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Ruling

Subject: Deduction for personal superannuation contributions

Questions

1. Does your client need to satisfy the maximum earnings as an employee condition under subsection 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2010-11 income year?

2. Will the superannuation contributions be deductible under section 290-150 of the ITAA 1997 for the 2010-11 income year?

Answers

1. No.

2. Yes, to the extent that it does not add to or create a loss.

This ruling applies for the following periods:

Year ended 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

Your client is under 50 years of age.

Your client made a personal superannuation contribution to their complying superannuation fund during the 2010-11 income year.

Your client has confirmed that the contributions were made for the purpose of providing superannuation benefits for their retirement.

Your client states that they wish to claim a deduction for this contribution in the 2010-11 income year.

You confirm that a valid notice under section 290-170 of the ITAA 1997 will be lodged with the trustee of your client's superannuation fund and that the trustee of that superannuation fund will acknowledge the notice.

Your client is a consultant for an entity (Entity 1) which is incorporated and registered in a foreign country.

Your client does not receive any superannuation contributions from Entity 1.

You advise that your client's assessable income for the 2010-11 income year comprises:

· net foreign employment income;

· interest income; and

· dividend income.

The consultancy services agreement (the agreement) between Entity 1 and your client outlines the following:

· Where Entity 1 requires certain agreed services they are to be provided to another entity (Entity 2) which are conducted from offshore facilities and various shore base offices.

· Your client will provide the following services as and when required:

· Be the designated engineer for a task (Task 1) and another task (Task 2).

· Managing, planning and executing Task 1 and Task 2.

· All management services and supervision.

· Your client is instructed to 'use reasonable endeavours' to undertake and complete the required services.

· No fees will be payable in respect of any period during which the services are not provided.

· Your client will have both onshore and offshore assignments rotations as follows:

· Onshore assignment - your client will work a specified number of hours a day and for a certain number of days a week. The rotation will be at least a specified number weeks on and no more than a certain number of weeks off.

· Offshore assignment - your client will work a specified number of hours a day and a for a certain number of days a week. The rotation will be at least a specified number of weeks on and no more than a certain number of weeks off.

· With regards to offshore costs and mobilisation, your client:

§ Must be available to work at an offshore location where the scope of the services reasonably requires him or as otherwise requested by Entity 1.

§ Will be given reasonable notice whenever they are required to work at an offshore location. Entity 1 will arrange and pay for all transport between the 'Nominated Mobilisation Point' and the offshore location.

§ Will be reimbursed for all reasonable transport expenses incurred between their ordinary place of business and the 'Nominated Mobilisation Point'.

§ Must receive prior written approval from Entity 1 before incurring any air transportation costs.

§ Will be provided accommodation and meals at the offshore location.

· Your client will be remunerated as follows:

§ Onshore assignment - €x per day worked. This is made up of home country allowance, local salary and retention payment.

§ Offshore assignment - €y per day worked. This is made up of home country allowance, local salary and retention payment.

§ The above will remain fixed for the duration of the provision of services.

§ Overtime is deemed to be included in the daily rate.

§ Your client will be reimbursed for reasonable expenditure.

· Your client is required to submit completed timesheets.

· Your client must ensure that the provisions and requirements of the confidentiality clause are incorporated in any subcontract and that the officers and agents of your client and of any sub-consultant comply with the same.

· All materials supplied to your client will remain the property of Entity 1 and must be returned to Entity 1 when the agreement is terminated.

· Entity 1 can request materials provided to your client be immediately returned for whatever reason.

· Your client is required to invoice Entity 1 providing a break down of fees and reimbursable expenses and distinguish between the services provided.

· Services commenced during the 2009-10 income year.

· The agreement will remain in full force until the completion, commissioning and acceptance by Entity 2.

· The agreement can be terminated at any time for convenience by either party giving one month's written notice.

· Entity 1 will save, indemnify, defend and hold harmless your client from the group's own consequential loss and your client will save, indemnify, defend and hold harmless the group from their own consequential loss.

· Entity 1 paid for professional indemnity insurance, comprehensive general liability and workers compensation - employers liability insurance on your client's behalf.

Ÿ Your client is to bare the cost of obtaining and maintaining any other insurances that were required by any applicable law.

· Your client must ensure that they (and any of their subcontractors) shall comply with any local or international applicable health, safety and environmental laws, rules regulations and any other requirements and standards of Entity 2 and Entity 1.

· In the performance of the abovementioned agreement your client is acting as an independent contractor and not as an agent or partner of Entity 1 and they shall not hold themself out as such.

· The agreement constitutes a contract for the provision of services and not a contract of employment and accordingly your client shall be fully responsible for and shall indemnify any member of Company Group in respect of:

§ Any income tax, national insurance and social security contributions and any other liability… made in the connection of services.

