Edited version of administratively binding advice

Authorisation Number: 1011488967925

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Subject: employer employee relationship

Are directors who are appointed by their employer to represent their interest on a board of directors of an unrelated entity, considered employees of that entity for the purposes of the Superannuation Guarantee (Administration) Act (SGAA)?

No, please refer to our reasons for decision.

This advice applies for the following period/s:

Period ending 30 June 2010

Period ending 30 June 2011

The arrangement commences on:

1 July 2009

Relevant facts and circumstances

This advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on Tax Office advice.

You manage an entity which is a statutory body corporate with a board of directors.

Directors are entitled to be paid fees, allowances and expenses which are determined by a government body.

Certain directors are appointed to be board as a result of their employment with their employer. These directors, as part of the terms of employment with their employer, are not entitled to the directors' fees and must remit their directors fees to their employer.

For these directors, you deposit the directors' fees directly into the bank account of their employer.

Contention

In your correspondence you made the following contentions.

Section 6-5 of the Income Tax assessment Act 1997 (ITAA 1997) states a taxpayer's assessable income includes their ordinary income derived directly or indirectly. Directors' fees are ordinary income. Therefore, whether the directors' fees should be included in the assessable income of the directors depends on whether the directors or their employers derived these fees.

The Commissioner initially considered this issue in relation to partners in professional partnerships who are appointed as directors. In Taxation Determination TD 97/2, the Commissioner stated that generally where the partnership agreement requires a partner to pass on the directors' fees to the partnership, the directors' fees are not included in the assessable income of the partner. The Commissioner acknowledges such appointments are common practice, the partner will usually require the approval of the other partners prior to accepting the appointment and the partnership agreement will usually require the directors' fees to be paid into the partnership account.

The Commissioner distinguishes the circumstances where fees are required to be included in the partner's assessable income as follows:

If the appointment as director is either as agent for the partnership or resulted from the opportunity arising from a partnership business connection, any directors' fees received by the partner are received in the capacity as trustee for the partnership. While the individual partner may have legal entitlement to the directors' fees, the beneficial entitlement rests with the partnership. Consequently, the directors' fees are income of the professional partnership and the partner is not an employee of the paying company for the purposes of the PAYE provisions of the Income Tax Assessment Act 1936 or the Superannuation Guarantee (Administration) Act 1992 (SGAA).

In the case where an appointment as a director is unrelated to the partner's membership of the professional partnership, the individual partner is beneficially entitled to any directors' fees, notwithstanding any agreement to pay the directors' fees over to another.

In Class Ruling CR 2002/56 the Commissioner applied the principles in TD 72/2 to employees of the RMIT University.

Paragraph 10 of CR 2002/56 provides details of the relevant arrangement. It presents that from time to time employees of the University are offered directorships or consultancies by organisations outside the University. These positions are offered because of the individual's association with the University and the perceived prestige and resources that this link will bring to the organisation. The University considers that the appointments arise within the scope of the person's duties as employees of the University.

Paragraph 11 of CR 2002/56 further states that any payments for the services of the outside appointees will where possible be made directly to the University. If this cannot be done, the outside appointees will pass on to the University any payment they receive.

The Commissioner ruled that the fees paid to employees of the University which are either passed on to the University (where received by the employee) or paid directly to the University, do not form part of the assessable income of the employee. You also quoted paragraphs 15 to 18 as important factors of that decision:

The employees of the University have taken up outside directorships and consultancies because they are employees of the University. The opportunity to do so arose from the employee's relationship with the University as it was based on the University's reputation within the private sector. The University regards the outside appointees as holding the appointment in the course of their employment with the University.

Where the directors' or consultancy fees are paid directly to the University, the outside appointees do not derive income from the fees as the fees are not received by them. The appointees are required to pass on any directors'/consultancy fees received from their outside appointment to the University. The fiduciary relationship between the outside appointee and the University is such that should the fees not be passed on, the University will be able to sue for recovery of those fees. The fees are not the income of the outside appointees but that of the University.

If the outside appointees have a legal entitlement to the fees, they hold those fees in a constructive trust for the University. They do not have beneficial ownership of those fees.

For income tax purposes, a person holding an amount of income as constructive trustee for another person is not the beneficial owner of that income and cannot be regarded as having derived that income. It follows that they are not assessable on that income.

It is your view that the principles set out by the Commissioner in TD 97/2 and CR 2002/56 should apply to the directors' fees paid by the board where the directors are required to remit their fees to their employer for the following reasons:

· The board is required to have a representation in key areas as set above.

