From 1 July 2007, for employers to claim a tax deduction for 100% of superannuation contributions, the requirements of the new Division 290 of the Income Tax Assessment Act 1997 (1997 Act) must be satisfied. The shift from limiting concessionally taxed benefits to now limiting contribution concessions requires a rethink in approach, especially for people with multiple directorships.
Division 290
Division 290 of the 1997 Act states that employer superannuation contributions are deductible where the employee is:
- an employee within the expanded definition of section 12 of the Superannuation Guarantee Administration Act 1992 (SGA Act); or
- engaged in producing assessable income of the employer; or
- an Australian resident engaged in the business of the employer.
Additional requirements that must be satisfied for employer contributions to be deductible include:
- the deduction must be claimed in the financial year in which the contributions are made;
- the employer has not elected to have the contribution offset against a superannuation guarantee charge liability of the employer;
- the fund must be a complying superannuation fund in the income year in which the contribution was made or the employer has reasonable grounds to believe the fund was a complying superannuation fund; and
- where the employee is 75 years:
- the contribution must have been made on or before the day that is 28 days after the end of the month in which the employee turned 75 years; or
- the employer contribution is required by an industrial award, determination or notional agreement preserving State awards that are in force under an Australian law.
Directors as employees
Section 12(2) of the SGA Act deems a director to be an employee where he or she is “entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate.”
Where a director is not entitled to remuneration and therefore not a deemed employee (i.e. a director of a corporate trustee where the constitution of the trustee company precludes directors from receiving remuneration), the director must either be engaged in producing the assessable income of the employer or an Australian resident engaged in the business of the employer, for employer contributions made on their behalf to be deductible.
Employer contributions made on behalf of a passive director will be deductible to the employer where the passive director is entitled to receive remuneration in connection with his or her role as a director of the company, irrespective of whether the director is involved in the management or day-to-day running of the company. However, the entitlement to payment for services must be in addition to the superannuation contribution.
The extension of the deductibility of employer contributions for deemed employees under section 12 of the SGA Act was excluded from the initial rewrite of the former deductibility provisions contained in the 1997 Act and the Income Tax Assessment Act 1936 (1936 Act). However, the tax deductibility for deemed employees was reinserted into the 1997 Act through the recent Tax Laws Amendment (2007 Measures No 4) Act 2007, which received Royal Assent on the 24 September 2007. This amendment enables employers to claim a tax deduction for contributions made on behalf of directors who are deemed employees under the expanded definition of ‘employee’ contained in section 12 of the SGA Act.
Former employees
Where an employee is no longer employed by the employer, employer contributions made on behalf of the former employee will only be deductible where:
- the contribution reduces the employer’s charge percentage under the SGA Act; or
- it is a one-off payment in lieu of salary or wages that relate to a period of service during which the employee was employed.
Controlling interest test
The controlling interest provisions are designed to allow contributions made on behalf of an employee to be deductible to a taxpayer who is not the employer where certain conditions outlined below are satisfied. Where the requirements of Division 290-90 are met, a taxpayer can claim a tax deduction for superannuation contributions the taxpayer makes on behalf of an employee where:
- the employee is employed by a company in which the taxpayer has a controlling interest; or
- the taxpayer is the beneficial owner of shares in a company that employees the employee, the taxpayer does not have a controlling interest in the company and:
- the taxpayer is at arm’s length with the employee in relation to the contribution; and
- neither the employee nor a relative of the employee has set apart an amount in a fund or made a contribution to a fund for the purpose of providing superannuation benefits for the taxpayer or a relative of the taxpayer; or
- neither the employee nor a relative of the employee has made an arrangement with the taxpayer to make superannuation contributions on behalf of the taxpayer.
The controlling interest provisions apply not only to individual taxpayers but also to corporate taxpayers where:
- the employee is employed by a company or individual that has a controlling interest in a company that makes contributions on behalf of the employee; or
- an individual or company that has a controlling interest in a company that makes contributions on behalf of the employee, also has a controlling interest in the company that employs the employee.
For the employer contributions to be deductible under Division 290, the employee must be:
- an employee within the expanded definition of section 12 of the SGA Act; or
- engaged in producing the assessable income of the employer; or
- an Australian resident engaged in the business of the employer.
It is important to note that where the controlling individual provisions are being relied upon, the employee and the taxpayer claiming the tax deduction cannot be the same person.
Associate provisions
A tax deduction may not be available where the employee is an associate of the employer as defined in section 85-25 of the 1997 Act. An employer cannot claim a deduction for a contribution for an associate to the extent that the activities of the associate relate to the personal services income of the employer. The exception to this general rule is where the activities of an associate form part of the principal work that the employer relies on to produce its personal services income. The tax deduction available to an employer under the exception is limited to mandated employer contributions paid in accordance with the SGA Act (currently 9% of an employee’s ordinary time earnings or notional earnings base).
