Edited version of private ruling

Authorisation Number: 1011604892047

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Ruling

Subject: Deduction for Personal Superannuation Contributions

Questions

1. Is the payment received in the 2009-10 income year from employment activities undertaken in the 2007-08 income year, included in the maximum earnings test in section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

2. Can your client claim a deduction in respect of a personal superannuation contribution for the 2009-10 income year under section 290-150 of the ITAA 1997?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

Your client, who is over age 55 but under age 65, was diagnosed with a medical condition a number of years ago. Your client underwent medical treatment after the medical condition was diagnosed.

Your client was unable to work because of the medical condition. Your client applied for retirement from the employer. Retirement was granted at the end of the 2007-08 income year (the retirement date). During the time the employer was assessing your client's retirement application, your client received pre-assessment payments through the employer's payroll system.

Your client retired on the retirement date, and your client has not worked since the retirement date.

Several weeks later your client commenced receiving a superannuation pension.

Your client has a superannuation account in a complying superannuation fund (the fund). Your client made a personal superannuation contribution to the fund in early 2010. Your client lodged with the fund trustee a notice of intent to claim a deduction for the full amount of the contribution.

In mid June 2010, the employer advised your client that after a review of the payroll before the retirement, an error in your client's pre-assessment payments had been discovered, and as a result, your client was entitled to a payment in arrears. Tax was withheld from the payment, and a net payment was made to your client a number of weeks later. The employer also issued a PAYG Payment Summary-individual non-business for the 2009-10 income year in respect of the payment.

Your client's assessable income for the 2009-10 income year is comprised of the payment in arrears from the employer, the superannuation pension and investment income. The investment income is comprised of interest, franked and unfranked dividends, franking credits, a trust distribution, foreign sourced income, other income and a net capital gain. Your client's intended deduction for the personal contribution will not create a loss in this income year.

Your client derived no reportable fringe benefits in the 2009-10 income year, and your client has no reportable employer superannuation contributions for this income year.

Your client received a written notice from the fund trustee in mid July 2010, acknowledging receipt of the notice of intent in respect of the personal contribution. In the advice letter your client was advised that of the total personal contributions for the period ended 30 June 2010 (including deducted and undeducted contributions), the personal contribution your client made during this income year are already covered by a valid notice, and that total deductions equal to the full amount of the personal contribution are included in previous deduction notices.

Your client has yet to lodge an income tax return for the 2009-10 income year.

Relevant legislative provisions

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

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 Subsection 290-165(2),

Income Tax Assessment Act 1997 Section 290-170,

Income Tax Assessment Act 1997 Section 290-175 and

Income Tax Assessment Act 1997 Subsection 292-25(2).

Reasons for decision

Summary

The maximum earnings test does not apply to your client in the 2009-10 income year, because your client was not engaged in an employment activity in the income year in which your client made the personal superannuation contribution.

The payment in arrears your client received from the employer is not considered to be attributable to activities that result in your client being treated as an employee in the 2009-10 income year.

Although the payment is assessable in the year of receipt, the payment does not constitute income from an employment activity in this income year.

Accordingly the payment is not included in the maximum earnings test in determining your client's eligibility to claim a deduction for the personal contribution.

As your client satisfies all the required conditions in the legislation, the contribution is fully tax deductible, and a concessional contribution, in the 2009-10 income year.

Detailed reasoning

Personal superannuation contributions made in the 2009-10 income year

From 1 July 2007, a person 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). However, all the applicable conditions in subdivision 290-C of the ITAA 1997 must be satisfied for the person to be able to claim the deduction.

These conditions are explained in detail in Taxation Ruling TR 2010/1 (TR 2010/1) entitled 'Income Tax: superannuation contributions'. TR 2010/1 explains some aspects of the rules in Division 290 of the ITAA 1997 that apply if a personal superannuation contribution is to be allowed as an income tax deduction.

Your client made a personal superannuation contribution to a complying superannuation fund (the fund) in early 2010, in order to obtain superannuation benefits.

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 also be satisfied for you to deduct the contribution.

