Edited version of your written advice

Authorisation Number: 1012941913504

Date of advice: 3 February 2016

Ruling

Subject: Deductibility of personal superannuation contributions

Question

Will the maximum earnings as employee condition under section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the taxpayer in the relevant income year?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The taxpayer's employment with an organisation terminated during the relevant income year.

During the subsequent income year, the taxpayer was subcontracted by the organisation to work on a number of projects.

The taxpayer has provided copies of the services contracts for each of these projects.

The taxpayer did not receive superannuation guarantee payments from the organisation, or any other party, in relation to any of these three projects.

During the subsequent income year, the taxpayer will receive income from the following sources:

• Payments from the organisation in relation to the subcontractor services;

• Income from a retirement pension;

• Income from dividends; and

• Income from interest

The taxpayer intends to make a personal superannuation contribution to their superannuation fund in the subsequent income year.

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 Section 290-165

Income Tax Assessment Act 1997 Section 290-170

Superannuation Guarantee (Administration) Act 1992 Subsection 12(1)

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

Reasons for decision

Summary

The taxpayer will not be subject to the maximum earnings test under section 290-160 of the ITAA 1997 in the subsequent income year because the taxpayer will not be engaged in any employment activities during that 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 under section 290-150 of the ITAA 1997. However, the conditions in sections 290-155, 290-160 (if applicable), 290-165 and 290-170 of the ITAA 1997 must also be satisfied for the person to claim the deduction.

The condition under section 290-160 of the ITAA 1997 is known as the maximum earnings test and is only applicable in certain situations.

Maximum earnings test

According to subsection 290-160(1) of the ITAA 1997, the maximum earnings test only 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 duties;

(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).

The application of the maximum earnings test is discussed in Taxation Ruling TR 2010/1 Income tax: superannuation contributions. Relevantly, paragraphs 58 and 59 state that:

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.

59. 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'

Under subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA), a person is an employee if they come within the ordinary meaning of employee, or if they come within the meaning as expanded by subsections 12(2) to 12(10) of the SGAA.

Ordinary meaning of 'employee'

Other than stating that 'employee' has its ordinary meaning, the SGAA does not list the indicators that may be considered in determining whether a worker is an employee at common law. In most cases, it will be self-evident whether an employer/employee or a principal/independent contractor relationship exists. However, it is sometimes difficult to discern the true character of the relationship from the facts of the case as the intentions of the parties may be unclear or ambiguous, such as where the terms of the contract are disputed by the parties or are otherwise in apparent conflict. Because of these difficulties, the ordinary meaning of employee has been the subject of a significant amount of judicial consideration.

Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? discusses the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term. In summary, these include:

• the terms and conditions of the contract between the parties in light of the circumstances surrounding the making of the contract;

• the degree of control which one party can exercise over the other party in relation to the provision of services;

• does the worker operate on their own account or in the business of the payer;

• whether the contract is to achieve a specified result;

• whether the work can be delegated or subcontracted;

• whether the worker also performs work for other entities;

• the level of risk the worker bears of costs arising out of injury or defect in carrying out their work;

• the provision of tools and equipment and payment of business expenses; and

• provision of benefits such as annual leave, sick and long service leave and other benefits prescribed under an award for employees.

In the taxpayer's case, the facts indicate that the taxpayer is not an employee of the organisation at common law. That view is based on the following terms contained in the contracts made between the taxpayer and the organisation:

• the relationship between the taxpayer and the organisation is characterised as that of a principal and independent contractor;

• the taxpayer was contracted to achieve specified results;

• the taxpayer has a right to sub-contract (delegate) specified services;

• a fee is payable to the taxpayer on completion of specified services only if services are performed to the organisation's reasonable satisfaction;

• the taxpayer has to provide invoices to the organisation and the fee must include GST;

• the taxpayer is responsible for paying any GST, income tax or superannuation contributions relating to their provision of services;

• the taxpayer may work for other parties;

• the taxpayer must effect and maintain professional indemnity and (where appropriate) public liability insurance to cover their performance of the services;

• the taxpayer shall indemnify and keep indemnified the organisation, its officers, employees and agents from and against any loss or liability incurred or suffered as a result of or in connection with the taxpayer's activities;

• the taxpayer must not use the organisation's name or trademarks in a manner to suggest that the organisation endorses or is associated with the taxpayer's business, products or services.

However, if it is considered that the relationship at common law is one of principal/independent contractor rather than an employee/employer, or the determination of the status of the worker is unclear, the extended definition of 'employee' in the SGAA must be considered.

Under subsection 12(3) of the SGAA, if a person works under a contract that is wholly or principally for the labour of the person, that person is an employee of the other party to the contract.

SGR 2005/1 clarifies which persons are employees under the extended definition and, at paragraph 11, states:

For the purposes of subsection 12(3), where the terms of the contract in light of the subsequent conduct of the parties indicate that:

• the individual is remunerated (either wholly or principally) for their personal labour and skills;

• the individual must perform the contractual work personally (there is no right of delegation); and

• the individual is not paid to achieve a result,

the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.

Based on the above, subsection 12(3) of the SGAA does not apply to the taxpayer's situation. This is because:

• the taxpayer's contracts with the organisation were not wholly or principally for the taxpayer's personal labour and skills;

• the taxpayer had a right of delegation; and

• the taxpayer was contracted to achieve specified results rather than to simply provide their personal labour. The taxpayer's remuneration was linked to the achievement of specified results rather than to the number of hours worked.

In view of this, the taxpayer has not engaged in any activities in the subsequent income year so far that would make them an employee for the purposes of the SGAA. This is consistent with the fact that the taxpayer has not received any superannuation guarantee payments from the organisation in relation to the services provided.

Accordingly, so long as the taxpayer does not engage in any employment activities for the remainder of the subsequent income year, the taxpayer will not be subject to the maximum earnings test under section 290-160 of the ITAA 1997.

Other conditions

As the taxpayer is not required to satisfy section 290-160 of the ITAA 1997, the taxpayer will be able to claim a deduction for their proposed personal superannuation contribution in the subsequent income year if the conditions under sections 290-155, 290-165 and 290-170 of the ITAA 1997 are satisfied.

In other words, the taxpayer will be able to claim a deduction if:

• The contribution is made to a complying superannuation fund;

• The contribution is made before a certain date (28 days after the end of the month in which the taxpayer turns 75); and

• The taxpayer satisfies the relevant notice requirements.

Section 290-170 of the ITAA 1997 requires the taxpayer to provide a valid notice of their intention to claim a deduction to the trustee of the superannuation fund. This notice must be given before the earlier of:

• the date the taxpayer lodges their income tax return for the income year in which the contribution was made; or

• the end of the income year following the year in which the contribution was made.

A notice will be valid if:

• the notice is in respect of the contributions;

• the notice is not for an amount covered by a previous notice;

• at the time when the notice is given:

• the taxpayer is a member of the fund;

• the trustee of the fund holds the contribution (for example, a notice will not be valid if a partial roll-over of the superannuation benefit which includes the contribution covered in the notice has been made);

• the trustee has not begun to pay a superannuation income stream based on the contribution; or

• before the notice is given:

• a contributions splitting application has not been made in relation to the contribution; and;

• the trustee of the fund to which the taxpayer made the application has not rejected the application.

In addition, the taxpayer must also receive an acknowledgement of the notice by the trustee of the superannuation fund.