Edited version of your private ruling

Authorisation Number: 1012454239844

Ruling

Subject: Deduction for personal superannuation contribution

Question:

Is your client entitled to claim a deduction for a personal superannuation contribution made in the 2012-13 income year under section 290-150 of the Income Tax Assessment Act 1997?

Answer:

Yes.

This ruling applies for the following period:

Year ending 30 June 2013.

The scheme commenced in:

The income year beginning 1 July 2012.

Relevant facts and circumstances:

Your client, who is under age 75, was employed by a government agency until early April 2012, and is no longer employed.

Your client receives income from an allocated pension, bank interest, workers' compensation payments and payments from an income protection insurance policy.

In respect of the income protection payments, the income protection policy was paid for by your client, and the policy is totally separate from insurances held by the previous employer.

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

In early February 2013, your client made a personal superannuation contribution to the fund. Your client made the contribution 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 the benefits.

Your client intends to claim a deduction in respect of the contribution.

You have advised that the deduction will not add to or create a loss in the 2012-13 income year.

Your client has provided a notice to the fund trustee, stating an intent to claim a deduction for the personal contribution.

Your client expects to receive an acknowledgment of the notice of intent prior to the lodgement of a tax return for the 2012-13 income year. Your client has yet to lodge a return for this income year.

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 and

Income Tax Assessment Act 1997 Paragraph 292-20(2)(f).

Reasons for decision

Summary

The maximum earnings as an employee condition does not apply to your client in the 2012-13 income year, because your client is not engaged in an employment activity.

Therefore, your client is entitled to claim a deduction in respect of the personal superannuation contribution they made during this income year, provided:

· the trustee of the superannuation fund acknowledges your client's notice of intent to claim the deduction for the contribution; and

· the deduction does not add to or create a loss.

The amount of the deduction is a concessional contribution in the 2012-13 financial year.

Detailed reasoning

Personal superannuation contributions made in the 2012-13 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).

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 the contribution is made. 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 2012-13 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. As such, the allocated pension your client receives in the 2012-13 income year is not taken into account in the calculation prescribed in the maximum earnings test.

In TR 2010/1, the Commissioner discusses the operation of the maximum earnings as employee condition. 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.

Example 8 - maximum earnings test in paragraphs 88 and 89 of TR 2010/1 provides an example of the maximum earnings test in the situation where employment is terminated prior to the income year in which a contribution is made, as follows:

88. Caitlin terminates her employment with Bling Pty Ltd on 30 June 2009 and was paid unused long service leave and annual leave on 3 July 2009. Caitlin made a contribution of $5,000 to her complying superannuation fund on 9 July 2009. Caitlin was not engaged in any employment activities for the 2009-10 income year.

89. As Caitlin was not engaged in any employment activities in the 2009-10 income year, she does not need to meet the earnings test in relation to her $5,000 contribution.

The employment activity 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.

The critical factor is whether your client is engaged in an employment activity during the 2012-13 income year. In this case, your client's employment with the employer ceased in early April 2012. In addition, your client is no longer employed. Therefore your client is not engaged in an employment activity during this income year.

Provided your client does not engage in any new employment activities, the employment activity condition does not apply to your client in this income year.

Section 290-160 of the ITAA 1997 and workers' compensation payments

In TR 2010/1, the Commissioner discusses the operation of the maximum earnings as employee condition for persons who are receiving workers' compensation payments. At paragraphs 246 to 248 of TR 2010/1, the Commissioner states:

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

247. Those persons who have not engaged in an 'employment' activity in the income year in which they make a contribution are not subject to this earnings test. For example, a person who, although no longer employed, is receiving workers' compensation payments, is not subject to the maximum earnings test.

248. A person will be engaged in an 'employment' activity if they are engaged in an activity in the income year that results in them being treated as an employee for the purposes of the SGAA. The term 'engaged' is not defined and takes its ordinary meaning. One of several meanings given to engaged is 'busy or occupied; involved'. Another meaning is 'under an engagement' where the ordinary meaning of 'engagement' is given as 'under an obligation or agreement.

