Edited version of private ruling

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Ruling

Subject: Assessability of amounts shown as part of your gross salary

Question 1

Are you assessable on the amount deducted from your gross salary that is your foreign resident employer's contributions to a foreign superannuation fund?

Answer

No.

Question 2

Are you assessable on the amounts deducted from your gross salary that are your compulsory personal superannuation contributions, pension contributions, unemployment t, accident and sickness income insurance?

Answer

Yes.

Question 3

Are your compulsory personal contributions made to a foreign superannuation fund and pension fund deductible as your personal superannuation contributions under subdivision 290-C of the ITAA 1997?

Answer

No.

Question 4

Are you entitled to a deduction for amounts deducted from your gross income for unemployment, accident and sickness income insurance under section 8-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Income year ending 30 June 2011
Income year ending 30 June 2012

Relevant facts

You became an Australian resident at the beginning of 2009 calendar year after moving to Australia from foreign country X.

You continue to be employed by your foreign country employer.

You stated that as a condition of your employment you are required to contribute to a superannuation fund, a pension fund and make payment for income protection insurance.

You provided the following additional information about amounts deducted from your gross salary:

· In the foreign country the employer and employee pay equal share into a superannuation fund that is listed under the company's name and each employee's name is listed with the exact amount of contributions and expected payout on reaching retirement age.

· A contribution to an old age pension fund that is a government controlled fund. Each employee has to contribute to this fund and on reaching retirement age the foreign country government will pay a monthly pension. This payment is not based on your wealth; every person who worked in the foreign country will get this payment based on the time they have worked and paid contributions.

· Unemployment, accident, sickness income insurance are compulsory deductions made from your gross remuneration.

Information on the foreign country's social insurance website states that the contributions received by them are kept in individual accounts

Relevant legislative provisions

Income Tax assessment Act 1997 Subsection 6-5(2)
Income Tax assessment Act 1997 Subsection 6-5(4)
Income Tax Assessment Act 1936 Section 23L
Fringe Benefits Tax Assessment Act 1986 Section 136
Income Tax assessment Act 1997 Subsection 290-150
Income Tax assessment Act 1997 Subsection 290-155
Income Tax assessment Act 1997 Subsection 995-1(1)
Income Tax assessment Act 1997 Section 295-95
Superannuation Industry (Supervision) Act 1993 Subsection 45(1)
Income Tax assessment Act 1997 Section 8-1

Reasons for decision

Questions 1 and 2

Subsection 6-5(2) of the Income Tax assessment Act 1997 (ITAA 1997) provides that Australian residents are assessable on ordinary income derived directly or indirectly from all sources, whether in or out of Australia.

Salary and wages are ordinary income under subsection 6-5(2) of the ITAA 1997. As an Australian resident your world wide income is assessable in Australia under section 6-5(2) of the ITAA 1997.

Subsection 6-5(4) of the ITAA 1997 provides that you have derived an amount of ordinary income when you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

The constructive receipt rule in subsection 6-5(4) of the ITAA 1997 is designed to ensure that if an amount is applied or dealt with in any way on an individual's behalf or at an individual's direction, the individual is taken to have received the amount . This provision ensures that money paid to an individual's account (at the individual's direction or on the individual's behalf) is treated as received by the individual and therefore as ordinary income if the money is a reward for employment.

In this case, although amounts deducted from your gross salary are compulsory, they are paid to a superannuation account in your name for your benefits. Also contributions made to the pension fund are kept for your aged pension and are payable to you not based on wealth when you retire from work. Other amounts deducted for unemployment, accident and sickness income insurance are all amounts paid or dealt with on your behalf for your benefit. Since they are paid from your gross earnings to funds and accounts on your behalf and kept for your benefit, you are constructively deemed to have derived these amounts as part of your assessable income under subsection 6-5(4) of the ITAA 1997.

However, section 23L of the Income Tax Assessment Act 1936 (ITAA 1936) provides that an amount will not be included in the assessable income of the taxpayer if it is a fringe benefit within the meaning of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Section 136 of the FBTAA contains definitions of terms relevant to the administration of that Act, including a definition of the term fringe benefit. The definition of fringe benefit includes benefits provided to an employee or an associate of an employee by the employer, in respect of the employee's employment. An employer's superannuation contributions made for the employee in respect of their employment is a benefit provided to an employee by the employer.

