Edited version of private ruling

Authorisation Number: 1011791459285

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Ruling

Subject: Deduction for personal superannuation contribution

Question

Are payments from an insurance policy to be included as part of the maximum earnings as employee condition under subsection 290-160(2) of the Income Tax Assessment Act 1997?

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Up until the 2010-11 income year you were an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992.

You have insurance policy (the Policy).

You are in receipt of payments under the Policy because of your medical condition.

Payments under the Policy are not received by you as a result of injuries suffered during the course of your employment.

The Policy is not an arrangement which gives rise to you receiving a payment for either services rendered or the provision of your labour to the insurers of the Policy.

You wish to make a contribution to your superannuation fund in the 2010-11 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 290-150.

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 Subsection 290-160(2).

Income Tax Assessment Act 1997 Section 290-165.

Income Tax Assessment Act 1997 Section 290-170.

Reasons for decision

Summary

It is considered that the payments under the Policy are not attributable to activities that result in you being treated as an employee in the 2010-11 income year.

Accordingly the total disability benefit payments made under the Policy are not taken into account for the purposes of calculating your assessable income attributable to your employment activities as part of the maximum earnings as employee condition in determining your eligibility to claim a deduction for personal superannuation contributions for the 2010-11 income year.

Detailed reasoning

Personal deductible superannuation contributions:

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, the conditions in sections 290-155, 290-160, 290-165 and 290-170 of the ITAA 1997 must also be satisfied for the person to claim the deduction.

Maximum earnings as an employee condition:

You have requested that the condition set out in section 290-160 of the ITAA 1997 be considered in relation to your disability benefit payments.

Section 290-160 of the ITAA 1997 requires that if, during a year of income, a taxpayer is engaged in any activities that results in them being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA) then less than 10% of the total of their assessable income, reportable employer superannuation contributions and reportable fringe benefits must be attributable to those activities. Subsection 290-160(1) of the ITAA 1997 states:

This section applies if:

(a) in the income year in which you make the contribution, you engage in any of these activities:

o holding an office or appointment;

o performing functions or appointment;

o engaging in work;

o doing acts or things; and

(b) the activities result in you being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (assuming that subsection 12(11) of that act has not been enacted).

Section 12 of the SGAA states that the terms employee and employer have their ordinary meaning for the purposes of the SGAA.

In this case you were an employee for the purposes of the SGAA during the 2010-11 income year.

Consequently, section 290-160 of the ITAA 1997 applies to you in the 2010-11 income year.

Where section 290-160 of the ITAA 1997 applies to a person, subsection 290-160(2) of the ITAA 1997 states that:

To deduct the contribution, less than 10% of the total of the following must be attributable to the activities:

(a) your assessable income for the income year;

(b) your reportable fringe benefits total for the income year;

(c) the total of your reportable employer superannuation contributions for the income year.

This test, also known as the 10% rule, means that in order to satisfy the condition set out under section 290-160 of the ITAA 1997, your total assessable income, reportable employer superannuation contributions and reportable fringe benefits attributable to your employment must be less than 10% of your total assessable income, reportable employer superannuation contributions and reportable fringe benefits for the 2010-11 income year.

In this case it is noted that you are not involved with the insurers of the Policy except as being the holder of the Policy. The Policy is not an arrangement which gives rise to you receiving a payment for either services rendered or the provision of your labour to the insurers. Rather, the Policy is a contract which gives rise to you receiving payments under the terms of the Policy in return for you paying premiums.

The insurers did not engage you as a common law employee under the Policy. Income received under the Policy is not income that would result in you being treated as an employee of the insurers. You are simply an insurance policy holder and even though the Policy payments are made to replace assessable income, it is merely a pay-out on a policy purchased from an insurance company.

Taxation Ruling 2010/1 entitled Income tax: superannuation contributions (TR 2010/1) discusses the receipt of insurance payments for injury at paragraph 259:

The 'employment' activities of the recipient are not the direct or proximate cause of workers' compensation payments and like payments such as the proceeds of an insurance policy covering loss of employment income. Rather, the direct or proximate cause of the payments is the injury suffered during the course of their employment activities. However, the injury would never have arisen but for those activities. Therefore, there is a contributory cause or connection between the 'employment' activities and the payments to show 'attributability' within the meaning of subsection 290-160(2).

You are in receipt of payments under the Policy because of your medical condition. However, unlike the situation discussed in paragraph 259 of TR 2010/1, the payments in this instance are not as a result of injuries suffered during the course of your employment. Rather, it is considered that the receipt of disability benefit payments under the Policy are not in any way attributable to your employment activities in the 2010-11 income year, but are solely due to your illness.

Accordingly the total disability benefit payments made under the Policy are not taken into account for the purposes of calculating your assessable income attributable to your employment activities under subsection 290-160(2) of the ITAA 1997 for the 2010-11 income year.