Edited version of your private ruling

Authorisation Number: 1012497204772

Ruling

Subject: Deduction for personal superannuation contributions

Question

1. For the purposes of the ten percent rule in section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997), is the income from employee share schemes regarded as being attributable to activities that result in your client being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

2. Can your client claim a deduction for personal superannuation contributions?

Answer

1. Yes.

2. No.

This ruling applies for the following period:

2011-12 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your client was employed by the employer.

Your client commenced employment with the employer several years ago.

The employer has an employee share scheme referred to as Employee Share Scheme 1 (ESS 1).

The relevant clauses under the rules of ESS 1 are as follows:

· A clause of the Rules of ESS 1 provides that if a person who holds unvested shares ceases to be an employee due to retirement, all the unvested shares become vested on the last employment date.

· A clause of the Rules of ESS 1 states that issue of securities may be made to eligible employees.

· A clause of the Rules of ESS 1 defines eligible employees to mean an employee whom the Board determines is to receive an invitation under the scheme.

· A clause of the Rules of ESS 1 defines an employee as any person who is in full time or part time employment of a Group Company.

The employer also has an employee share scheme referred to as Employee Share Scheme 2 (ESS 2).

The relevant clauses under the rules of ESS 2 are as follows:

· A clause of the Rules of ESS 2 provides that a taxpayer may exercise their securities on retirement on their last employment date or up until 12 months from their last employment date.

· A clause of the Rules ESS 2 states issue of securities may be made to eligible employees.

· A clause of the Rules of ESS 2 defines eligible employees to mean an employee whom the Board determines is to receive an invitation under the scheme.

· A clause of the Rules of ESS 2 defines an employee as any person who is in full time or part time employment of a Group Company.

Your client participated in the 2 employee share schemes with the employer.

Your client retired from employment with the employer during the relevant income year. Your client also retired from the workforce generally on the same day.

You advised that following your client's retirement during the relevant income year, your client did not undertake any further activities during the relevant income year that would result in your client being treated as an employee for Superannuation Guarantee purposes.

On the date of your client's retirement from employment with the employer, share options for an amount were deemed to be exercised by your client.

You provided details of your client's total income for the relevant income year which was broken up as follows:

· Salary or wages X%

· Employer lump sum payment B Y%

· Gross interest Z%

· Dividends V%

· Employee share scheme U%

· Total income 100%

You advised that your client did not have any reportable fringe benefits and did not have any reportable employer superannuation contributions in the relevant income year.

Your client made a contribution to a complying superannuation fund during the relevant income year.

During the subsequent income year, your client provided the superannuation fund a notice of their intention to claim a tax deduction for their personal superannuation contributions in the relevant income year.

A letter from the superannuation fund to your client during the subsequent income year acknowledged your client's personal tax deduction notice to claim a tax deduction for their personal superannuation contributions in the relevant income year.

Your client is under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 290-150

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 Subsection 290-160(2)

Income Tax Assessment Act 1997 Section 290-165

Income Tax Assessment Act 1997 Section 290-170

Superannuation Guarantee (Administration) Act 1992 Section 12

Reasons for decision

Summary

For the purposes of the ten percent rule in section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997), the income from the employee share schemes is regarded as being attributable to activities that result in your client being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

Your client is not eligible to claim a deduction for the personal superannuation contributions they make to the superannuation fund as one of the conditions under section 290-150 have not been met in the relevant income year.

Detailed reasoning

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.

In this case, you have advised that your client has made a contribution to a complying superannuation fund. Therefore, 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 their assessable income, reportable fringe benefits and reportable employer superannuation contributions for the income year must be attributable to those activities (This is also referred to as the 10% rule). 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 has not been enacted).

Subsection 290-60(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:

(a) your assessable income for the income year;

(b) your reportable fringe benefits total for the income year;

(c) the total of your reportable employer superannuation contributions for the income year.

One of the circumstances under which a person will have an obligation or commitment to make contributions to a superannuation fund for the benefit of a taxpayer is if he or she is required to make contributions to a superannuation fund for the benefit of an employee under section 12 of the SGAA.

From the facts of the case your client terminated employment with the employer during the relevant income year. Your client was paid an amount of salary or wages and an assessable amount of lump sum payment from the employer in the relevant income year. As your client was still employed by the employer in the relevant income year your client is considered to be engaged in an employment activity in that income year.

As your client was paid an amount of salary or wages during the relevant income year, which is in excess of $450 in that month, the employer would have an obligation to make superannuation contributions of at least 9% of the salary and wages paid to reduce the Superannuation Guarantee Charge (SGC) otherwise liable under the SGAA to Nil. Those contributions would mean that your client should be treated as an employee for the purposes for the SGAA in the relevant income year.

As your client was engaged in an employment activity, your client is required to meet the maximum earnings test in the relevant income year (the year that your client made a contribution).

Employee Share Scheme

From the facts provided, your client exercised share options from an employee share scheme in the early part of the 20XX financial year representing U% of the total income.

