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Authorisation Number: 1011678192803

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Ruling

Subject: Deduction for Personal Superannuation Contributions

Question 1

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

Answer

No.

Question 2

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

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2009.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

Your client, who is under 50 years of age, commenced employment with the employer during income year W. Your client was paid a salary by the employer up until income year T.

Your client was disabled in a work-related accident. After the accident, your client has been receiving workers' compensation payments from the employer. These payments commenced in income year Y, and the payments will continue to be paid by the employer until your client reaches retirement age.

Records held by the Australian Taxation Office (ATO) indicate that from income year Y to income year V, your client received periodic workers' compensation payments from the employer.

In a letter issued during the second quarter of income year S, an officer of the employer confirmed that your client is no longer employed with the employer 'from at or around' the commencement of income year X. Records held by the ATO also indicate that your client's employment with the employer has been terminated.

You have advised that since your client commenced receiving these workers' compensation payments, your client has not been gainfully employed as a result of the disability. You have further advised that your client was not engaged in an employment activity during income year X. You have also advised that the employer did not make any superannuation guarantee contributions in respect of these workers' compensation payments for your client's benefit or on your client's behalf.

During income year X your client received regular workers' compensation payments from the employer. A PAYG payment summary - individual non-business issued by the employer for this income year shows no reportable fringe benefits, and discloses gross payments made and PAYG withholding amounts withheld by the entity during this income year.

Your client's assessable income for income year X includes these workers' compensation payments. In addition to these payments, your client's assessable income in this income year included income from interest, franked and unfranked dividends, franking credits, a trust distribution, and foreign sourced income.

Your client has a superannuation account in a complying superannuation fund (the fund). In early July of the relevant year, your client commenced making monthly personal superannuation contributions into the fund. In early April of the following year, your client increased the monthly personal contributions being made to the fund. 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. You have advised that the deduction will not create a loss in income year X.

In late July of the same year, your client lodged with the fund trustee a notice of intent to claim the deduction for the personal contributions. Your client has received a written notice for income year X from the fund trustee, acknowledging receipt of the notice of intent to claim the deduction.

In early December your client's income tax return for income year X was lodged with the ATO. Interest and dividend deductions, and deductions for gifts or donations and the cost of managing your client's tax affairs, were claimed in your client's return for this income year. A deduction in respect of the personal contributions was not claimed in your client's return.

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 and

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

Reasons for decision

Summary

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

The periodic worker's compensation payments are not considered to be attributable to activities that result in your client being treated as an employee in income year X. Therefore the workers' compensation payments do not constitute income from an employment activity in this income year.

Hence these payments are not included in the maximum earnings test in determining your client's eligibility to claim a deduction for the personal contributions. This means your client can claim a deduction for the contributions your client made in this income year.

Detailed reasoning

Personal superannuation contributions made in income year X

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 personal superannuation contributions to a complying self-managed superannuation fund (the fund) in income year X, 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 contributions he made 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 prior to 1 July 2009, a deduction can only be claimed where the sum of assessable income and reportable fringe benefits attributable to the 'employment' activities is less than 10% of the total of the person's assessable income and reportable fringe benefits in the income year that the contribution is made.

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 commenced receiving periodic worker's compensation payments from the employer in income year Y. The payments arose as a result of a work-related accident.

Records held by the ATO indicate that from income year Y to income year V, your client received periodic workers' compensation payments from the employer. The payments will continue to be paid until your client reaches their retirement age.

You have advised that since your client commenced receiving these payments, your client has not been gainfully employed as a result of the disability. You have also advised that your client was not engaged in an employment activity during income year X.

In a letter issued during the second quarter of income year S, an officer of the employer confirmed that your client is no longer employed with the employer 'from at or around' the commencement of income year X. Records held by the ATO also indicate that your client's employment with the employer has been terminated.

In this light, it is accepted that your client was no longer employed by the employer at the commencement of income year X. It is also accepted that at and from this time, your client had ceased the previous employment with the employer and that your client has now ceased all employment.

Most of your client's gross assessable income for income year X made up of the workers' compensation payments. The remainder of your client's assessable income is comprised of investment income.

In Superannuation Guarantee Ruling SGR 2009/2 (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, your client is not involved with the employer, except for being the recipient of workers' compensation payments where no work is performed because of the disability, and where your client's employment with the employer has been terminated.

Your client received these payments in income year X when the previous employment with the employer was terminated. As noted above, your client has ceased all employment, and your client will continue to receive these payments whilst not performing work until your client reaches their retirement age.

As your client was not an employee of the employer or any other employer at and from the commencement of income year X, your client was not an employee for the purposes of the SGAA in this 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 during this income year.

Hence, 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:

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.

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 2008-09 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 workers' compensation 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 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 these payments are 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.

Your client was under age 50 when the contributions were made. Therefore, your client satisfies the age-related conditions in subsection 290-165(2) of the ITAA 1997.

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:

· your client is a member of the fund;

· 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);

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

· before the notice is given:

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

· the fund trustee has not rejected the application.

In late July of the relevant year, your client lodged with the fund trustee a notice of intent to claim the deduction for the personal contributions. Several months later your client's tax return for income year X was lodged with the ATO. Therefore your client lodged the notice of intent with the fund trustee before a tax return for this income year was lodged, and prior to 30 June.

Your client received a written notice from the fund trustee acknowledging receipt of the notice of intent to claim the deduction. In this light, the Commissioner notes in paragraph 264 of TR 2010/1 that a person may choose how much of their contributions to deduct and this notice is used to give effect to that choice. Thus it is accepted from the facts that your client's notice covering the contributions was valid.

In this situation, your client's notice of intent for income year X 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.

Your client intends to claim a deduction for the personal contributions your client made to the fund during income year X. Thus it is accepted that the amount of the deduction that will be claimed will not exceed the amount specified in the section 290-170 notice. Therefore, your client will also satisfy this requirement.

Deduction limits

From 1 July 2007, a person can 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.

Other deductions were claimed in your client's tax return for income year X. These deductions were not for previous years tax losses or for farm management losses. The intended deduction for your client's personal contributions will be added to these other deductions. After the total of these deductions is from your client's gross assessable income for this income year, your client will have a taxable income. Hence the deduction will not create a loss in this income year.

Deduction for the personal contributions made in income year X

Your client satisfies all the required conditions in subdivision 290-C of the ITAA 1997. Therefore, your client can claim a deduction for the personal contributions your client made to the fund in income year X. This amount will be a concessional contribution in income year X, and will be counted towards your client's annual concessional contributions cap of $50,000 for this financial year.

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 of $150,000 for income year X.