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Ruling

Subject: Deductibility for personal superannuation contributions

Question

Is your client eligible to claim a deduction for personal superannuation contributions made in 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 commenced on

1 July 2009

Relevant facts and circumstances

A number of years ago, whilst your client was working for the previous employer, your client suffered an injury and was receiving workers' compensation benefits (the Compensation Scheme).

The previous employer sold the business and your client's employment in the previous position, was transferred to the new employer (the employer) and your client continued to receive workers' compensation benefits.

Prior to the 2009-10 income year, the employer advised that your client's employment would be terminated, as they was no longer able to carry out the inherent requirements of their specific position.

Your client is a member of a complying superannuation fund (the Fund).

In the 2009-10 income year, your client made personal superannuation contributions of $50,000 into your client's superannuation account with the Fund for the purpose of providing superannuation benefits for your client or for your client's dependants if your client dies before or after becoming entitled to these benefits.

During the 2009-10 income year, the Fund acknowledged receipt of a deduction notice your client had lodged in respect of your client's personal contributions for the 2009-10 income year. The letter further states that the deduction notice was processed, and that the amount of $50,000 being claimed as a tax deduction is subject to tax in the Fund of 15%. The letter also states that income tax of $7,500 was deducted from your client's personal contribution.

Also during the 2009-10 income year, the employer offered your client specific light duties. Your client worked for a short period on light duties however, having previously suffered an injury, your client had difficulty doing this work and was not offered any other work after this period.

The employer made a gross payment for wages to your client with an amount of tax withheld.

For the 2009-10 income year, the Compensation Scheme made workers' compensation benefit payments to your client with an amount of tax withheld. These payments were made due to your client having suffered an injury whilst employed with the previous employer in a specific position.

You state that no entity has made superannuation contributions for your client's benefit in relation to either your client's workers' compensation payments or wages during the 2009-10 income year.

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.

Your client's total assessable income for the 2009-10 income year includes ordinary and statutory income which includes workers' compensation payments, income from employment, and investment income.

Your client did not claim a deduction for the personal contributions in their tax return for the 2009-10 income year.

Your client is over the age of 50 years and under age 75.

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 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.

Income Tax Assessment Act 1997 Section 290-175.

Income Tax Assessment Act 1997 Section 292-15.

Income Tax Assessment Act 1997 Subsection 292-25(2).

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

Reasons for decision

Summary

Your client is entitled to claim a deduction for the concessional contributions made in the 2009-10 income year provided the deduction does not add to or create a tax loss in that income year.

Detailed Reasoning

Personal deductible 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 ITAA 1997. However, the conditions in sections 290-155, 290-160, 290-165 and 290-170 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.

In this case, your client made personal superannuation contributions to a complying superannuation fund, the Fund, in the 2009-10 income year. Therefore the complying superannuation fund condition is satisfied.

Maximum earnings as an employee condition

Subsection 290-160(1) of the ITAA 1997 states:

This section applies if:

o 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 duties;

(iii) engaging in work;

(iv) doing acts or things; and

o 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).

Subsection 290-160(2) of the ITAA 1997 states:

To deduct the contribution, less than 10% of the total of the following must be attributable to the activities:

o your assessable income for the year;

o your reportable fringe benefits total for the income year;

o the total of your reportable employer superannuation contributions for the income year.

Where the person engages in any 'employment' activities in the income year a deduction can only be claimed where the assessable income, reportable fringe benefits total, and (from 1 July 2009) reportable employer superannuation contributions attributable to the 'employment' activities are together less than 10% of the person's total assessable income, reportable fringe benefits total, and reportable employer superannuation contributions in the income year that the contribution is made.

In this case your client was employed by the employer for a short time during the 2009-10 income year. As such, your client was an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA). Hence section 290-160 of the ITAA 1997 applies to your client in this income year.

Further, the payment made to your client from the employer is included in your client's assessable income in the 2009-10 income year.

The Commissioner has issued Taxation Ruling TR 2010/1 which deals with, among other matters, deductions for personal superannuation contributions. At paragraphs 57 and 58 of TR 2010/1, the Commissioner states:

57. Those persons who are engaged in an 'employment' activity in the income year in which they make a contribution need to meet an earnings test if they are to deduct their contribution.

58. Those persons who have not engaged in an 'employment' activity in the income year in which they make a contribution, such as persons who although receiving workers' compensation payments are not employed at any time during the year, are not subject to the maximum earnings test.

Your client's total assessable income, reportable fringe benefits and reportable employer superannuation contributions for the 2009-10 income year includes workers' compensation payments, income from employment, and investment income.

The workers' compensation payments your client received in the 2009-10 income year relate to the position held by your client in their previous period of employment . Therefore they are not taken into account in the maximum earnings test in the 2009-10 income year as they are not attributable to the employment activity your client engaged in during the 2009-10 income year.

The income relating to your client's employment activity with the employer in the 2009-10 income year is counted in the maximum earnings test.

Accordingly, your client's total assessable income, reportable fringe benefits and reportable employer superannuation contributions attributable to the activities that result in your client being treated as an employee for the purposes of the SGAA, will be less than 10% of your client's total assessable income for the 2009-10 income year.

Therefore, your client will satisfy the maximum earnings as an employee condition under section 290-160 of the ITAA 1997.

Age-related condition

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 over age 50 and under age 75 when the contributions were made, your client satisfies the age-related condition.

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 their 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 this notice to the trustee by the earlier of the date of lodgement of your client's 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 deduction notice in the 2009-10 income year. In the deduction notice your client claimed $50,000 as a tax deduction in respect of your client's personal contribution. Your client received a confirmation letter from the fund trustee, acknowledging receipt of the notice of intent to claim the deduction. At the time the deduction notice was processed by the Fund, your client's income tax return had not been lodged for the 2009-10 income year.

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

Deduction limited by the amount specified in the section 290-170 notice

Section 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. As noted above, the tax deduction your client claimed in the deduction notice was $50,000 in respect of your client's personal contribution. Provided this amount does not exceed the deductible amount specified in the deduction notice, your client will also satisfy 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.

Your client claimed deductions in the 2009-10 income year. Information provided in your client's tax return indicates that these deductions are not for previous year's tax losses or for farm management losses. In stating your client's taxable income your client did not claim a deduction for personal contributions.

It is clear from the foregoing the deduction for your client's personal contribution will not create a loss in this income year.

Conclusion

In view of all the above, your client has satisfied the required conditions under sections 290-155, 290-160, 290-165 and 290-170 of the ITAA 1997, in respect of the personal contribution of $50,000 your client made to the Fund in the 2009-10 income year. Therefore, your client can claim a deduction for the entire contribution.

Further issues for you to consider

Contribution limits

The concessional contributions cap for the 2009-10 income year is $25,000 if you are under 50 years of age on 30 June of the financial year.

A transitional concessional contributions cap of $50,000 will apply for individuals aged 50 or older on 30 June of the financial year.

Concessional contributions include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions claimed as a tax deduction by a person.

Therefore, as your client is over age 50 in the 2009-10 income year, the transitional concessional contributions cap of $50,000 will apply. This amount is not indexed.