Edited version of private advice

Authorisation Number: 1051527534362

Date of advice: 12 June 2019

Ruling

Subject: Reportable Employer Superannuation Contributions

Question 1

Do employees have the 'capacity to influence' the amount of their employer contributions, for the purpose of those contributions meeting the definition of reportable employer superannuation contributions under section 16-182 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No.

This ruling applies for the following period:

1 July 2014 to 30 June 2022

Relevant facts and circumstances

1.     The employer is a provider of education, with all employees covered under the terms of a collectively negotiated enterprise agreement (Agreement).

2.     As per the Agreement, the employer has entered into a Deed of Covenant with an industry fund to make employer contributions in accordance with the rules of the fund as outlined in the Consolidated Trust Deed.

3.     Within the Consolidated Trust Deed and Deed of Covenant, different categories of membership exist. Only specified employees are entitled to become members of schemes (Scheme 1) that receive employer contributions that exceed the minimum superannuation guarantee rate. Scheme 2 members are only entitled to the minimum superannuation guarantee rate.

4.     The Trust Deed determines the employer's contribution rates for all the relevant Schemes.

5.     A clause within the Deed of Covenant provides an employee, with the permission of the employer, to opt out of Scheme 1 to join Scheme 2, or to join another superannuation fund.

6.     Generally, reduced employer superannuation contributions are exchanged for a corresponding increase in an employee's salary or wages.

7.     The employer will ultimately decide whether the employee can exercise this option.

Reasons for decision

Detailed reasoning

Reportable employer superannuation contributions (RESC) are assessed as income in determining eligibility for a range of means-tested government assistance programs in the tax and transfer system.

RESC is defined under subsection 16-182(1) of Schedule 1 to the TAA and includes an amount contributed by an employer for an individual to a superannuation fund to the extent that the individual has, or might reasonably be expected to have, the 'capacity to influence':

·        the size of the amount, or

·        the way the amount is or will be contributed so that his or her assessable income is reduced.

The contributions will typically be those made under effective 'salary sacrifice' arrangements. However, the definition also includes other contributions made for an individual's benefit that the individual has the capacity to influence.

However, an amount is not a RESC to the extent that it is included in the individual's assessable income for the income year (subsection 16-185(2) of Schedule 1 to the TAA).

An individual is not considered to have the capacity to influence the size of the amount where an employer is required to make the contributions under an 'industrial instrument' or the rules of a superannuation fund, and the individual did not have the capacity to influence the content of that instrument or those rules (subsection 16-182(5) of Schedule 1 to the TAA).

The term 'industrial instrument' means an Australian law or an award, order, determination or industrial agreement in force under an Australian law (section 995-1 of the Income Tax Assessment Act 1997).

The Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No. 4) Bill 2011 clarifies that RESC are employer contributions to superannuation in addition to what is provided for under an industrial instrument or the rules of a superannuation fund and the employee had or has the capacity to influence the content of that requirement (clauses 4.3, 4.12).

The employees are employed under an Agreement that meets the definition of an 'industrial instrument'. The Employer is required to make employer contributions in accordance with the Agreement and the rules contained in the Deed of Covenant and the Fund's Trust Deed.

The Deed of Covenant (and subsequent amendments) allows an eligible employee to make a request to the Employer to not join or to opt out of Scheme 1 to join Scheme 2 or another superannuation fund. The predominant purpose of the request, if accepted by The Employer, is to include the foregone employer contribution amount in the employee's salary income.

It may be argued that the election available to eligible employees for Scheme 1 is considered a capacity to influence the size of their employer contribution.

Individual employees are not in a position to influence the drafting of contribution rules in the Deed of Covenant or Trust Deed. These rules are determined via processes involving collective enterprise bargaining agreements, legislation and the Fund's Board of Trustees. However, this is not the determining factor on whether contributions are RESC. A decisive factor is whether an employee has options available to them which enable a 'capacity to influence' the amount of their superannuation contributions.

An example was in ATO Interpretative Decision 2010/112: Reportable employer superannuation contributions: additional superannuation contributions made by employer (ATO ID 2010/112) where additional contributions made by an employer on behalf of an employee due to the employee's choice of superannuation fund, met the definition of RESC in subsection 16-182(1) of Schedule 1 to the TAA, as the employee's choice of fund influenced the amounts contributed by the employer on the employee's behalf.

The difference in this case is that employer contributions are being reduced via the employee's choice. Although the contributions do not come within the exemption of subsection 162-182(2) of the TAA (that they are included in the individual's assessable income for the income year), it is noted that the foregone employer contribution amount is generally included in the employee's salary and assessable income.

The option to reduce employer contributions is only available to 5% of eligible employees of Scheme 1 members, with the Employer holding the absolute right to grant or deny this option. While it is arguable whether an employee has any capacity to influence under this arrangement, it is clear that a minimum of 95% of employees will have no capacity to influence their employer contribution amount.

Furthermore, the intent of the legislation (as per the EM) is that RESC will include employer superannuation contributions that are 'in addition to' what is provided for under an industrial instrument or fund rules, and/or the amount contributed will reduce the employee's assessable income. Therefore the reduction in the employee's contribution amount, which will generally result in an increase in their assessable income, will not satisfy this intent.

A reduced employer contribution amount that is equal to the minimum SG rate will also comply with an 'industrial instrument'.

For these reasons, it is considered that the employee's election to reduce their employer contributions does not satisfy the requirements of section 16-182 of the TAA and will not meet the definition of RESC.