Edited version of private ruling

Authorisation Number: 1011627176084

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Ruling

Subject: Deduction for Personal Superannuation Contributions

1. Is the payment received in the 2009-10 income year from employment activities undertaken in the 2005-06 income year, included in the maximum earnings test in section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

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

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 was over age 55 but under age 65 during the 2009-10 income year, retired from employment with a company at the end of the third quarter of the 2005-06 income year. In a letter issued during the first quarter of the 2010-11 income year, the company confirmed your client's retirement on the retirement date, and advised that your client has not been employed by the company since that date. Since the retirement date, your client has been a self-funded retiree and has not engaged in any employment activity.

Also in this letter, the company stated that since the retirement your client has from time to time, received deferred bonus payments from the company. The company further stated that your client's entitlement to these deferred bonuses is contingent upon the performance of shares in another company. The company also stated that these deferred bonus payments relate entirely to your client's employment up to the retirement date.

During the 2009-10 income year your client received a deferred bonus payment from the company.

Tax was withheld from the bonus payment.

A PAYG Payment Summary-individual non-business was issued by the company for the 2009-10 income year. The PAYG payment summary shows no reportable fringe benefits and no reportable employer superannuation contributions, and discloses gross payments made and PAYG withholding amounts withheld by the company during this income year.

Your client's assessable income for the 2009-10 income year is comprised of the bonus payment and investment income.

Your client received no reportable fringe benefits from a source other than the company in the 2009-10 income year. No salary sacrifice contributions were made for your client's benefit to a complying superannuation fund in this income year.

Your client made personal superannuation contributions to a complying self-managed superannuation fund (the fund) in the 2009-10 income year. Your client made these personal contributions in order to obtain superannuation benefits.

Your client intends to claim a deduction in respect of these personal contributions. The deduction will not create a loss in the 2009-10 income year.

Your client has yet to provide the fund trustee with a notice of intent to claim a deduction in respect of the contributions.

Your client has yet to obtain a written notice for the 2009-10 income year from the fund trustee acknowledging receipt of your client's notice of intent in respect of these contributions.

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

Assumptions

Your client will provide a written notice to the trustee of the fund (the fund trustee) in accordance with section 290-170 of the Income Tax Assessment Act 1997 (ITAA 1997), stating that your client intends to claim a deduction in respect of the contributions your client made in the 2009-10 income year.

Your client will obtain a written notice for the 2009-10 income year from the fund trustee acknowledging receipt of your client's notice of intent in respect of these contributions.

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 Subsection 290-165(2)

Income Tax Assessment Act 1997 Section 290-170

Income Tax Assessment Act 1997 Section 290-175.

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 deferred bonus payment your client received is not considered to be attributable to activities that result in your client being treated as an employee in the 2009-10 income year. As the bonus payment is not income from an employment activity, the payment is not subject to the maximum earnings test in this income year.

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

Your client can claim a deduction in respect of the personal contributions your client made during the 2009-10 income year, provided your client gives a valid notice of intent to claim the deduction to the fund trustee, the fund trustee acknowledges your client's notice, and the deduction your client will claim for the contributions does not add to or create a loss.

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 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 personal superannuation contributions to a complying self-managed superannuation fund (the fund) in the 2009-10 income year, 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 contributions 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.

Superannuation Guarantee Ruling SGR 2005/1 (SGR 2005/1) entitled 'Superannuation guarantee: who is an employee?' explains when an individual is considered by the Commissioner to be an 'employee' for the purposes of the SGAA.

In paragraph 21 of SGR 2005/1 the Commissioner explains that subsection 12(1) of the SGAA 'defines the term "employee" as having its ordinary meaning - that is, its meaning under common law'.

The Commissioner further notes, at paragraph 8, that if a worker is held to be an employee at common law, then they will be an employee under the SGAA.

In other words, the simple fact of being a common law employee results in an individual being treated as an employee for the purposes of the SGAA.

In this situation, your client retired from previous employment with a company at the end of the third quarter of the 2005-06 income year. In a letter issued during the first quarter of the 2010-11 income year, the company confirmed your client's retirement on the retirement date, and advised that your client has not been employed by the company since that date. Since that time, your client has been a self-funded retiree and has not engaged in any employment activity.

During the 2009-10 income year your client received a deferred bonus payment from the company.

Your client's assessable income for the 2009-10 income year is comprised of the bonus payment and investment income.

In relation to the bonus payment, the company also stated in its confirmation letter that since the retirement your client has from time to time, received deferred bonus payments. The company further stated that your client's entitlement to these deferred bonuses is contingent upon the performance of shares in another company. The company also stated that these deferred bonus payments relate entirely to your client's employment up to the retirement date.

Your client is not involved with the company, except for being the recipient of the bonus payments.

These payments are based on income derived from shares in another company, and are not based on work your client performed after the retirement. Your client has received these bonus payments since the retirement during the 2005-06 income year.

The bonus payment did not relate to any 'employment' activities with the company in the 2009-10 income year. Rather the payment was related to employment activities previously undertaken by your client in the 2005-06 income year. As your client had retired during the 2005-06 income year, your client had no employment activity with the company in the 2009-10 income year, and the payment is not attributable to employment in that year.