As noted above, your client is no longer employed since early April 2012. In the light of paragraphs 58, 89 and 247 of TR 2010/1, although your client is receiving workers' compensation payments during the 2012-13 income year, your client is not subject to the maximum earnings test in respect of these payments. This is because your client was not engaged in any employment activity during this income year.

As such, the workers' compensation payments are income that is not attributable to an employment activity in this income year. Therefore, these payments are not taken into account in the calculation prescribed in subsection 290-160(2) of the ITAA 1997.

Section 290-160 of the ITAA 1997 and income protection payments

As noted in the facts, your client receives payments from an income protection insurance policy during the 2012-13 income year. In respect of the income protection payments, the income protection policy was paid for by your client, and the policy is totally separate from insurances held by the previous employer.

It should be noted that income received from an insurance company under an income protection policy is not income that is attributable to employment as an employee. Further, the payment from the insurance company would not result in the person being treated as an employee of the insurance company. Even though these payments are made to the person to replace assessable income, these payments are merely a pay-out on an insurance policy.

As such, there is no employment relationship attached to these income protection payments made to a person by the insurance company. As a result, payments received by a person under an income protection insurance policy are not taken into account in the calculation prescribed in subsection 290-160(2) of the ITAA 1997.

In this instance, no employment relationship between your client and the insurer is attached to the income protection payments. Hence your client is not engaged in an employment activity with the insurer when they receive the payments.

Therefore, these payments are income that is not attributable to an employment activity, and as such, they are not taken into account in the maximum earnings test.

The maximum earnings as an employee condition does not apply to your client

As discussed above, the employment activity condition does not apply to your client in the 2012-13 income year.

In addition the allocated pension, the workers' compensation payments and the income protection payments are each not attributable to an employment activity in this income year. It follows, therefore, that these amounts of income are not taken into account in the maximum earnings test.

Consequently, the maximum earnings as an employee condition prescribed in section 290-160 of the ITAA 1997 does not apply to your client in this income year.

In light of the above, it should be noted that under the conditions in subdivision 290-C of the ITAA 1997, your client's eligibility to claim the deduction is not determined by the level of superannuation support they receive or should have received from an employer or another entity.

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 75 at the time the 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, in the approved form, 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.

Section 290-170 of the ITAA 1997 also provides that 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 fund trustee is required to acknowledge your client's notice without delay.

Your client has provided a notice to the fund trustee, stating an intention to claim a deduction for the personal contribution. Your client expects to receive an acknowledgment of the notice of intent prior to the lodgement of a tax return for the 2012-13 income year. Your client has yet to lodge a return for this income year.

It is accepted that your client has lodged a valid notice of intent with the fund trustee before an income tax return for the 2012-13 income year is lodged. Provided the fund trustee duly acknowledges your client's notice of intent, the notice of intent to deduct conditions under section 290-170 of the ITAA 1997 will be satisfied.

Deduction limited by amount specified in 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 of the ITAA 1997.

Your client intends to claim a deduction for the entire amount of the personal contribution. Provided this amount does not exceed the deductible amount specified in her section 290-170 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.

You have advised that the deduction for the personal contribution will not add to or create a loss in the 2012-13 income year. Therefore it is accepted that the deduction for the contribution will not create or increase a loss in this income year.

Conclusion

Based on the facts provided, section 290-160 of the ITAA 1997 does not apply to your client in the 2012-13 income year. In addition, your client has satisfied the required conditions under sections 290-155 and 290-165 of the ITAA 1997.

Provided the conditions under section 290-170 are satisfied, and the deduction does not add to or create a loss, your client is entitled to claim a deduction for the entire amount of the contribution they made to the fund during the 2012-13 income year.

The amount of the deduction is a concessional contribution in the 2012-13 financial year.

As such, this amount is counted towards the annual concessional contributions cap of $25,000 which applies to all individuals from 1 July 2012.