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Authorisation Number: 1011823596202

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Ruling

Subject: Deduction for Personal Superannuation Contribution

Question

Will the maximum earnings as an employee condition apply to your client in respect of a personal superannuation contribution for the 2010-11 income year under section 290-150 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

Your client, who is under age 55, commenced employment with a company over 10 years ago.

Immediately prior to your client's resignation a few years ago, your client was employed in a senior executive position. Your client was also a director of the company.

Several weeks later your client entered into a Deed of Separation (the Separation Deed) with the company. Your client's resignation letter states that the resignation is effective immediately on the resignation date.

The Separation Deed states that by agreement between the parties, your client's employment and directorship have ceased. The Separation Deed further states that notwithstanding the termination of your client's employment, it is envisaged that your client may upon request and by arrangement consult to the company from time to time.

After the resignation date, your client commenced operating a business consulting service. Your client conducts the business in their own name as a sole trader. Since the resignation date, your client has been self-employed.

Your client continued the consulting business during the 2010-11 income year, and was not engaged in any other employment activity. You have advised that your client was not employed or engaged in employment throughout this income year.

As a result of legal proceedings surrounding the payment of your client's entitlements on termination of employment, payments were received from the company in the 2010-11 income year.

Your client expects to earn gross business income, and will receive no reportable fringe benefits, during this income year. As your client is self-employed, reportable employer superannuation contributions are not applicable.

Your client intends to make a personal superannuation contribution to a complying self-managed superannuation fund in late June 2011, in order to obtain superannuation benefits for themselves.

Your client intends to claim a deduction for the full amount of the personal contribution. You have advised that this deduction will not add to or create a loss in the 2010-11 income year.

Your client will provide a written notice of intent to the fund trustee, stating an intent to claim a deduction in respect of the contribution your client will make in the 2010-11 income year. Your client will receive a notice from the fund trustee, acknowledging receipt of your client's notice of intent in respect of this contribution.

Relevant legislative provisions

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 Section 290-165 and

Income Tax Assessment Act 1997 Section 290-170.

Reasons for decision

Summary

The maximum earnings test does not apply to your client in the 2010-11 income year, because your client was not engaged in an employment activity. The payments that your client received from the previous employer do not constitute income from an employment activity in this income year.

Detailed reasoning

Personal superannuation contributions made in the 2010-11 income year

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).

Your client intends to make a personal superannuation contribution to a complying self-managed superannuation fund in late June 2011, in order to obtain superannuation benefits for themselves.

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 all be satisfied before the person can claim a deduction for the contributions made in that income year. These conditions are explained in detail in Taxation Ruling TR 2010/1 (TR 2010/1) entitled 'Income Tax: superannuation contributions'.

Maximum earnings as an employee condition

Subsection 290-160(1) of the ITAA 1997 operates to apply the maximum earnings as an employee condition only 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 (SGAA).

For those persons who are engaged in any 'employment' activities in the 2010-11 income year, subsection 290-160(2) of the ITAA 1997 prescribes that a deduction for personal contributions can only be claimed where the sum of their:

· assessable income

· reportable fringe benefits total and

· reportable employer superannuation contributions

attributable to the 'employment' activities is less than 10% of the total of that person's assessable income, reportable fringe benefits total and reportable employer superannuation contributions. The term 'reportable employer superannuation contributions' includes salary sacrifice contributions made for the person's benefit in that income year. This calculation is referred to as the 'maximum earnings test'.

In TR 2010/1, the Commissioner discusses the operation of the maximum earnings as employee condition. In paragraph 58 of TR 2010/1 the Commissioner states that those persons who have not engaged in an 'employment activity' in the income year in which they make a contribution 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 of the maximum earnings test in the situation where employment is terminated prior to the income year in which a contribution is made, as follows:

88. 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.

89. 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.

The maximum earnings as an employee condition 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 SGAA, as specified in paragraph 290-160(1)(b) of the ITAA 1997.

Your client was employed by the company until your client resigned in the particular year. Also at this time, your client resigned a director of the company.

Your client's resignation was effective immediately on the resignation date.

Several weeks later your client entered into a Deed of Separation (the Separation Deed) with the company. The Separation Deed states that the parties agree that your client's employment and directorship have ceased.

As noted in the application, the Separation Deed clearly states that your client ceased employment with the company on the resignation date. The term 'Termination' is defined in the Separation Deed as meaning the termination of your client's contract of employment and the employment effective on the resignation date and the cessation of the directorship. The Separation Deed further provides that the parties agree to categorise the Termination as the resignation by your client.

After the resignation date, your client commenced operating a consulting business as a sole trader. Since the resignation date, your client has been self-employed.

Your client continued the consulting business during the 2010-11 income year, and your client was not engaged in any other employment activity. You have advised that your client was not employed or engaged in employment throughout this income year.

The facts show that your client was not engaged by the company as an employee during the 2010-11 income year. Rather, your client was involved in a dispute with the company, and the settlement of this dispute resulted in your client receiving a late termination payment during this income year. The payment was made in accordance with a separate Deed of Settlement and Release.

Your client received the termination payment in the 2010-11 income year, well after the end of the income year during which their employment was terminated. The payment did not relate to any 'employment activities' in the 2010-11 income year.

Your client is not employed in any capacity during the 2010-11 income year. Rather, your client is self-employed in their own business. Hence your client is not engaged in an employment activity during this income year. Therefore, the maximum earnings as employee condition does not apply to your client in this income year.

Consequently, section 290-160 of the ITAA 1997 does not apply to your client in the 2010-11 income year.

Deduction for personal contributions

If your client satisfies all the other required conditions in subdivision 290-C of the ITAA 1997, as you have advised they will, your client can claim a deduction for the full amount of the proposed contribution. This amount will be a concessional contribution in the 2010-11 financial year, and will be counted towards your client's annual concessional contributions cap for this financial year.