Edited version of private advice

Authorisation Number: 1012636775127

Ruling

Subject: deductibility of personal superannuation contributions

Question

What is considered to be 'assessable income', the gross or net income from the running of a particular business (the Business) in applying the 10% rule under section 290-160 of the Income Tax Assessment Act 1997?.

Answer

The gross income from the business

This ruling applies for the following period

Year ending 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

Your client's total assessable income for the 2012-13 income year comprises of:

Gross Salary & Wages

Allowance - travel

Reportable employer super contributions

Interest income

Gross income from the Business

During the 2012-13 income year, your client made a contribution to a public offer Fund and intends to claim a deduction up to the concessional contributions limit.

Your client's income tax return for the 2012-13 income year was lodged and received by the Australian Taxation Office during the 2013-14 income year.

The personal superannuation contribution was not claimed as a deduction in the 2012-13 income year.

The Notice of Assessment for the 201-13 income year was issued during the 2013-14 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 290-150.

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 Subsection 6-5(2).

Income Tax Assessment Act 1997 Section 6-10.

Reasons for decision

Summary

The gross income from the Business is the assessable income to be used in determines the 10% rule.

Detailed reasoning

In accordance with section 290-150 of the ITAA 1997, a person who makes contributions to a superannuation fund for the purpose of providing superannuation benefits for themselves, can claim the deduction for contributions in the income year the contributions are made.

However, to deduct the contributions, the person must satisfy a number of conditions¹, including the maximum earnings as employee condition (where applicable) set in section 290-160 of the ITAA 1997.

Subsection 290-160(1) of the ITAA 1997 states that section 290-160 of the ITAA 1997 applies if in the income year in which a person makes the contribution, the person engages in any of the following activities:

n holding an office or appointment;

n performing functions or duties;

n engaging in work;

n doing acts or things; and

the activities result in the person 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).

In accordance with subsection 290-160(2) of the ITAA 1997, where the above is the case, to deduct the contribution, less than 10% of the total of the following must be attributable to a person's 'employment' activities:

n the person's assessable income for the income year;

n the person's reportable fringe benefits total for the income year;

n the total of the person's reportable employer superannuation contributions for the income year.

The Commissioner has issued Taxation Ruling TR 2010/1 in which he expresses his view on the application of subsection 290-160(2) of the ITAA 1997 and, at paragraph 63, states:

Assessable income, reportable fringe benefits total and reportable employer superannuation contributions are to be given their statutory meaning. In this regard, a person's assessable income is usually a gross amount worked out ignoring expenses incurred in gaining the income. However, in some cases, such as partnership or trust income, the amount included in a person's assessable income is their share of the net partnership income or net trust income.

Paragraph 64 of TR 2010/1 states that all amounts that are 'attributable' to the 'employment' activity are taken into account as assessable income for the purposes of subsection 290-160(2) of the ITAA 1997. These include:

All amounts that are attributable to the 'employment' activity are taken into account as assessable income in the 10% test. These include:

n the salary or wages (as used in its ordinary meaning) from the activity;

n allowances and other payments earned by an employee;

n the other payments, such as commission, director's remuneration and contract payments, that are treated as salary or wages by section 11 of the SGAA for those persons who engage in an 'employment' activity in a capacity other than a common law employee;

n an employment termination payment received by a person in consequence of the termination of their employment; and

n workers' compensation and like payments made because of injury or illness received by a person while holding the employment, office or appointment the performance of which gave rise to the entitlement to the compensation payments.

Subsection 6-5(2) of ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income is income according to ordinary concepts and is generally considered to include:

n amounts received in return for personal services, whether received in the capacity of an employee or otherwise; and

n amounts received periodically or regularly and which the recipient relies on for the maintenance of themselves and/or their dependants (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540).

Section 6-10 of the ITAA 1997 further provides that assessable income also includes some amounts that are not ordinary income. This income is referred to as statutory income. Statutory income from all sources in or out of Australia is also included in the assessable income of an Australian resident. Statutory income includes net capital gains.

It can be seen from TR 2001/1 at paragraph 63, a person's assessable income is usually a gross amount worked out ignoring expenses incurred in gaining the income. In your client case, the gross income from the Business should be used to determine the eligibility of a deduction for personal superannuation contribution under the 10% rule.

¹ Subsection 290-150(2) of the ITAA 1997.