Edited version of private ruling

Authorisation Number: 1011674667918

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Ruling

Subject: Deduction for Personal Superannuation Contribution

1. Is the superannuation lump sum death benefit of $D your client received in the 2010-11 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 a personal superannuation contribution for the 2010-11 income year under section 290-150 of the ITAA 1997?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

Your client and your client's spouse are the nominated beneficiaries of the deceased's accrued benefits in a superannuation fund, after their child (the deceased) died tragically.

A superannuation lump sum death benefit was paid directly to your client by the trustee of this fund in respect of the deceased in mid July 2010. A Superannuation Lump Sum Payment Summary for the year ending 30 June 2011 discloses that tax was withheld from the non-dependent death benefit, and that the death benefit is comprised of a taxed element of a taxable component and an untaxed element of a taxable component.

Your client, who is under 55 years of age, is a partner in a partnership which conducts a business.

In the 2010-11 income year your client will derive a distribution of net income from the partnership.

In addition to the amounts already noted above, your client will also receive interest and rental income in the 2010-11 income year. Your client will receive no reportable fringe benefits, and no salary sacrifice contributions will be made for your client's benefit to a complying superannuation fund, in this income year.

During the 2010-11 income year your client intends to make a personal contribution to a complying superannuation fund (the fund). Your client proposes to make the contribution for the purpose of providing superannuation benefits for your client or for your client's dependants if your client dies before or after becoming entitled to these benefits.

Your client intends to claim a deduction for the full amount of the personal contribution. You have advised that this deduction will not add to or create a loss in the 2010-11 income year.

You have advised that your client will provide a written notice of intent to deduct contributions to the fund trustee, stating an intent to claim a deduction in respect of the contribution your client will make in the 2010-11 income year.

You have also advised that your client will receive a notice for the 2010-11 income year from the fund trustee acknowledging receipt of your client's notice of intent in respect of this contribution.

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

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 2010-11 income year because your client is not engaged in an employment activity in the income year in which your client will make the personal superannuation contribution.

The superannuation lump sum death benefit your client received is not considered to be attributable to activities that result in your client being treated as an employee in the 2010-11 income year.

Although the taxable component of the death benefit is assessable income in your client's hands, the death benefit payment does not constitute income from an employment activity in this income year. Accordingly the death benefit 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 for the personal contribution your client will make in the 2010-11 income year, provided your client gives a notice of intent to the fund trustee before an income tax return for this income year is lodged or by 30 June 2012, whichever is the earlier. The contribution will be a concessional contribution in this income year.

Detailed reasoning

Personal superannuation contributions made in the 2010-11 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'.

During the 2010-11 income year your client intends to make a personal contribution to a complying superannuation fund (the fund). Your client proposes to make the contribution for the purpose of providing superannuation benefits for your client or for your client's dependants if your client dies before or after becoming entitled to these 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 will make the personal contribution is a complying superannuation fund. Therefore, your client will 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 your client can claim a deduction for the contribution he makes in this 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 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 income 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 (SGAA) (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 SGAA, as specified in paragraph 290-160(1)(b) of the ITAA 1997.

Your client is self-employed as a partner with your client's spouse in a partnership which conducts a business.

Your client received a superannuation lump sum death benefit from another superannuation fund. The death benefit payment was made directly to your client by the trustee of this fund in respect of their child (the deceased), who had died tragically. The payment did not relate to any employment activities in the 2010-11 income year. Rather your client received the payment as a nominated beneficiary of the deceased's accrued benefits in this fund.

Most of your client's assessable income for the 2010-11 income year will be made up of this death benefit, which is comprised of a taxed element of a taxable component and an untaxed element of a taxable component. The remainder of your client's assessable income will be comprised of a distribution of net income from the partnership, interest and rental income.

In this situation, your client is not engaged in any employment with the trustee of this fund in the 2010-11 income year. The death benefit in respect of the deceased was paid to your client by the trustee because of the deceased's death.

Based on the above, your client is not engaged in employment at any time during the 2010-11 income year. Therefore, your client is 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 is 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 is not engaged in an employment activity in the 2010-11 income year, the criteria of subsection 290-160(1) of the ITAA 1997 are not satisfied. Thus the employment activity condition not does 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 is made, and your client does not need to meet the maximum earnings test in relation to the personal contribution.

Therefore, the taxable component of the death benefit, while included in your client's assessable income in the 2010-11 income year, 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 will be under 55 years of age at the time the proposed contribution will be made to the fund, your client will satisfy the age-related conditions.

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:

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.

Your client intends to claim a deduction for the full amount of the personal contribution. You have advised that your client will lodge with the fund trustee a notice of intent to claim the deduction.

You have also advised that your client will receive a written notice from the fund trustee acknowledging receipt of your client's notice of intent in respect of the contribution.

Provided your client lodges a valid notice of intent with the fund trustee before an income tax return for the 2010-11 income year is lodged or by 30 June 2012, whichever is the earlier, the notice of intent to deduct conditions under section 290-170 of the ITAA 1997 will be satisfied in this instance.

Deduction limited by amount specified in the 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 will claimed in the notice is the full amount of the contribution your client will make in the 2010-11 income year.

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 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 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. Accordingly, a deduction for personal superannuation contributions cannot add to or create a loss.

You have advised that the deduction for the contribution will not add to or create a loss in the 2010-11 income year. Therefore, it is accepted that the deduction will not create a loss in this income year.

Deduction for the personal superannuation contribution

As your client will satisfy all the required conditions in Subdivision 290-C of the ITAA 1997, your client can claim a deduction in the 2010-11 income year for the entire personal contribution your client will make to the fund in this income year.

Concessional contributions

From 1 July 2007, concessional contributions made to superannuation funds are subject to an annual cap. For a person who is aged 50 or over on 30 June 2011, the annual cap of $50,000 is now a transitional concessional contributions cap.

In this case, because your client is over age 50 in the 2010-11 financial year, the transitional concessional contributions cap 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 2010-11 income year will be fully tax deductible, the contribution will also be a concessional contribution in this income year.