However, certain payments and benefits are specifically excluded from the definition and therefore exempt from fringe benefits. One of the exclusions, contained in paragraph (j) of the definition, is a benefit constituted by, broadly:

· superannuation contributions paid to a complying superannuation fund;

· superannuation contributions paid to a non-resident fund in respect of an 'exempt visitor' or temporary resident; or

· amounts paid to a retirement savings account.

Based on the exclusions above, employer superannuation contributions made for an employee to a non-complying superannuation fund or a foreign resident superannuation fund where the employee is not a temporary resident of Australia can constitute a fringe benefit under FBTAA. In this case, the employer superannuation contribution is made to a foreign superannuation fund for an employee who is a resident of Australia. Therefore, the employer contribution in this case can be considered to be a fringe benefit and hence excluded from assessable income under section 23L of the ITAA 1936.

All other payments or contributions made on your behalf from your gross salary are assessable to you under subsection 6-5(2) of the ITAA 1997 as they are deemed to be derived by you under subsection 6-5(4) of the ITAA 1997.

Question 3

Deductibility of personal superannuation and pension contributions

A taxpayer is entitled to a deduction for personal superannuation contributions if the conditions in subdivision 290-C of the ITAA 1997 are satisfied.

To qualify for a tax deduction the following conditions (in Subdivision 290-C of the ITAA 1997) must be satisfied:

· the contribution must be made to a complying superannuation fund or an RSA for the purposes of providing superannuation benefits for the contributor (whether or not the benefits are payable to the contributor's dependants): (subsection 290-150, 290-155);

· if the taxpayer is an employee engages in employment activities, the total of the taxpayer's assessable income and reportable fringe benefits attributable to the employment activities, must be less than 10% of the taxpayer's total assessable income.

Therefore, to be entitled to a deduction for personal superannuation contributions under section 290-150 of the ITAA 1997 the contribution must first of all be made to a complying superannuation fund (section 290-155).

A complying superannuation fund is defined under subsection 995-1(1) of the ITAA 1997 as meaning a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). Subsection 45(1) of the SIS Act states:

A fund is a complying superannuation fund for the purposes of the Income Tax Assessment Act in relation to a year of income if, and only if:

(a) the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to the current year of income; or

(b) the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to a previous year of income and has not given a notice to a trustee of the fund under that section stating that the fund was not a complying superannuation fund in relation to:

(i) the current year of income; or

(ii) a year of income that is:

· later than that previous year of income; and

· earlier than the current year of income.

It should be noted that only regulated superannuation funds can be complying superannuation funds. A regulated superannuation fund is a fund that has elected that the SIS Act applies to the superannuation fund. Further, a superannuation fund that is not an Australian superannuation fund (as defined under section 295-95 of the ITAA 1997) at all times during a financial year will automatically be a non-complying superannuation fund.

Therefore, you are not entitle to a deduction for amounts that are your personal superannuation or pension contributions under subdivision 290-C of the ITAA 1997.

Question 4

Deductibility for unemployment, accident and sickness income insurance

Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent they are incurred in gaining or producing assessable income and are not of a capital, private or domestic nature.

In applying this provision the courts have held that to be deductible the loss or outgoing must be incidental and relevant to the earning of assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236, Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; 81 ATC 4114; (1981) 11 ATR 538 (Smith's Case)).

In Smith's Case the High Court considered the deductibility of premiums paid for a personal disability insurance policy. The policy provided the taxpayer with a monthly indemnity against any income loss arising from an inability to earn.

The Court held that the premium was deductible because it was incidental and relevant to the operations and activities carried on to produce assessable income. This decision was not made by reference to the certainty or likelihood of the premium generating income but by reference to its nature and character and its general connection with the taxpayer's activities which directly produced assessable income.

The majority also concluded at ATC 4117; ATR 542, that the premiums paid were not of a capital, private or domestic nature.

Likewise, payments deducted from your gross salary that are in the nature of premium paid for unemployment, accident or sickness income protection insurance for yourself will be deductible under section 8-1 of the ITAA 1997 as there is sufficient connection to your assessable income and are not of a capital, private or domestic nature.