§ Any liability for any employment related claim or any claim based on worker status brought by your client arising out of or in connection with the provision of services.

· Any tax obligation of your client in another foreign country or elsewhere will be for their account and will be settled directly between your client and any relevant tax authority.

· The specific legislation of another foreign country relating to the rights of third parties under contracts shall not apply to this agreement and no person other than your client and Entity 1 have rights hereunder.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 290-150.

Income Tax Assessment Act 1997 Subsection 290-150(1).

Income Tax Assessment Act 1997 Subsection 290-150(2).

Income Tax Assessment Act 1997 Subsection 290-150(3).

Income Tax Assessment Act 1997 Section 290-155.

Income Tax Assessment Act 1997 Section 290-160.

Income Tax Assessment Act 1997 Section 290-165.

Income Tax Assessment Act 1997 Section 290-170.

Income Tax Assessment Act 1997 Subsection 290-170(1).

Income Tax Assessment Act 1997 Subsection 290-170(3).

Income Tax Assessment Act 1997 Section 292-15.

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

Superannuation (Excess Concessional Contributions Tax) Act 2007) Section 4.

Superannuation (Excess Concessional Contributions Tax) Act 2007) Section 5.

Superannuation Guarantee (Administration) Act 1992 Section 12

Superannuation Guarantee (Administration) Act 1992 Subsection 12(11)

Taxation Administration Act 1953 Subsection 357-110(1)

Reasons for decision

Summary

Your client is not engaged in activities that would result in they being considered as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992. Accordingly, the maximum earnings as an employee condition will not apply.

Your client will be eligible to claim a deduction for the personal superannuation contributions they made to their nominated superannuation fund as all of the conditions for deductibility were met for the 2010-11 income year.

Detailed reasoning

Deduction for 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 (or their dependants after their death) 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.

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 the contribution is made.

As you have provided a copy of a Letter of Compliance from your client's superannuation fund this requirement is satisfied.

Maximum earnings as an employee condition:

The condition in section 290-160 of the ITAA 1997 requires that if a taxpayer is engaged in any activities that result 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 the following must be attributable to those activities:

· their assessable income for the income year;

· their reportable fringe benefits for the income year; and

· the total of their reportable employer superannuation contributions for the income year.

Subsection 290-160(1) states:

This section applies if:

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

(i) holding an office or appointment;

(ii) performing functions or appointment;

(iii) engaging in work;

(iv) 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 had not been enacted).

Under subsection 12(1) of the SGAA, if a person is an employee at common law, that person is an employee under the SGAA.

Where a common law employment relationship is not established, subsection 12(3) of the SGAA extents the definition to classify as an employee a person who works under contract that is wholly or principally for the labour of the person.

Whether a person is an employee is determined by examining the terms and circumstances of the contract, referring to the key indicators expressed in the relevant case law and examining a number of factors within the context of the relationship between the parties. No one indicator, of itself, is determinative and therefore, the totality of the relationship is considered.

Superannuation Guarantee Ruling SGR 2005/1 outlines the major indicators of a common law employment relationship to be:

· Control.

· Integration.

· Results.

· Delegation.

· Risk.

· Provision of tools and equipment and payment of business expenses.

· Control

Paragraph 33 of SGR 2005/1 states that a common law employee is told not only what work is to be done, but how and where it is to be done. It refers to the following statement made by Justice Dixon of the Full High Court in Humberstone v. Northern Timber Mills (1949) 79 CLR 389; (1949) 23 ALJ 584; [1950] VLR 44; [1949] ALR 985:

The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter's order and directions. …

In review of the contract provided by you, it appears your client had some control over the manner of performing their work. This is supported with reference to schedule 1 of your client's contract where it refers to your client using 'reasonable endeavours' to perform the required services. Whilst the contract is specific as to what duties they are to carry out, according to paragraph 35 of SGR 2005/1, this does not necessarily imply an employment relationship as a high degree of direction and control is not uncommon in contracts for services.

Integration

Paragraph 39 of SGR 2005/1 distinguishes between an employee and an independent contractor by identifying the difference between a person serving their employer within their employer's business and a person who is carrying on a trade or business of their own.

Further, reference is made to the Full High Court decision in Hollis v. Vabu Pty Ltd [2001] HCA 44; (2001) 106 IR 80; (2001) 75 ALJR 1356; (2001) 181 ALR 263; (2001) 2001 ATC 4508; (2001) 33 MVR 399; (2001) 47 ATR 559; [2001] Aust Torts Reports 81-615; (2001) 50 AILR 4-476; (2001) 207 CLR 21 where the workers were found to be operating within their employer's business as they were not running their own business, nor did they have independence in the conduct of their operations.

