Edited version of private ruling

Authorisation Number: 1011653125175

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Ruling

Subject: Deduction for Personal Superannuation Contributions

Question 1

Are the workers' compensation incapacity payments you received in the 2009-10 income year included in the maximum earnings test in section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Can you claim a deduction in respect of your personal superannuation contributions 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

You are aged between 55 and 65 years of age, and you retired from your employment with the employer during the 2004-05 income year.

You ceased all employment at the time you retired from the employer, and you have not engaged in any employment activity since your retirement.

Upon your retirement you commenced receiving workers' compensation incapacity payments from a government entity. These payments will continue to be paid until you reach your retirement age.

The entity does not make any employer superannuation contributions for your benefit or on your behalf. The entity also does not provide for any salary sacrifice of these workers' compensation incapacity payments to superannuation.

During the 2009-10 income year you received regular workers' compensation incapacity payments.

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

You will disclose the workers' compensation incapacity payments as salary and wages in your income tax return for the 2009-10 income year. You have yet to lodge this income tax return.

In addition, you received two superannuation pensions during the 2009-10 income year.

In respect of the first superannuation pension, a PAYG payment summary-superannuation income stream issued for the 2009-10 income year discloses an untaxed element of a taxable component, a non-assessable non-exempt amount, a tax offset amount and PAYG withholding amounts withheld during this income year.

In relation to the second superannuation pension, a PAYG payment summary-superannuation income stream issued for the 2009-10 income year discloses an untaxed element of a taxable component, a tax offset amount and PAYG withholding amounts withheld during this income year.

Your assessable income for the 2009-10 income year includes the assessable amounts of your superannuation pensions and your workers' compensation incapacity payments. In addition to these amounts, your assessable income in this income year included income from interest, franked and unfranked dividends, franking credits, a trust distribution, foreign sourced income and a net capital gain.

You received no reportable fringe benefits from another source in the 2009-10 income year. No salary sacrifice contributions were made for your benefit to a complying superannuation fund in this income year.

You made personal superannuation contributions to a complying superannuation fund (the fund) during the 2009-10 income year, in order to obtain superannuation benefits for yourself.

You intend to claim a deduction in respect of these personal contributions. You lodged with the fund trustee a notice of intent to claim the deduction.

In the second quarter of the 2010-11 income year you received a written notice from the fund trustee, acknowledging receipt of your notice of intent to claim the deduction.

In addition to the deduction for your personal contributions, you also intend to claim dividend deductions, and deductions for gifts or donations and the cost of managing your tax affairs.

The amount remaining after the total of these deductions are subtracted from your assessable income will be your taxable income for the 2009-10 income year.

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

Superannuation Guarantee (Administration) Act 1992 Subsection 6(1)

Superannuation Guarantee (Administration) Act 1992 Section 11

Superannuation Guarantee (Administration) Act 1992 Subsection 12(1).

Reasons for decision

Summary

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

Your workers' compensation incapacity payments are not considered to be attributable to activities that result in you being treated as an employee in the 2009-10 income year. Therefore the payments do not constitute income from an employment activity in this income year.

Hence the payments are not included in the maximum earnings test in determining your eligibility to claim a deduction for your personal contributions. This means you can claim a deduction for the personal contributions you made in this 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 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.

During the 2009-10 income year you made personal superannuation contributions to a complying superannuation fund (the fund), in order to obtain superannuation benefits for yourself.

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 you made the personal contributions is a complying superannuation fund. Therefore, you satisfy 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 you can claim a deduction for the contributions you 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) of the ITAA 1997):

· 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) of the ITAA 1997).

The maximum earnings test does not apply to you

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 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, you retired from your previous employment with the employer during the 2004-05 income year. From this time you have been receiving workers' compensation incapacity payments from a government entity. These payments will continue to be paid until you reach your retirement age.

Upon your retirement you ceased all employment, and you have not engaged in any employment activity since your retirement.

Most of your gross assessable income for the 2009-10 income year is made up of the assessable amounts of two superannuation pensions. The remainder of your assessable income is comprised of the worker's compensation payments and other income.

In Superannuation Guarantee Ruling SGR 2009/2 entitled 'Superannuation guarantee: meaning of the terms "ordinary time earnings" and "salary or wages"' the Commissioner confirms that workers compensation payments made where no work is performed are neither 'ordinary time earnings' nor 'salary and wages' as defined in subsection 6(1) and section 11 of the SGAA respectively, in respect of which the Superannuation Guarantee Charge is payable by an employer.

