Edited version of private ruling

Authorisation Number: 1011709914675

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Ruling

Subject: Salary sacrifice of workers compensation payments

Question

Are weekly compensation payments paid by the insurer on behalf of the policy owner (the former employer) able to be salary sacrificed in return for concessional contributions being made to a superannuation fund?

Answer:

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were employed with your employer (the Employer) and in receipt of a transition to retirement pension from your superannuation fund.

In the 2007-08 income year you suffered a workplace injury which resulted in your termination of employment in the 2009-10 income year.

Prior to the termination of employment, you lodged a claim for workers compensation with the Employer's insurer (the Insurer).

At the time of your termination of employment you were salary sacrificing to superannuation which was permitted in the Awards under which you were employed.

In the Awards there are clauses which deal with salary sacrifice. One common clause in the Awards stated that a salary arrangement shall cease on the day of the termination of employment.

In the 2010-11 income year, your claim, relating to you being entitled to weekly compensation payments from the Insurer, on behalf of the Employer, was accepted.

In a letter from the solicitors for the Employer and the Insurer, it was stated that the Employer will make a payment of weekly compensation pursuant to legislation dealing with compensation (the Act).

You are entitled to a back payment of the weekly benefits from the employer from the date of your termination of employment onwards.

No worker's compensation payments have been paid by the Insurer as you want the payments to be made directly to your superannuation fund as salary sacrifice.

Your are less than 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-25.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Weekly compensation payments payable by the Insurer on behalf of the policy owner (the former employer) cannot be treated as salary sacrificed amounts contributed to a superannuation fund as they do not arise from an effective salary sacrifice arrangement.

The payments, which relate to a period after the employee's termination of employment, do not arise from a contractual employment agreement with the employer.

Detailed reasoning

The Commissioner's view on the taxation and superannuation implications of salary sacrifice arrangements (SSAs) is discussed in Taxation Ruling TR 20001/10 (TR 2001/10) Income Tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements.

A salary sacrifice arrangement is an arrangement between an employer and an employee whereby the employee agrees to forgo part of their future remuneration entitlement in return for a benefit of a similar value. The consequence of such an arrangement is that the employee is assessed on the reduced amount of the salary actually received and the employer is liable for any fringe benefits tax payable on the benefit provided.

TR 2001/10 states that an effective salary sacrifice arrangement details the amount of income to be sacrificed, and must be entered into before the employee becomes entitled to be paid.

An ineffective salary sacrifice arrangement involves an employee directing an entitlement to receive salary or wages that has been earned to be paid in a form other than as salary or wages. Benefits provided under an ineffective salary sacrifice arrangement are generally regarded as assessable income.

Consequently, salary sacrifice arrangements require a contractual relationship between an employer and employee. The contract between the two parties, employer and employee, is required prior to services being performed.

In your case, you suffered a workplace injury and continued to work until your termination of employment in the 2009-10 income year. Further it is noted that at the time of your termination you had an unresolved claim for workers compensation.

It is also noted in a letter from the solicitors for the Employer and the Insurer that it was agreed you would be paid weekly compensation payments pursuant to legislation dealing with compensation (the Act).

As stated above, an effective SSA requires a contractual relationship between the employer and the employee that must be negotiated prior to performing the employment services for which remuneration is received.

In your case the workers compensation payments payable by the Insurer, even though payable on behalf of the Employer, do not relate to an effective SSA as:

1) the payments do not result from an employment contract between you and the Employer. The payments made by the Insurer are pursuant to the Act and not an employment contract. This indicates there is no employer/employee relationship between you and the Insurer.

Although the compensation payments are paid to replace the salary and wages normally earned, they do not, in themselves, represent salary and wages; and

2) salary and wages are paid as a reward for services performed under a contract of employment. Compensation payments do not relate to the performance of services under a contract of employment but rather are paid under an insurance policy upon the happening of an event specified under the policy.

Further, it should also be noted that in the Awards under which you were employed it was stated that a salary sacrifice arrangement shall cease on the day of the termination of employment.

In view of the above and the letter from the solicitors, which shows the payments relate to periods after your termination of employment, it is evident that the payments are not in relation to a SSA especially as your SSA with the Employer ceased on the day that your employment was terminated.

Conclusion

The payments from the Insurer which are deposited to your superannuation fund are not salary sacrificed amounts. The amounts are assessable income to you and need to be included in your income tax return.

In addition the superannuation fund, on the basis of the facts provided, should treat these amounts as non-concessional contributions in that they are amounts correctly payable to you which you intend to merely redirect to the superannuation fund.