As noted above your client retired from their employment with the employer in the early part of the 20XX financial year and was paid an amount of salary or wages representing X% of the total income for the relevant income year. Therefore your client is considered to be engaged in the type of activities described in paragraph 290-160(a) of the ITAA 1997 which resulted in your client being treated as an employee under section 12 of the SGAA as prescribed by paragraph 290-160(1)(b).

The extent of the link between these activities and the income from the employment share scheme must be examined as per subsection 290-160 of the ITAA 1997. It needs to be determined whether the exercise of the share options under the employee share scheme is considered to be attributable to activities that result in your client being treated as an employee for the purposes of the SGAA. This will have an impact on whether or not your client satisfies the 10% rule in section 290-160 of the ITAA 1997.

The term 'attributable' is not defined, however, the courts have considered the meaning of the term in a number of cases. The Commissioner provides the following guidelines on the term 'attributable' in paragraph 255 to 258 of TR 2010/1:

255. The term 'attributable to' in subsection 290-160(2) is not defined. However, the courts have considered the meaning of the term in a number of different cases. For example, in determining whether the plaintiff's loss of employment was 'attributable to' the provisions of the Local Government Act 1972 (UK), Donaldson J in Walsh v. Rother District Council [1978 ICR 1216 at 1220]; [1978] 1All ER 5101 at 5104 stated:

These are plain English words involving some causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient.

256. Donaldson J's comments were cited with approval by the High Court in Commissioner of Taxation v. Sun Alliance Investments Pty Limited (in liquidation) [2005] HCA 70; 2005 ATC 4955; (2005) 60 ATR 560.

257. In Repatriation Commission v. Law (1980) 31 ALR 140 at 151, the Full Federal Court said:

It seems clear the expression 'attributable to' in each case involves an element of causation. The cause need not be the sole or dominant cause: it is sufficient to show 'attributability' if the cause is one of a number of causes provided it is a contributing cause...

258. In McIntosh v. Federal Commissioner of Taxation 79ATC 4325;(1980) 10 ATR 13 the Full Federal Court considered whether there was a causal connection between a commutation payment and the employee's termination of employment. Brennan J said that:

Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement.

Your client was a participant in two employee share schemes, ESS 1 and ESS 2. On the date of your client's retirement from employment with the employer, share options for an amount were deemed to be exercised by your client.

A clause of the Rules of ESS 1 provides that if a person who holds unvested shares ceases to be an employee due to retirement, all the unvested shares become vested on the last employment date. A clause of the Rules of ESS 1 states that issue of securities may be made to eligible employees. Eligible employees are defined in a clause of the Rules of ESS 1 to mean an employee whom the Board determines is to receive an invitation under the scheme. An employee is defined in a clause of the Rules of ESS 1 as any person who is in full time or part time employment of a Group Company.

A clause of the Rules of ESS 2 provides that a taxpayer may exercise their securities on retirement on their last employment date or up until 12 months from their last employment date. A clause of the Rules of ESS 2 states issue of securities may be made to eligible employees. Eligible employees are defined in a clause of the Rules of ESS 2 to mean an employee whom the Board determines is to receive an invitation under the scheme. An employee is defined in a clause of the Rules of ESS 2 as any person who is in full time or part time employment of a Group Company.

These clauses of the respective rules of the employment share schemes make it clear that your client's retirement from the activities described in paragraphs 290-160(1)(a) and (b) is the trigger event which causes these shares to vest in your client, the value of which becomes assessable to your client as income. But for your client's retirement from the employment to which these activities relate, the value of these shares would not have become assessable to your client at this point in time. On this basis, and in light of Donaldson J's aforementioned comments in Walsh v. Rother District Council [1978 ICR 1216 at 1220]; [1978] 1All ER 5101 at 5104, it is considered that there is a sufficient causal connection between the activities described in paragraphs 290-160(1)(a) and (b) of the ITAA 1997 and the income from the employee share schemes such that this income is regarded as being attributable to those activities for the purposes of subsection 290-160(2) of the ITAA 1997.

As it has been determined that the income from the share options is attributable to the employment activities, we will now determine how much of that amount will be included in the ten percent test.

Your client's total assessable income from activities that result in your client being treated as an employee for the SGAA is an amount. (That includes income from the employee share schemes, salary and wages and an employer lump sum payment).

Your client's total assessable income from activities that result in your client being treated as an employee for the SGAA is an amount for the relevant income year. This is more than ten percent of your client's total assessable income, plus reportable fringe benefits and reportable employer contribution in the relevant income year. Therefore the condition under section 290-160 has not been met.

As your client does not satisfy the ten percent rule, there is no need to consider the other conditions that need to be met for a deduction to be allowed.

Conclusion:

For the purposes of the ten percent rule in section 290-160 of the ITAA 1997, the income from the employee share schemes is regarded as being attributable to activities that result in your client being treated as an employee for the purposes of the SGAA in relation to the ten percent rule in section 290-160 of the ITAA 1997.

As one of the conditions under section 290-150 have not been met your client is not entitled to a deduction for personal superannuation contributions in the relevant income year.