In relation to workers compensation payments where an employee is not required to work, the Commissioner states, in paragraph 76 of SGR 2009/2, that:

Workers' compensation payments made by or on behalf of an employer to an employee who is not required to attend work due to incapacity, or whose employment has been terminated, are not salary or wages.

In this instance, you are not involved with the entity making the periodic workers' compensation incapacity payments, except for being the recipient of the payments where no work is performed.

You received the payments since your retirement during the 2004-05 income year. As noted above, you will continue to receive the payments whilst not performing work until you reach your retirement age.

As you have not been an employee of any employer since your retirement during the 2004-05 income year, you are not an employee for the purposes of the SGAA.

Therefore you were 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:

Those persons who have not engaged in an 'employment' activity in the income year in which they make a contribution, such as persons who although receiving workers' compensation payments are not employed at any time during the year, 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.

Because you were 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. This means the employment activity condition does not apply to you in this income year.

Accordingly the workers' compensation incapacity payments are not subject to the maximum earnings test in this income year.

Therefore section 290-160 of the ITAA 1997 does not apply to you in the income year in which the personal contributions were made, and you do not need to meet the maximum earnings test in relation to these contributions.

Hence these payments are not included in the maximum earnings test in determining your eligibility to claim a deduction for your personal 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 you were aged between 55 and 65 years of age when you made the contributions, you satisfy this requirement.

Notice of intent to deduct conditions

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

Ÿ your client is a member of the fund

Ÿ 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)

Ÿ the fund trustee has not begun to pay a superannuation income stream based on the contribution, or

· before the notice is given:

Ÿ a contributions splitting application has not been made in relation to the contribution; and;

Ÿ the fund trustee has not rejected the application.

You lodged with the fund trustee a notice of intent to claim a deduction in respect of your personal contributions. You have yet to lodge an income tax return for the 2009-10 income year. Therefore you lodged the notice of intent with the trustee before a tax return for this income year was lodged.

In the second quarter of the 2010-11 income year you received a written notice from the fund trustee, acknowledging receipt of the notice of intent in respect of the personal contribution.

It is accepted from the facts that your notice covering these contributions was valid.

In this situation, your notice of intent for the 2009-10 income year was lodged correctly and was duly acknowledged by the fund trustee. Therefore you have 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, you stated the amount of the tax deduction you claimed in respect of your personal contributions in your notice of intent. You will claim this amount as a tax deduction in your income tax return for the 2009-10 income year. As the tax deduction you intend to claim does not exceed the amount specified in your notice for this income year, you 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 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.

In addition to the deduction for your personal contributions, you also intend to claim other deductions, which are not for previous years tax losses or for farm management losses.

The amount remaining after the total of these deductions are subtracted from your assessable income will be your taxable income for the 2009-10 income year. It is quite clear that the deduction for your personal contributions will not create a loss in this income year.

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

As you satisfy all the applicable conditions in subdivision 290-C of the ITAA 1997, you can claim a deduction for the personal contributions you made in the 2009-10 income year.

The amount of this deduction will be a concessional contribution in the 2009-10 financial year. As you are over age 50, this amount will be counted towards your annual concessional contributions cap of $50,000 for this financial year.

You will not claim a deduction for the remainder of your personal contributions. Therefore this portion will be counted towards your non-concessional contributions cap of $150,000 for the 2009-10 financial year.

Further issues for consideration

As previously advised, periodic workers' compensation payments made where no work is performed are not 'salary and wages' in respect of which the Superannuation Guarantee Charge is payable by an employer. However, the manner in which the payments are disclosed in an income tax return is separate and distinct from the treatment of the payments for Superannuation Guarantee (SG) purposes.

At page 5 of TaxPack 2010, the Commissioner states that question 1 of the 2009-10 income tax return is about salary and wages shown on a PAYG Payment Summary-individual non-business, from which tax is withheld. The Commissioner further states that income disclosed as salary and wages at this question includes amounts for lost salary and wages paid under a workers' compensation scheme.

The workers' compensation incapacity payments are shown as gross payments on the PAYG Payment Summary-individual non-business for the 2009-10 income year which was issued by the entity making the payments. Tax was withheld from the payments, which represent amounts for lost salary and wages paid under a workers' compensation scheme where no work is performed.

Although the payments are not 'salary and wages' for SG purposes, the payments are salary and wages for the purposes of completing question 1 of the 2009-10 income tax return. Therefore the payments should be shown as salary and wages at question 1 of the return for this income year.

However as previously advised, the payments are not taken into account as assessable income in determining your eligibility to claim a deduction for your personal superannuation contributions.