An associate of an employer generally includes:
- the relatives of the employer (where the employer is a natural person);
- a trustee of a trust where the employer benefits under the trust; or
- a company where the company is sufficiently influenced by, or a majority voting interest in the company is held by, the employer.
Personal services income is ordinary or statutory income (including income derived by an entity) of an individual, where the income is derived predominately as a reward for the personal effort or skill on the part of the individual.
Quantum of deductible contributions
From 1 July 2007, all employer contributions made on behalf of an employee will be deductible to the employer where the requirements of Division 290 of the 1997 Act are satisfied. However, where employer contributions made for an employee exceed the concessional contributions cap (ie $50,000 per annum or $100,000 per annum for employees 50 years and over until 30 June 2012), the excess contributions will be taxed in the fund at an additional 31.5% on top of the standard 15%. It is important to consider the amount of contributions being made for employees as the concessional contributions cap applies per employee instead of per employer, as was the case with the age-based limits that applied prior to the “Simpler Super” reform.
Where employer contributions exceed the employee’s concessional contributions cap, the excess contributions will count against the employee’s non-concessional contributions cap (ie $150,000 per annum or $450,000 averaged over three years). For example, where Andrew (age 50) is a director of five companies and salary sacrifices $75,000 per annum into superannuation from each directorship, the full salary sacrificed amount will be deductible to each company. However, Andrew will have exceeded his concessional contributions cap of $100,000 per annum by $275,000, which will be taxed at an additional 31.5% in the fund and count against his non-concessional contributions cap.
To avoid exceeding his non-concessional contributions cap, Andrew can elect to use the ‘bring forward’ provisions and average any non-concessional contributions over three years. This means that he will only be able to make non-concessional contributions of up to $175,000 (ie $450,000 minus $275,000) over the next three years. Where he exceeds his non-concessional contribution cap, the excess will be taxed at 46.5%, which he can elect to have paid from the fund. He will still have a concessional contributions cap of $100,000 the following year, despite having exceeded the cap in the current financial year.
Exceptions
An exception is where employer contributions are mandated employer contributions under an industrial award, determination or notional agreement preserving State awards in force under an Australian law made on behalf of an employee who is 75 years or more. These contributions are only tax deductible to the employer up to the contribution amount required by the industrial award, determination or notional agreement preserving State awards; the excess is not deductible.
ATO Interpretive Decisions
As the rewrite of the taxation of superannuation provisions in the 1997 Act is similar in material respects to the former provisions that governed the tax deductibility of employer contributions contained in both the 1936 Act and the 1997 Act, we expect that the Australian Taxation Office (ATO) will apply the new legislation in a manner consistent with the interpretation of the former legislation. The former legislation was considered in two recent ATO Interpretive Decisions (ATO ID 2007/144 and ATO ID 2007/145), released just prior to the “Simpler Super” changes taking effect.
ATO ID 2007/144 considered the situation where a passive investment company made contributions on behalf of two directors who received nominal director’s fees ($100 each). The ATO confirmed that, as the company had paid fees to the two directors, they were deemed employees under section 12 of the SGA Act and the contributions were deductible, irrespective of whether the directors were engaged in producing assessable income, or engaged in the business, of the company.
ATO ID 2007/145 considered the situation where a corporate trustee of a family trust made contributions on behalf of a director from the assets of the family trust, (it is not clear from the ATO ID, but the analysis suggests the directors were not entitled to payment for acting as directors). In those circumstances, the superannuation contributions made by the trustee on behalf of the director would not be tax deductible to the trustee unless the director was either an eligible employee engaged in producing the assessable income of the trust, or an Australian resident engaged in the business of the trust.
Self-employed superannuation contributions
From 1 July 2007, self-employed people have also been able to claim a tax deduction for the full amount of superannuation contributions they make on their own behalf, which ensures consistency of treatment between self-employed people and other employers.
Conclusion
The amendments to the tax deductibility of employer contributions made on behalf of an eligible employer were a feature of the “Simpler Super” changes to superannuation law announced in the 9 May 2006 Federal Government budget. The changes to the tax deductibility of employer contributions seek to shift the emphasis from taxing superannuation benefits to taxing excess superannuation contributions and placing the penalty for any excess contributions above the contributions cap on the employee. This is in contrast to the situation prior to 1 July 2007 that restricted the tax deductibility of employer contributions to the age-based limits of the employee.
While all employer contributions are now be deductible to the company where Division 290 is satisfied, employer contributions that exceed the employees concessional contributions cap will be taxed at an additional 31.5% and count against the employees non-concessional contributions cap. Therefore, it is important to remember that the caps now apply per employee as opposed to per employer.