Complying superannuation fund condition

Section 290-155 of the ITAA 1997 states that:

If a contribution is made to a superannuation fund, it must be a complying superannuation fund for the income year of the fund in which you made the contribution.

The superannuation fund into which your client made the personal contribution is a complying superannuation fund. Therefore, your client satisfies this requirement.

Maximum earnings as an employee condition

As noted above, subsection 290-150(2) of the ITAA 1997 provides that the conditions in section 290-160 of the ITAA 1997 (if applicable) must be satisfied before your client can claim a deduction for the contribution your client made in the 2009-10 income year.

The maximum earnings test prescribed in section 290-160 is commonly known as the '10% test'. In short, for those persons who are engaged in any 'employment' activities in an income year, a deduction can only be claimed where the sum of assessable income, reportable fringe benefits total, and (from 1 July 2009) reportable employer superannuation contributions attributable to the 'employment' activities is less than 10% of the total of the person's assessable income, reportable fringe benefits total and reportable employer superannuation contributions in the income year that the contribution is made. The term 'reportable employer superannuation contributions' includes salary sacrifice contributions made for the person's benefit in that year.

Subsection 290-160(1) of the ITAA 1997 applies the maximum earnings test 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 (paragraph 290-160(1)(b)).

The maximum earnings test does not apply to your client

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 Superannuation Guarantee (Administration) Act 1992 (SGAA), as specified in paragraph 290-160(1)(b) of the ITAA 1997.

In this situation, your client retired at the end of the 2007-08 income year (the retirement date), and your client has not worked since the retirement date.

Prior to the retirement, your client received pre-assessment payments from the employer. Several weeks after the retirement, your client commenced receiving a superannuation pension.

In mid June 2010, the employer advised your client of an entitlement to a payment in arrears. The payment was made to your client a number of weeks later. The payment did not relate to any employment activities with the employer in the 2009-10 income year. Rather the payment was related to employment activities undertaken by your client in the 2007-08 income year.

Most of your client's assessable income for the 2009-10 income year is made up of the superannuation pension. The remainder of your client's assessable income is comprised of the payment in arrears from the employer and investment income.

In this instance, your client did not engage in any employment with the employer during the 2009-10 income year. The employer made the payment in arrears to your client after a review of their payroll had discovered an error in your client's pre-assessment payments before the retirement. The payment was made only after this error was discovered.

Based on the above, your client was not engaged in employment at any time during the 2009-10 income year. Therefore, your client was not engaged in any of the employment activities listed in paragraph 290-160(1)(a) of the ITAA 1997 in this income year. As a result, your client was not an employee for the purposes of the SGAA, and the requirement in paragraph 290-160(1)(b) of the ITAA 1997 is not satisfied in this year.

In paragraph 58 of TR 2010/1 the Commissioner states that those persons who have not engaged in an 'employment' activity in the income year in which they make a contribution are not subject to the maximum earnings test.

Example 8 - maximum earnings test in paragraphs 88 and 89 of TR 2010/1 provides an example similar to your client's situation as follows:

88. Caitlin terminates her employment with Bling Pty Ltd on 30 June 2009 and was paid unused long service leave and annual leave on 3 July 2009. Caitlin made a contribution of $5,000 to her complying superannuation fund on 9 July 2009. Caitlin was not engaged in any employment activities for the 2009-10 income year.

89. As Caitlin was not engaged in any employment activities in the 2009-10 income year, she does not need to meet the earnings test in relation to her $5,000 contribution.

As your client was not engaged in an employment activity in the 2009-10 income year, the criteria of subsection 290-160(1) of the ITAA 1997 are not satisfied. Thus the employment activity condition does not apply to your client in this income year.

Accordingly section 290-160 of the ITAA 1997 does not apply to your client in the income year in the personal contribution was made, and your client does not need to meet the maximum earnings test in relation to the personal contribution.

Therefore the payment in arrears, while included in your client's assessable income in the 2009-10 income year (the year of receipt), is not included in the maximum earnings test in determining your client's eligibility to claim a deduction for the contribution.

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. As your client was under age 65 when your client made the contribution in early 2010, your client satisfies this requirement.

