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Ruling

Subject: Deduction for Personal Superannuation Contribution

Question

Can your client claim a deduction in respect of a personal superannuation contribution for the 2009-10 income year under section 290-150 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

Your client is over age 55 but under age 65.

During the 2009-10 income year your client was not engaged in employment and he received no employment income. Also during this income year, your client derived no gross business income.

A breakdown of your client's assessable income for the 2009-10 income year was provided. Your client's assessable income includes a taxable component - taxed element of a superannuation pension, interest, dividends (including franking credits) and rent. Your client received no reportable fringe benefits in the 2009-10 income year. No reportable employer superannuation contributions were made for your client's benefit to a complying superannuation fund in this income year.

In mid February 2010, your client made a personal contribution to a complying self-managed superannuation fund (the fund). Your client made the personal contribution for the purpose of providing superannuation benefits for himself or for his dependants if he dies before or after becoming entitled to these benefits.

Your client intends to claim a deduction in respect of the contribution. In addition to this deduction, your client also intends to claim a deduction for a business loss and rental deductions. You have advised that the deduction for the contribution will not create a loss in the 2009-10 income year.

A Notice of intent to claim or vary a deduction for personal super contributions for the 2009-10 income year was signed by your client in mid May 2011.

In this notice your client stated an intent to claim a tax deduction in respect of the personal contribution your client made to the fund in this income year. Your client lodged the notice of intent, which did not vary an earlier notice, with the fund trustee on the same day.

Your client received a written notice dated the same day from the fund trustee, acknowledging receipt of your client's notice of intent to claim to claim the deduction.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 26-55(2),

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 Subsection 290-155(2),

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,

Income Tax Assessment Act 1997 Subsection 290-165(2),

Income Tax Assessment Act 1997 Section 290-170 and

Income Tax Assessment Act 1997 Section 290-175.

Reasons for decision

Summary

The maximum earnings test does not apply to your client in the 2009-10 income year, because your client was not engaged in an employment activity. Thus your client can claim a deduction in respect of the personal contribution he made during this income year. This amount is a concessional contribution in this income year.

Detailed reasoning

Personal superannuation contributions made in the 2009-10 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 made a personal superannuation contribution to a complying self-managed superannuation fund (the fund) in mid February 2010, in order to obtain superannuation benefits.

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'.

Complying superannuation fund condition

The condition in section 290-155 of the ITAA 1997 requires that where the contribution is made to a superannuation fund, it must be made to a complying superannuation fund for the income year of the fund in which you made the contribution. The superannuation fund into which your client made the contribution is a complying superannuation fund. Therefore, your client satisfies this condition.

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 2009-10 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'.

Only the income attributable to an employment activity that is assessable to a person under the ITAA 1997, is counted in the maximum earnings test. A pension paid by a superannuation fund is not income that is attributable to an employment activity.

Therefore the superannuation pension your client received in the 2009-10 income year is not taken into account in the calculation prescribed in subsection 290-160(2) of the ITAA 1997.

In addition, a business loss (being a deduction) does not form part of your client's assessable income and is not taken into account in 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.

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.

You have advised that your client was not engaged in employment during the 2009-10 income year, and they received no employment income in this income year.

Based on the facts provided, the maximum earnings as an employee condition does not apply to your client in the 2009-10 income year, because your client was not engaged in an employment activity during this income year. Consequently, section 290-160 of the ITAA 1997 does not apply to your client in this income year.

Age-related conditions

Under subsection 290-165(2) of the ITAA 1997 the ability to claim a deduction ceases for contributions that are made after 28 days from the end of the month in which the person making the contribution turns 75 years of age. As your client was under age 65 when the personal contribution was made, your client satisfies these conditions.

Notice of intent to deduct conditions

Section 290-170 of the ITAA 1997 provides that your client must give to the trustee of the complying superannuation fund (the fund trustee) a valid notice of an intention to claim a deduction in respect of the contribution, and your client must also have been given an acknowledgment of receipt of the notice by the fund trustee. Your client must give the notice to the fund trustee by the earlier of the date your client lodges an income tax return or the end of the income year following the year in which the contribution was made. In addition, the trustee is required to acknowledge your client's notice without delay.

Your client lodged with the fund trustee a notice of intent to claim a deduction in respect of the personal contribution. Your client subsequently received a written notice from the fund trustee, acknowledging receipt of your client's notice of intent to claim to claim the deduction. Both events occurred before your client lodged an income tax return for the 2009-10 income year.

Consequently, your client has satisfied the notice of intent to deduct condition in section 290-170 of the ITAA 1997.

Deduction limited by amount specified in notice

Subsection 290-175 of the ITAA 1997 states that the deduction cannot be more than the amount covered by the notice given under section 290-170 of the ITAA 1997.

Your client intends to claim a deduction for the personal contributions your client made to the fund during the 2009-10 income year. As the amount of the deduction that will be claimed will not exceed the amount specified in the notice of intent for this income year, your client also satisfies this requirement.

Deduction limits

The allowable deduction is limited under subsection 26-55(2) of the ITAA 1997 to the amount of assessable income remaining after subtracting all other deductions (excluding previous years tax losses and any deductions for farm management losses) from a taxpayer's assessable income.

Therefore a deduction for personal superannuation contributions cannot add to or create a loss.

You have advised that the deduction for the contribution will not create a loss in the 2009-10 income year. In addition your client also intends to claim other deductions which are not for previous years tax losses or for farm management losses.

There is an amount of assessable income remaining after the total of these deductions are subtracted from your client's assessable income. It is clear from the foregoing that the deduction for the contribution will not create a loss in this income year.

Deduction for the personal contribution made in the 2009-10 income year

Because your client satisfies all the required conditions in subdivision 290-C of the ITAA 1997, your client can claim a deduction in respect of the contribution he made to the fund in the 2009-10 income year. This amount will be a concessional contribution in the 2009-10 financial year, and will be counted towards your client's annual concessional contributions cap of $50,000 for this financial year.

Further issues for consideration

Non-concessional contributions and the bring-forward provisions

Non-concessional contributions made to complying superannuation funds are subject to an annual cap. For a person who is aged 50 years or over on 30 June 2010, their non-concessional contributions cap for the 2009-10 financial year is $150,000.

As a concession, to accommodate larger contributions, persons under age 65 in a financial year are able to bring forward future entitlements to up to two years' worth of non-concessional contributions. Where a bring-forward has not already commenced, the person will be able to make non-concessional contributions totalling $450,000 over three financial years without exceeding the non-concessional contributions cap.

The bring-forward provisions will be triggered where a person who is under age 65 makes non-concessional contributions during the first financial year that exceed the non-concessional contributions cap for that financial year. Where a bring-forward has been triggered, the entitlements in the two future financial years are not indexed.

Non-concessional contributions include personal contributions for which an income tax deduction is not claimed.

It is noted that your client will not claim a deduction for the remainder of the personal contribution.

Also as noted previously, your client was under age 65 when non-concessional contribution was made to the fund in the 2009-10 financial year.

As your client was under age 65 when the non-concessional contribution was made in this financial year, the bring-forward provisions have been triggered. Provided there has not been any previous calculation of the non-concessional contributions cap in relation to the contribution, the bring-forward cap of $450,000 will apply. Hence your client's non-concessional contributions cap for this financial year will be $450,000.