sacrificed significant amounts of salary for superannuation.

The taxpayer is an associated employee and Administration Director of a company which had a low gross income. The taxpayer worked an average of more than 50 hours per week..

The Commissioner consulted the remuneration survey published by a widely recognised remuneration consultant.

The Commissioner considered that the nature of the taxpayer's employment was comparable to that of a Principal Administration Executive ("PAE") under the remuneration tables of the survey.

The upper quartile salary for PAEs who work more than 50 hours per week is established under the tables. This amount represents the total salary package paid to employees performing comparable duties.

There were a high level of risks and responsibilities associated with the position.

Arm's length salaries were determined by the Commissioner and informed to the taxpayer. A Highest Average Salary ("HAS") was calculated to reflect these arm's length salaries.

The taxpayer has now applied for a review of these arm's length salaries.

The taxpayer claims that the arm's length salaries should be valued at a rate higher than previously allowed.

The determination of the arm's length salaries were reviewed by the Commissioner and a new HAS was calculated to reflect these revised arm's length salaries.

Reasons for Decision

Subregulation 47(1) of the Income Tax Regulations 1936 ("ITR 1936") defines "salary" for reasonable benefit limits purposes to include salary, wages, commissions, bonuses, fees, allowances or gratuities paid to a person during a financial year.

Superannuation contributions and fringe benefits are not included in the definition of "salary". Under subparagraph 47(3)(c)(ii) of the ITR 1936 an arm's length salary is the salary that would have been paid to an employee if the employee had not been an associate of the employer.

In determining an appropriate arm's length salary for an individual, the Commissioner relies on the remuneration figures from a remuneration survey published by a widely recognised remuneration consultant.

A 15% bonus to cover the risks and responsibilities associated with the taxpayer's position with the company was allowed and was added to the remuneration survey salary figure.

The remuneration survey salary figure was reduced by the same proportion as the taxpayer had sacrificed actual salary to superannuation. These amounts were deducted from the total salary package in order to arrive at a "salary" as defined under subregulation 47(1) of the ITR 1936.

Given the individual merits of this case and the unique contribution made by the taxpayer in the performance of the taxpayer's duties within the company, as verified by the casing points detailed in the remuneration report, the Commissioner, having regard to subregulations 47(3) and 47(4), is now of the opinion that the amounts requested for the relevant three consecutive years are reasonable arm's length salaries for the taxpayer. Therefore the taxpayer can have arm's length salaries greater than the arm's length salaries previously allowed by the Commissioner.

Legislative References:
Taxation Administration Act 1953
   Section 14ZL
   Section 14ZQ
   Section 14ZU
   Paragraph 14ZW(1)(c)
   Section 14ZY
   Section 14ZZ

Keywords
Salary sacrifice
Reasonable benefit limits
Transitional RBLs
Highest average salary

Business Line:  Superannuation

Date of publication:  30 January 2002

ISSN: 1445-2782