There is evidence to suggest that your client was integrated into Entity 1's business. As your client worked virtually full time for Entity 1 and held managerial and supervisory roles, it suggests that they were an integral part of the business.

However, reference is made to a general provision on a page of the agreement between your client and Entity 1, where it states your client is acting as an independent contractor and not as an agent or partner of Entity 1 and they shall not hold themself out as such. This statement would suggest that there was no intention for your client to be integrated into the company.

Therefore, although there appears to be some integration within Entity 1's business, the true nature of the integration indicator can be determined by acknowledging the intensions of both parties. In this case, it appears your client was not integrated into Entity 1's business.

Results

Where the nature of the contract is for the worker to produce a given result, there is a strong indicator that they are a contractor. Paragraph 42 of SGR 2005/1 quotes Justice Sheller of the NSW Court of Appeals in World Book (Aust) Pty Ltd v. Federal Commissioner of Taxation (1992) 27 NSWLR 377; (1992) 46 IR 1; (1992) 108 ALR 510; (1992) 23 ATR 412; (1992) 92 ATC 4327 (World Book):

Undertaking the production for a given result has been considered to be a mark, if not the mark, of an independent contractor.

Paragraph 43 goes on to state:

The 'production of a given result' means the performance of a service by a person who is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified service is the 'result' for which the parties have bargained. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled the remuneration is usually made for producing a given result.

According to the facts, it appears that not only does your client have a degree of flexibility in undertaking their work; there is evidence of them being able to employ their own means in terms of third party labour or plant and equipment to carry out their specified duties, albeit subject to the prior written approval of Entity 1. This is confirmed in two different provisions whereby reference is made to your client's subcontractors.

Further, the facts above state that the agreement between Entity 1 and your client is to remain in full force until Task 1 is complete, commissioned and accepted by Entity 2. This represents a contractually specified outcome your client must deliver and therefore a 'result' for which the parties have bargained for.

In contracts to produce a result, payment is often made for a negotiated price as opposed to an hourly rate. In your client's situation, although they are being paid on a daily rate and are required to submit timesheets, it states in the contract that their remuneration remains fixed for the duration of the provision of their services. This reflects that a contract price has, in fact, been negotiated and they are not being remunerated by reference to hours worked.

All in all, the facts presented above suggest that the agreement between your client and Entity 1 is a 'contract for service' as opposed to a 'contract of service'. This is more likely to reflect that your client is an independent contractor rather than an employee.

Delegation

Paragraph 48 of SGR 2005/1 states that if a person is contractually required to personally perform the work, this is an indication that the person is an employee. If an employee has unlimited power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is being engaged as an independent contractor.

The agreement between your client and Entity 1 does not expressly require your client to personally perform the contracted services. It also appears to allow your client to delegate work by subcontracting.

This indentifies your client's power to delegate work to others and therefore provides a strong indication that your client is being engaged as an independent contractor.

Risk

Paragraph 51 of SGR 2005/1 states that where a worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. An independent contractor often carries their own insurance and indemnity policies.

According to the facts, Entity 1 paid for the cost of obtaining and maintaining professional indemnity insurance, comprehensive general liability and workers compensation - employers liability insurance on your client's behalf.

Your client was to bare the cost of obtaining and maintaining any other insurances that were required by any applicable law.

As your client has had certain insurances paid on their behalf whilst others were not, the nature of the risk indicator is unclear.

Provision of tools/equipment and payment of business expenses

Paragraph 52 of SGR 2005/1 states that the provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor.

Paragraph 57 of SGR 2005/1 goes on to state that an employee, unlike a contractor, is often reimbursed for expenses incurred in the course of employment.

There is no evidence in the facts to make an assertion regarding whether your client uses their own tools or equipment in carrying out their services.

However, the facts state that your client does get reimbursed for reasonable expenditure. As such, this could suggest an employment relationship exists between your client and Entity 1.

Other indicators

Other indicators of whether an employment relationship exists have been variously stated and have been added to from time to time. These include the right to suspend or dismiss the person engaged, the right to exclusive services of the person engaged, compulsory uniforms, provision of benefits such as annual, sick and long service leave and the provisions of other benefits prescribed under an award for employees.

The majority of the above do not apply to your client's circumstances.

Through the analysis of various indicators, SGR 2005/1 identifies when an individual is considered to be an employee under subsection 12(1) of the SGAA. In this case, the indicators of control, integration, results contract, delegation, risk and the provision of tools/equipment and payment of business expenses have been considered.