As your client has not been an employee of the company or any other employer since the retirement in the 2005-06 income year, your client was not an employee for the purposes of the SGAA. Therefore your client was not engaged in any of the employment activities listed in paragraph 290-160(1)(a) of the ITAA 1997 in the 2009-10 income year. As a result, the requirement in paragraph 290-160(1)(b) of the ITAA 1997 is not satisfied.

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.

Accordingly, the employment activity condition not does apply to your client, and the deferred bonus payment is not subject to the maximum earnings test, in this income year. Therefore, section 290-160 of the ITAA 1997 does not apply to your client in the income year in the personal contributions were made, and your client does not need to meet the maximum earnings test in relation to these contributions.

This means the bonus payment is not included in the maximum earnings test in determining your client's eligibility to claim a deduction for these contributions.

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 at the time your client made the contributions, 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 has yet to provide the fund trustee with a notice of intent to claim a deduction of in respect of the contributions, and the fund trustee has yet to issue an acknowledgment of receipt of the notice of intent in respect of the contributions. Your client has yet to lodge an income tax return for the 2009-10 income year.

In paragraph 264 of TR 2010/1 the Commissioner notes that a person may choose how much of their contributions to deduct and this notice is used to give effect to that choice.

It is assumed that your client will provide a valid notice of intent to the fund trustee in accordance with section 290-170 of the ITAA 1997, and that the fund trustee will duly acknowledge the receipt of this notice. Based on these assumptions the notice of intent to deduct conditions under section 290-170 will be satisfied in this instance.

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.

Your client intends to claim a deduction for the personal contributions your client made to the fund during the 2009-10 income year. Thus it is accepted that the amount of the deduction that will be claimed will not exceed the amount specified in his section 290-170 notice. Therefore, your client will also satisfy 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 superannuation 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. Therefore, a deduction for personal superannuation contributions cannot add to or create a loss.

You have advised that your client's intended deduction for the contributions will not create a loss.

In this light, it is accepted that the deduction for the contributions will not create a loss in this case.

Deduction for the personal contributions made in the 2009-10 income year

As your client will satisfy all the applicable conditions in Subdivision 290-C of the ITAA 1997, your client will be entitled to claim a deduction for the personal contributions your client made in the 2009-10 income year. This amount will be a concessional contribution in the 2009-10 financial year, and will be counted towards your client's annual concessional contributions cap of $50,000 for this financial year.

Non-concessional contributions

Also from 1 July 2007, non-concessional contributions made to complying superannuation funds are subject to an annual cap. For the 2009-10 financial year, the non-concessional contributions cap is $150,000. Non-concessional contributions include personal contributions for which an income tax deduction is not claimed.

It is noted that your client will not claim a deduction for the remainder of the personal contributions.

Therefore, this portion will be counted towards your client's non-concessional contributions cap for the 2009-10 financial year.

Further issues for consideration

Acceptance of your client's contributions by the fund in the 2010-11 financial year

Your client is now 65 years of age. Therefore, the fund trustee may need to consider whether the fund can accept any contributions your client may make in the 2010-11 financial year, under subregulation 7.04(1) of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

There are two major categories of contributions: mandated contributions and non-mandated contributions.

Mandated contributions are contributions made by an employer under a law or an industrial agreement for the benefit of a fund member. These include:

· contributions made by employers to meet their obligations under the SGAA

· superannuation guarantee shortfall components

· award-related contribution, and

· some payments from the superannuation holding accounts special account.

Non-mandated contributions include voluntary superannuation contributions such as:

· contributions made by employers over and above their SGAA or award obligations

· personal contributions made by employees

· personal contributions made by self-employed people, and

· other personal contributions and spouse contributions.

For members aged 65 but less than 70, a complying superannuation fund may only accept non-mandated contributions where (item 2 of subregulation 7.04(1)):

· the member is gainfully employed on at least a part-time basis, and

· the member has quoted their tax file number (TFN).

Under subregulation 7.01(1) of the SIS Regulations a person is gainfully employed on a part-time basis during a financial year if the person was gainfully employed for a least 40 hours in a period of not more than 30 consecutive days in that financial year.

Under subregulation 1.03(1) of the SIS Regulations 'gainfully employed' is defined as meaning:

employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

The issue of a complying superannuation being able to accept contributions is discussed by the Australian Prudential Regulation Authority (APRA) in APRA Superannuation Circular I.A.1, entitled Contribution and Benefit Accrual Standards for Regulated Superannuation Funds. At paragraph 22 the Circular states:

'Gainfully employed' means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. The concept of 'gain or reward' envisages receipt of remuneration such as salary or wages, business income, bonuses, commissions, fees or gratuities, in return for personal exertion.

Consequently, to enable the fund to accept any personal contributions your client proposes to make in the 2010-11 financial year, your client will need to be gainfully employed on at least a part-time basis during this financial year. Where your client is engaged in any employment activities during this financial year, any income that is attributable to your client's employment in this financial year will be subject to the maximum earnings test, in determining whether your client is eligible to claim a deduction for the contributions.