· Directors are appointed on the basis of their experience and background in the required areas of representation which often coincides with their field of employment. Consequently certain directors are appointed to the board as a result of their employment with their employer.

· The appointment of the director to the board of unrelated entity is considered to be another service provided by the employer or an extension of the usual business activities of the employer, due to the activities of the unrelated entity and the services it provides to employers.

· The directors are required under their employment contracts to remit the directors' fees to their employer.

· While the individual directors may have a legal entitlement to the directors' fees, they hold the fees in constructive trust and therefore the beneficial entitlement rests with their employer.

Consequently, it is your view that the directors are not the beneficial owners of the directors' fees and cannot be regarded as having derived that income. Therefore, the directors' fees are not assessable income for the directors.

The following contentions had been made in respect of the superannuation guarantee obligations.

Subsection 12(2) of the SGAA expands the ordinary meaning of an employee as follows:

A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate.

The Commissioner issued Superannuation Guarantee Determination SGD 97/1 which addresses the factual situation considered in TD 97/2. In SGD 97/1 the Commissioner considers that the partner will not generally be considered an employee of the company if the partner:

· contracts on behalf of his or her partnership to provide directorship services to a company; and

· must pass on any directors' fees to the partnership as required by the partnership agreement.

It is your view that the principles set out by the Commissioner in SGD 97/1 should apply to the directors' fees paid by the unrelated entity where the directors are required to remit these fees to their employer.

For the same reasons as noted previously, it is your view that the directors' hold the fees in constructive trust for their employer and the fees are therefore derived by the employer and not by the director. It follows that the directors are not entitled to payment for their services and should not be regarded as employees of unrelated entity for the purposes of the SGAA. The unrelated entity therefore does not have to pay any superannuation contributions under the SGAA in this situation.

Your contentions have been taken into consideration.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 Section 12.

Superannuation Guarantee (Administration) Act 1992 Subsection 12(2).

Reasons for decision

Summary

The directors appointed by their employer to represent the employer's interest on the board of directors of an unrelated entity are not employees of that entity as these directors are required, in accordance with their employment agreements, to pass on any fees they earn to their employer.

Accordingly, the unrelated entity does not have any obligation, under the SGAA, to pay superannuation contributions to these directors.

Detailed reasoning

The SGAA requires that an employer must provide a prescribed minimum level of superannuation support for their employees (unless the employees are exempt employees) or pay the superannuation guarantee charge (SGC). 

Under the SGAA, an employer will be liable to the SGC where the employer does not make the required level of superannuation contributions, for the benefit of an employee, to a complying superannuation fund or retirement savings account.

Section 12 of the SGAA provides an interpretation of employee and employer. It states, the terms employer and employee have their ordinary common law meanings that are extended further by subsections 12(2) to 12(11) of the SGAA to expressly cover other persons like members of a board of directors.

In your case, you argue that in accordance with principles established in SGD 97/1 directors appointed by their employer to sit on the board of directors of an unrelated entity, to represent the interest of their employer, are not employees of that entity as these directors are appointed to the board as a result of their employment with their employer.

The appointment of these directors to the board is considered to be another service provided by the employer - an extension of the regular business activities of the employer.

The directors are required to remit the directors' fees to their employer under their employment contracts where they receive them directly. In your case, you advised us, the unrelated entity will pay the directors' fees directly to the bank account of the employer of the appointed directors.

Paragraph 1 of the SGD 97/1 states:

A partner would not be an employee of the company for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA) if the partner:

· contracts on behalf of his or her partnership to provide directorship services to a company; and

· must pass on any directors' fees to the partnership as required by the partnership agreement

Paragraph 13 of the Superannuation Guarantee Ruling SGR 2005/1 extends this principle to individuals performing work for another party through an entity such as a company. It states:

Where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual….

Accordingly, based on the provided information we accept that the directors appointed by their employer to represent the employer's interest on the board of directors of an unrelated entity are not employees of that entity as these directors are required, in accordance with their employment agreements, to pass on any fees they earn to their employer.

There is no employee-employer relationship between these directors and unrelated entity for the purposes of the SGAA.

The appointment of these directors to the board of directors of the unrelated entity represents another form of service they provided on behalf of their employer.

Accordingly, the unrelated entity does not have any obligation, under the SGAA, to pay superannuation contributions to these directors.