Edited version of private ruling

Authorisation Number: 1011815268802

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Ruling

Subject: Deductibility of employer superannuation contributions

Question:

Can the private company claim a deduction under section 290-60 of the Income Tax Assessment Act 1997 for superannuation contributions made in respect of the two directors of the company?

Answer: Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts:

The Company is an investment company holding shares in various public companies, units in managed funds and trusts; and owns a small farming property.

The shares and investments are held for long term investment and the Company is not a share trader.

In the past, the Company operated a large farming enterprise until it was sold approximately 10 years ago.

The Company purchased a small cattle farm later that year as the directors were winding back for retirement.

Up to several years ago the Company operated the small cattle farm until entering an agreement to agist the property.

The Company was incorporated in the 1960's and adopted Table A of the Corporations Act 1961 which allows for directors to be paid such remuneration as is from time to time determined by the Company in their general meeting.

The Company has two directors, one under age 65 during the 2010-11 income year (Director 1) and the other under age 75 during the 2010-11 income year (Director 2).

The Company has paid director fees in the previous six years as follows:

· Amount W to Director 1 in the 2008-09 and 2009-10 income years.

· Amount X to Director 2 in the 2004-05 income year

· Amount Y to Director 2 in the 2005-06, 2006-07, 2007-08 income years

· Amount Z to Director 2 in the 2008-09 and 2009-10 income years.

The Company proposes to pay director fees to each director in the 2010-11 income year.

The Company intends to dispose of a managed fund investment and make a superannuation contribution of $50,000 to each director in the 2010-2011 and 2011-12 income years as they are approaching retirement age.

The Company has not made provision for the directors' superannuation contributions since the 2000-01 income year.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 290-60.

Income Tax Assessment Act 1997 Section 290-65.

Income Tax Assessment Act 1997 Section 290-70.

Income Tax Assessment Act 1997 Section 290-75.

Income Tax Assessment Act 1997 Section 290-80.

Superannuation Guarantee (Administration) Act 1992 Section 12.

Superannuation Guarantee (Administration) Act 1992 Subsection 12(2).

Income tax (Transitional Provisions) Act 1997 Section 292-20.

Reasons for decision

Summary

Superannuation contributions made by the Company in respect of its two directors for the 2010-11 and 2011-12 income years can be claimed as a deduction in each income year subject to all the conditions for deductibility being met and provided the directors are entitled to payment of director fees for the duties they perform as a director of the Company in each of those income years.

Detailed reasoning

Deduction for employer contributions to a superannuation fund

The deductibility of contributions to a superannuation fund for the benefit of an employee are governed by Subdivision 290-B of Division 290 of the Income Tax Assessment Act 1997 (ITAA 1997).

An entity is entitled to claim a tax deduction in respect of superannuation contributions under section 290-60 of ITAA 1997 if:

· the contribution is made to a superannuation fund or a retirement savings account (RSA)

· the contribution is made for the purpose of providing superannuation benefits for another person who is an employee of the entity when the contribution is made, and

· the conditions in sections 290-70, 290-75 and 290-80 of the ITAA 1997 are also satisfied.

The deduction under section 290-60 of the ITAA 1997 can only be claimed in respect of the income year in which the contribution was made.

Employee activity conditions

In accordance with section 290-70 of the ITAA 1997, the person for whom the contribution is made must be:

· an employee, or

· engaged in producing assessable income of the employer, or

· an Australian resident who is engaged in the employer's business.

Paragraph 290-70(aa) specifies that to deduct the contribution, the employee must be an employee (within the expanded meaning of employee given by section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

The term employee is defined in section 12 of the SGAA which states the term is given its ordinary meaning unless it is included in the expanded definitions in subsections 12(2) to 12(11).

Subsection 12(2) of the SGAA states:

A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate.

Members of executive bodies of bodies corporate are discussed at paragraphs 62 and 63 of Superannuation Guarantee Ruling Superannuation Guarantee: Who is an employee? (SGR 2005/1). Paragraph 63 provides that in the majority of cases such a person, to whom subsection 12(2) applies, will be called a director.

Members of executive bodies of bodies corporate

62. Under subsection 12(2) of the SGAA, a person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate⁴⁶ is, in relation to those duties, an employee of the body corporate.

63. In the majority of circumstances, such a person will be called a 'director'. The SGAA will apply even if the person is not referred to as a director but falls within the terms of subsection 12(2).

The wording of subsection 12(2) requires that the director of a company must also be 'entitled to payment' for the duties they perform as a director to qualify as an employee under the SGAA.

Taxation Ruling Income tax: superannuation contributions (TR 2010/1) discusses directors and 'entitled to payment'.

