Edited version of administratively binding advice

Authorisation Number: 1011892649805

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Advice

Subject: Concessional contributions cap

Questions

1) Will a contribution paid during the 2011-12 income year to a constitutionally protected fund count towards your concessional contributions cap?

2) Can you salary sacrifice an amount of back pay during the 2011-12 income year to a constitutionally protected fund?

Advice

1) No.

2) No.

This ruling applies for the following period:

2011-12 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your advice is based on the following facts.

You commenced employment with an employer several years ago. A review of the position was commenced a few years ago and a reclassification was approved. A new contract of employment became effective during the 2010-11 income year. The employer offered an increase in remuneration with the effective date being preserved to a previous income year.

Your base salary has increased.

Your employer is still working out the exact amount of back pay owing, however, you have estimated the amount of back pay owing.

At the time of your employment reclassification application, you advised your employer that you would like any accrued back pay paid into the superannuation fund.

The superannuation fund is an untaxed constitutionally protected fund.

An approval from the employer dated during the 2010-11 income year stated that the effective date of the remuneration increase is effective from a previous income year:

An e-mail from your employer dated during the 2010-11 income year stated:

· the taxpayer has been in receipt of various allowances etc which should be taken into consideration when preparing any back pay

· the taxpayer has requested that any back pay be paid to superannuation and is currently considering their options for pre or post tax.

You wish to have the back pay paid as employer contributions into your superannuation fund account.

You advised that a small percentage of your salary is normally salary sacrificed into the superannuation fund.

You expect the back pay will be paid during the 2011-12 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Subsection 292-20(2)

Income Tax Assessment Act 1997 Section 292-15

Income Tax Assessment Act 1997 Paragraph 292-25(2)(c)

Income Tax (Transitional Provisions) Act 1997 Subsection 292-20(2)

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 4

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 5

Taxation Administration Act 1953 Section 10-5 of Division 10 of Part 2-5 of Schedule 1

Reasons for decision

Summary of decision

The superannuation fund (the Fund) is a constitutionally protected fund (CPF). Salary sacrifice contributions made to a CPF do not count toward a member's concessional contributions cap.

An effective salary sacrifice arrangement must be an arrangement between the employer and the employee detailing the amount of salary or wages income to be sacrificed and must be entered into before the employee has earned the entitlement to be paid the amount of salary and wages.

The back pay to be paid by your employer in the 2011-12 income year may not be salary sacrificed into the Fund as you have already earned the entitlement to be paid the salary and wages. The amount is considered to be ordinary salary and wages and must be included in your assessable income. Your employer is liable to make PAYG withholding in relation to those payments.

Detailed reasoning

Concessional contributions cap

Concessional contributions are contributions made in respect of a person in the financial year to a complying superannuation fund and included in the assessable income of the superannuation provider. Concessional contributions include employer contributions, salary sacrifice contributions and personal contributions claimed as a tax deduction by a self-employed person.

From 1 July 2007, concessional contributions made to superannuation funds are subject to an annual cap. The concessional contributions cap will be indexed to upward movements of average weekly ordinary time earnings (AWOTE) in $5,000 increments (subsection 292-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). For the 2011-12 income year the annual cap is $25,000.

A person will be taxed on concessional contributions over the $25,000 cap at a rate of 31.5% (section 292-15 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2006).

Between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply. In the 2010-12 income year, the annual cap will be $50,000 for people aged 50 or over. If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap (subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997).

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

Under paragraph 292-25(2)(c) of the ITAA 1997 the following amounts are excluded from being concessional contributions:

(a) so much of an amount that is transferred to a superannuation fund from a foreign superannuation fund and is included in the assessable income of the fund as a result of a choice made under section 305-80;

(b) an amount that is a roll-over superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed roll-over amount;

(c) a contribution made to a CPF.

From the facts of the case your employer has made contributions including salary sacrifice contributions to the Fund. The Fund is a CPF. As the Fund is a CPF the amounts contributed to the fund by you and your employer, including salary sacrifice contributions, are excluded from being concessional contributions and are not included in your concessional contributions cap.

In this case you advised that you are entitled to back pay from your employer. You are considering an option to have your employer pay the amount as salary sacrifice contributions to the Fund. We will now determine whether the back pay can be salary sacrificed into the Fund.

Salary sacrifice

A salary sacrifice arrangement (SSA) means an arrangement under which employees agree contractually to forego part of the remuneration that they would otherwise receive as salary or wages, in return for their employer or someone associated with their employer providing benefits of a similar value.

There are two types of SSAs:

(a) An effective SSA which involves an employee foregoing a future entitlement to salary or wages before that entitlement becomes presently existing; and

(b) An ineffective SSA which involves an employee directing that a presently existing entitlement to salary and wages is to be paid in a form other than salary or wages.

We consider benefits paid under an effective SSA are not 'salary or wages' within the meaning of the PAYG requirement of withholding tax from salary or wages under Section 10-5 of Division 10 of Part 2-5 of Schedule 1 of the Taxation Administration Act 1953.

Taxation Ruling TR 2001/10 states at paragraphs 113 and 114 under the heading, Employers - income tax, fringe benefits tax, PAYG withholding obligations and superannuation guarantee, as follows:

113. As discussed in paragraphs 63 to 87, once an employee becomes entitled to receive an amount of salary or wages, the payment of that entitlement is a payment of salary or wages. As amounts are paid under an ineffective SSA as salary or wages, the employer PAYG payer has a PAYG withholding obligation in relation to the payments.

114. The existence of an entitlement to receive salary or wages is contingent on the performance of services by an employee. Until services have been performed, the character of an employees remuneration can be altered with the agreement of the employer and the employee. As benefits provided under an effective SSA represent expected salary or wages foregone before the services have been performed, such benefits are not payments of salary or wages for which there is a PAYG withholding obligation.

Furthermore in relation to payment in arrears (back pay), paragraph 88 of TR 2001/10 says:

The employee will be assessed on the back payment of salary or wages under either section 6-5 or section 6-10 of the ITAA 1997.

In short, salary or wages that have already been earned in the previous year or years of income, but not yet paid, are a presently existing entitlement to salary or wages. They do not represent a future entitlement to salary or wages. Back pay that is salary or wages paid in arrears cannot be subject to an effective SSA. Any arrangement in relation to these amounts would therefore be an ineffective SSA.

Benefits paid under an ineffective SSA are salary or wages and employers are liable to make PAYG withholding in relation to those payments. An employer must withhold an amount for PAYG purposes from any back pay.

Any contributions to a superannuation fund would be made from the 'after tax salary'. These contributions would be considered to be made by the employee. Note that whether the contributions can actually be made to a particular superannuation fund depends on the rules of that fund that are stated in the trust deed of the fund.

In your case, the entitlement is to salary relating to a past period of employment rather than a future period and is thus considered to be an ineffective salary sacrifice.