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Ruling

Subject: Deduction for personal superannuation contributions

Questions

1. Do you 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 2011-12 income year?

2. Will the superannuation contributions be deductible under section 290-150 of the ITAA 1997 for the 2011-12 income year?

Answers

1. Yes.

2. No.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

Your are over 30 years of age.

You are an Australian citizen and Australian resident for taxation purposes.

You wish to claim a deduction for the personal superannuation contributions you made during the 2011-12 income year.

You are not self employed.

You work overseas for a non resident company (the Company).

You are employed in the position of Supervisor.

You have stated that you do not receive superannuation contributions from your employer as they are not obligated to do so by law.

The contract of employment (the contract) between he Company and yourself outlines the following:

Your employment commenced in the 2007-08 income year.

You are based in the Company's office or other site, but your duties may require you to travel or reallocate to other work locations.

The terms and conditions of your employment contract are subject to annual review.

You are required to acknowledge and comply with the company work regulations and other company policies, procedures, regulations, rules, codes of conduct or lawful demands.

You are expected to be accountable for up to 12 hours full shift operation. You may need to work additional hours based on work requirements.

Your salary is gross AUD X per shift. This is made up as follows:

· Basic daily wage for 8 hours working AUD Y; and

· Daily diligence bonus for full shift accountability AUD Z. This rate is a supplement in lieu of national holidays, and any overtime worked in excess of 8hours.

The company will meet air travel costs between your home and work.

You will be reimbursed for reasonable work related expenses properly incurred in the course of your duties.

You are required to submit an annual health assessment. This is at the cost of the company.

You will report directly to the Maintenance and Asset Manager or his assignee.

You will be insured under a health insurance scheme as selected by the company.

You must report any injuries sustained at work to the Company immediately. Failure to do so may jeopardise any claims payable to you under any Company provided insurance policies.

You may be eligible to sick leave and special paid leave up to 3 days in the case of bereavement or compassionate circumstances within the immediate family.

You are eligible for annual holidays, however these have been provided for in your scheduled roster and wage calculation (diligence bonus). Therefore, you are not eligible to take any further time off in respect of annual holidays.

You may be provided with tools of trade for example, a mobile phone, necessary office equipment for business use and a motor vehicle.

Your position description statement details the following:

Your role is to lead the workshop and maintenance team to provide technical support, safely service, repair and rebuild Drilling Services fleet of drills, vehicles and ancillary equipment.

Among other functional accountabilities, specific reference is made to the following:

· Liaise with production manger to ensure maximum rip utilisation.

· Maintain good relationships and rapport with colleagues and key stakeholders within the operation and understand their roles and responsibilities within the structure.

· Actively participate as a key player in the safety audit process and meetings as required.

· You will be expected to work with a wide range of stakeholders including Asset & Maintenance Manager, site operations, site maintenance team and technical peers.

You have stated that your foreign employment income was your only source of employment income and also represents more than 10% of the total of assessable income, reportable fringe benefits and reportable employer superannuation contributions.

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.

Superannuation Guarantee (Administration) Act 1992 Section 12

Superannuation Guarantee (Administration) Act 1992 Subsection 12(3)

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

Reasons for decision

Summary

You are currently engaged in activities that result in you being considered an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992. Accordingly, the maximum earnings as an employee condition applies.

You will not be eligible to claim a deduction for the personal superannuation contributions made to your nominated superannuation fund as not all of the conditions for deductibility were met for the 2011-12 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.

According to the facts, the conditions in section 290-160 have not been met. This will be discussed in further detail below.

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 (RFB) for the income year; and

· the total of their reportable employer superannuation contributions (RESC) 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 of employment provided by you it appears the ultimate authority over how and where your work is to be performed remained with the Company as the employer. This is evident in the level of detail provided in your 'Position Description' document which has provided you with little discretion with the manner in which your services are to be performed. Further, specific reference is made to a clause of your contract where it specifies where you will be based and that relocation will occur pending your duty requirements. As such, you have been provided with little or no discretion in location your services are to be performed.

The above factors are common in an employment contract where employee-employer relationship exists.

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 material evidence to suggest that you were integrated into the Company's business. Firstly, you work full time for the Company and hold a managerial position. Secondly, specific reference is made to the Position Description statement where it provides some indication that you were to be integrated into the Company. This statement identifies your need to 'maintain good relationships and rapport with colleagues and key stakeholders' within the organisation. It further makes reference to your need to liaise with a wide variety of stakeholders and 'actively participate as a key player' in certain processes.

With regards to the above factors together with acknowledging the intensions of both parties, it appears you were integrated the Company'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.

There appears to be no evidence in the facts to suggest the nature of your contract is to produce a given result. Rather, the contract details your specific role and the associated duties in a way that highlights your ongoing service to the Company. Further, it does not provide you with the ability to employ your own means, such as third party labour, to fulfil these duties and requirements.

The facts presented above suggest that the agreement between you and the Company is a 'contract of service' as opposed to a 'contract for service'. This is more likely to reflect that an employee-employer relationship exists between both parties.

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 contract of employment, including the Position Description statement, between you and the Company is structured in a way that indicates you are to personally perform the contracted services. Both documents make reference to your responsibilities, duties and performance and provide no indication that you have the authority to delegate work to others by way of subcontracting. As such, we can deduce you are expressly required to personally perform the contracted services and therefore provides a strong indication that an employment relationship exists.

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, you have the benefit of the Company's health insurance scheme. There is no evidence that you have had to obtain and maintain any other insurances, which is common in an independent contractor agreement. Further, the contract makes reference to your responsibilities when making claims payable to you under the Company provided insurance policies.

The above suggests that you have borne little to no risk of the costs arising out of injury or defect in carrying out your work. As such, the nature of the risk indicator could suggest an employee-employer relationship exists.

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.

The facts state you will be provided will the tools of trade required for you to fulfil your contractual duties. Further, the contract states you will also be reimbursed for all reasonable work related expenditure.

The above could suggest an employment relationship exists between you and the Company

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.

Your contract makes specific reference to your entitlement to certain leave provisions including sick leave and bereavement or compassionate leave. Further, you have also been entitled to annual holiday leave, the payment of which has been factored into the diligence payment component of your daily wage. These entitlements are examples of benefits associated with an employee contract. This further suggests an employee-employer relationship exists between you and the Company.

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.

All of the above indicators have suggested you were contracted as an employee. As such, you are considered an employee under common law pursuant to section 12 of the SGAA. Therefore we do not need to consider the extension of the definition of an employee under subsection 12(3) of the SGAA.

In the application of the maximum earnings test, the relevant 'employment' activity need not be an activity in Australia. The 'employment' income of an Australian resident employed overseas by a foreign employer will be counted in the maximum earnings test if the income is assessable income.

In the facts you have stated that your income from your employment activities represent more than 10% of the total of your assessable income, reportable fringe benefits and reportable employer superannuation contributions that that year. As such, the maximum earnings as an employee condition is not satisfied.

Conclusion:

As not all of the conditions for deductibility under section 290-150 of the ITAA 1997 have been satisfied in relation to the 2011-12 income year, you are not entitled to claim a deduction for the personal superannuation contributions made to your nominated superannuation fund in the 2011-12 income year.