Notice of intent to deduct conditions

Section 290-170 of the ITAA 1997 provides that your client must give to the trustee of the superannuation fund (the fund trustee) a valid notice, in the approved form, of an intention to claim a deduction in respect of the contribution. The notice must be given by the earlier of the date your client lodges an income tax return or the end of the income year following the year in which the contribution was made. Your client must also have been given an acknowledgment of receipt of the notice by the fund trustee.

A notice will be valid as long as the following conditions are satisfied:

· the notice is in respect of the contribution;

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

· at the time when the notice is given:

o your client is a member of the fund;

o the fund trustee 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 fund trustee 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 fund trustee has not rejected the application.

Your client lodged with the fund trustee a notice of intent to claim a deduction for the full amount of the contribution. Your client has yet to lodge an income tax return for the 2009-10 income year.

Therefore your client lodged the notice of intent with the trustee before a return for this income year was lodged.

Your client received a written notice from the fund trustee in mid July 2010, acknowledging receipt of the notice of intent in respect of the personal contribution.

In the advice letter the fund trustee advised your client that the contribution was covered by a valid notice. It is accepted from the facts that your client's notice covering the contribution was valid.

In this case your client's notice of intent for the 2009-10 income year was lodged correctly and was duly acknowledged by the fund trustee. Therefore your client has satisfied the notice of intent to deduct condition in section 290-170 of the ITAA 1997.

Deduction limited by amount specified in notice

Subsection 290-175 of the ITAA 1997 states that the deduction cannot be more than the amount covered by the notice given under section 290-170 of the ITAA 1997.

As noted above, the amount of the deduction your client claimed in the notice was the full amount of the contribution your client made to the fund in early 2010. As the amount of the deduction your client will claim does not exceed the amount specified in the notice of intent for this income year, your client also satisfies this requirement.

Deduction limits

From 1 July 2007, the previous age-based limits on deductions for personal superannuation contributions have been abolished. As a result a person can now claim a full deduction for the amount of the contribution made.

However, 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 losses) from a taxpayer's assessable income. Thus a deduction for personal superannuation contributions cannot add to or create a loss.

You have advised that your client's intended deduction for the contribution will not create a loss. In this light, it is accepted that the deduction for the contribution will not create a loss in this case.

Deduction for the personal superannuation contribution

As your client satisfies all the required conditions in subdivision 290-C of the ITAA 1997, your client can claim a deduction in the 2009-10 income year for the entire personal contribution your client made to the fund in this income year.

Concessional contributions

From 1 July 2007 until 30 June 2009, concessional contributions made to superannuation funds are subject to an annual cap of $50,000. As noted earlier, the age-based limits on deductions that existed prior to 1 July 2007 no longer apply.

However, from 1 July 2009, the concessional contributions cap was reduced. For a person under age 50 on 30 June 2010, the new concessional contributions cap is $25,000. The reduced annual cap is subject to indexation.

For a person who is aged 50 or over on 30 June 2010, the cap of $50,000 is now a transitional concessional contributions cap. In this case, because your client is over age 50 in the 2009-10 income year, the transitional concessional contributions cap of $50,000 will apply. This annual cap is not indexed.

Concessional contributions include personal contributions claimed as a tax deduction by a person (subsection 292-25(2) of the ITAA 1997). As your client's personal contribution in the 2009-10 income year is fully tax deductible, the contribution is a concessional contribution in this income year.

Further issues for consideration

The payment in arrears is derived by your client when the payment is received. The payment is included in your client's assessable income in the year of receipt, in accordance with subsection 6-5(2) of the ITAA 1997.

Although the payment was related to employment activities undertaken by your client in the 2007-08 income year, the payment cannot be treated as assessable income in this income year, because your client received the payment just before the end of the 2009-10 income year.

As your client received the payment in the 2009-10 income year, the payment is assessable in this income year. There is no discretion available to the Commissioner to treat the payment as being assessable to your client in the 2007-08 income year. The payment constitutes salary and wages in your client's hands, even though your client was retired at the time the payment was received.

However as previously advised, the payment is not taken into account as assessable income in determining your client's eligibility to claim a deduction for the contribution.