Paragraphs 237 to 242 of TR 2010/1 are as follows:

237. A person who is an employee only because of the operation of subsection 12(2) to 12(10) of the SGAA automatically satisfies the employment activity condition. As paragraphs 5.72 to 5.76 of the Explanatory Memorandum to Tax Laws Amendment (2007 Measures No. 4) Bill 2007 makes clear, this ensures an employer can claim a deduction for contributions made on behalf of a person who is an employee as defined in those subsections even though that employee is not actually engaged in producing the employer's assessable income or engaged in the employer's business.

238. For example, a company's director is an employee of the company for the purposes of the SGAA if the director is entitled to payment for the performance of duties as a member of the company's executive body.

239. It has long been held that the directors of a company are not entitled to payment for the services they provided as directors unless it is specifically provided for in the company's constitution or approved by shareholders (see Hutton v. West Cork Railway Co (1883) 23 Ch D 654 and Re George Newman & Co [1895] 1 Ch 674). In Re George Newman & Co the United Kingdom's Court of Appeal said:

Directors have no right to be paid for their services, and cannot pay themselves or each other, or make presents to themselves out of the company's assets, unless authorised to do so by the instrument which regulates the company or by the shareholders at properly convened meetings. The shareholders, at a meeting duly convened for the purpose can, if they think proper, remunerate directors for their trouble or make presents to them for their services out of assets properly divisible among the shareholders themselves.

240. However, section 202A of the Corporations Act 2001 states that directors shall be paid such remuneration as is from time to time determined by the company in a general meeting. As this is a replaceable rule for the purposes of that Act, whether a particular director is entitled to remuneration must be determined on a case by case basis.

241. A director entitled to remuneration will satisfy the employment activity test even if not engaged in producing the company's assessable income or its business.

242. A company cannot deduct a superannuation contribution for a member of the executive body who is not entitled to payment for the performance of duties as a member of the company's executive body.

Subsection 290-65(1) of the ITAA 1997 also specifies that at a time when an individual is an employee of an entity within the expanded meaning of employee given by section 12 of the SGAA, Subdivision 290-B applies as if the individual were an employee of the entity.

You have advised the directors are entitled to payment of director fees as the Company's constitution allows for directors to be paid such remuneration as is from time to time determined by the Company in their general meeting. You also advise the Company paid director fees to the two directors in previous years and proposes to pay director fees to each director in the 2010-11 income year. As such, the Company has satisfied paragraph 290-70(aa).

Therefore, subject to all other conditions for deductibility being met in each income year and provided the directors are also entitled to payment for the duties they perform as directors of the Company in the 2011-12 income year, they are considered as employees of the Company in both income years in question as they satisfy the employment activity condition of paragraph 290-70(aa) and subsection 290-65(1) of the ITAA 1997.

Complying fund conditions

Under section 290-75 of the ITAA 1997 if the contribution is made to a superannuation fund, the fund must be a complying superannuation fund.

This condition will be satisfied so long as the superannuation contributions made by the Company for the directors are made to a complying superannuation fund.

Age related conditions

Section 290-80 of the ITAA 1997 requires that to deduct the contribution, the entity must have made the contribution on or before 28 days after the end of the month in which the employee turns 75.

In this case, Director 1 is under age 65 in the 2010-11 income year and Director 2 is under age 75 in the 2010-11 income year and will turn 75 late in the 2011-12 income year, hence this condition will be satisfied.

Contribution limits

Although the amount of an employer's deduction is not limited, it should be noted that a person may be liable to excess concessional contributions tax if the concessional contributions made on their behalf exceed the concessional contributions cap for the year. For persons under 50 years of age, the cap is $25,000.

Concessional contributions include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions claimed as a tax deduction by a person. Amounts in excess of the concessional contributions cap in an income year are also counted towards the non-concessional contributions cap.

Concessional contributions cap for people 50 years old or over

A transitional concessional contributions cap applies until 30 June 2012 for people aged 50 years or over and is $50,000 for the 2010-11 and 2011-12 years. If a person has more than one fund, all concessional contributions made to all their funds in an income year are added together and count towards the cap. This cap is not indexed.

In the present case, on the basis of the information you have provided, the two directors will be over 50 years of age in the 2010-11 and 2011-12 income years, therefore the transitional concessional contributions cap of $50,000 for each year will apply.

Conclusion

On the basis of the information provided and subject to all of the above conditions being satisfied in each income year, the Company will be able to claim a tax deduction under section 290-60 of the ITAA 1997 in respect of the superannuation contributions made on behalf of the directors in the 2010-11 and 2011-12 income years.

Subdivision 290-B of the ITAA 1997 deals with the deduction of employer contributions and other employment-connected contributions. There is nothing contained in the Subdivision that allows the Commissioner to limit a deduction for employer contributions on the grounds of reasonableness. The only limits imposed are those set out under Division 292 in respect of excess contributions tax.