Whilst the risk indicator was unclear and the provision of tools/equipment and payment of business expenses indicator suggested your client was an contracted as an employee, the other indicators of control, integration, results contract and delegation point towards your client as being engaged as an independent contractor. As such, your client is not considered an employee under common law pursuant to section 12 of the SGAA.

However, as stated previously, where a common law employment relationship is not established, subsection 12(3) of the SGAA extents the definition to classify as an employee a person who works under contract that is wholly or principally for the labour of the person. This was to take into account some independent contractors who principally provide their own labour to meet obligations under a contract and to include a person who may not be an employee in the normal sense but who is in fact not very distinguishable from an employee.

'Labour' includes mental and artistic effort as well as physical toil.

The words 'wholly or principally' are used to limit or restrict the types of contracts that will be covered by subsection 12(3) of the SGAA.

Paragraph 72 of SGR 2005/1 states that from the decisions reached in Neale (Deputy Commissioner of Taxation) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419; (1955) 29 ALJ 28; (1955) 10 ATD 460; [1955] ALR 426; [1955] HCA 18 and World Book, it is clear that a person who has 'a right to delegate work' (whether or not that right is exercised) does not work under a contract wholly or principally for his or her labour and that a contract for labour must be distinguished from 'a contract to produce a given result'.

The ATO view is that some contracts for services will be wholly or principally for the labour of the individual contracted even though the individual is not a common law employee.

Paragraph 78 of SGR 2005/1 goes on to state:

Where the terms of the contract in light of the subsequent conduct of the parties indicates that:

Ÿ the individual is remunerated (either wholly or principally) for their personal labour and skills;

Ÿ the individual must perform the contractual work personally (there is no right of delegation); and

Ÿ the individual is not paid to achieve a result.

the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under subsection 12(3).

indicator analysis. It has been established that your client did have the right to delegate and the agreement between Entity 1 and your client was to provide a contractually specified outcome and therefore a 'result'.

As such, the agreement between Entity 1 and your client is not considered to be wholly or principally for the labour of your client but rather an agreement to produce a given result. Therefore, your client is not considered an employee under the extended definition pursuant to subsection 12(3) of the SGAA.

Conclusion

In light of the foregoing your client would not be considered an employee under section 12 of the SGAA in respect of the agreement with Entity 1. Accordingly, the maximum earnings as an employee condition under section 290-160 of the ITAA 1997 will not apply to your client for the 2010-11 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 is under the age of 50 they clearly meet this age-related condition.

Notice of intent to deduct conditions:

Section 290-170 of the ITAA 1997 requires a person to provide a valid notice of their intention to claim the deduction to the trustee of their superannuation fund. The notice must be given before the earlier of:

· the date you lodge your income tax return for the income year in which the contribution was made; or

· the end of the income year following the year in which the contribution was made.

In addition, you must also have been given an acknowledgement of the notice by the trustee of the superannuation fund.

Ÿ the notice is in respect of the contributions;

Ÿ the notice is not for an amount covered by a previous notice;

Ÿ at the time when the notice is given:

§ you are a member of the fund or the holder of the retirement savings account (RSA);

§ the trustee or RSA provider holds the contribution (for example, a notice will not be valid if a partial roll-over of the superannuation benefit which includes the contribution covered in the notice has been made);

§ the trustee or RSA provider has not begun to pay a superannuation income stream based on the contribution; or

Ÿ before the notice is given:

§ a contributions splitting application has not been made in relation to the contribution; and;

§ the trustee or RSA provider to which you made the application has not rejected the application.

It has been confirmed that a valid notice under section 290-170 of the ITAA 1997 will be lodged with the trustee of your client's superannuation fund and that the trustee of this superannuation fund will acknowledge that notice.

Deduction limits:

From 1 July 2007 the previous age based limits on deductions for personal superannuation contributions have been abolished. As a result a person can claim a full deduction for the amount of the contribution made.

However, 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 deposits) from a taxpayer's assessable income. Thus a deduction for personal superannuation contributions cannot add to or create a loss in the relevant income year the deduction is to be claimed.

Contribution limits and the concessional contributions cap:

Concessional contributions made to superannuation funds in the 2011-12 income year are subject to an annual cap of $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.

A person will be taxed on concessional contributions over the 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 2007).

However, between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply. The transitional concessional contributions cap is $50,000 for 2011-12 income year for people aged 50 or over (subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997).

As your client will be under 50 years of age at the end of the 2010-11 income year, the concessional contributions cap of $25,000 will apply.

Conclusion:

As all of the conditions for deductibility under section 290-150 of the ITAA 1997 have been satisfied in relation to the 2010-11 income year, your client is entitled to claim a deduction for the personal superannuation contributions made to their nominated superannuation fund in the 2010-11 income year.