Deductions for superannuation contributions

Can the taxpayer, an employer, claim a deduction under subsection 82AAC(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for superannuation contributions made on behalf of employees with accounts in excess of their pension reasonable benefit limit (RBL), where the superannuation fund's trust deed contains a provision requiring the forfeiture of any contributions in excess of members' pension RBL?

No, in this case, the employer cannot claim a deduction under subsection 82AAC(1) (ITAA 1936) for the superannuation contributions that are made on behalf of employees with accounts in excess of their pension RBL.

The taxpayer is an employer company that makes superannuation contributions on behalf of eligible employees to a complying superannuation fund that is an associate of the employer company. The trust deed of the superannuation fund provides that where superannuation contributions are made on behalf of employees with accounts in excess of their pension RBL, those contributions will be forfeited.

The taxpayer has several longstanding employees, each of whom is over 50 years of age. These employees all have superannuation member accounts that exceed their member pension RBL. The taxpayer continues to make superannuation contributions on behalf of those employees and claims deductions up to the age based limit on behalf of each employee for whom the contributions are made.

The superannuation contributions made to the longstanding employees are forfeited in the manner permitted in the trust deed. The trustee of the superannuation fund uses its discretion granted under the trust deed to apply the surplus forfeited funds for the benefit of particular members' accounts. In each case, the members who receive the forfeited amounts are young employees, who are also directors of the taxpayer company.

The taxpayer has not alerted its longstanding employees to the fact subsection 19(4) of the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) enables them to elect that the taxpayer will no longer be liable to superannuation guarantee charge once their superannuation benefit entitlements exceed their pension RBL. This election exempts the taxpayer from providing superannuation support for the employee.

Where an employer makes a contribution to a complying superannuation fund for the purpose of providing superannuation benefits to an eligible employee, the employer is entitled to claim a deduction in respect of the superannuation contribution under subsection 82AAC(1) (ITAA 1936). However, the amount of the deduction that is allowed is subject to limits that are determined on the basis of the age of each employee for whom the contributions are made: subsections 82AAC(2A) and 82AAC(2C) (ITAA 1936). The deduction limit for employees who are over 50 years of age is substantially higher than that allowed for employees in lower age brackets.

To determine whether a contribution has been made for the purpose of making provision for superannuation benefits, it is necessary to look at the purpose of the taxpayer: Raymor Contractors v. FC of T 91 ATC 4259; (1991) 21 ATR 1410.

It is necessary to examine the facts of each case to determine the purpose of the taxpayer making the superannuation contributions. It is permissible to look beyond the terms of the trust deed to establish the purpose. Accordingly, relevant considerations include the use made by the trustee of the trust funds, the extent to which the employees actually receive benefits from the fund and the extent to which the funds are used to benefit persons who are not employees: see Raymor Contractors v. FC of T 91 ATC 4259; (1991) 21 ATR 1410; AAT Case 6621A (1993) 26 ATR 1001; Case 25/93 93 ATC 314.

In this case, the taxpayer makes contributions on behalf of the employees whose member accounts exceed the pension RBL with a view to claiming a deduction up to the age-based limit in respect of those contributions. However, the non-arm's length trustee of the superannuation fund applies the forfeiture provision in the trust deed so that those contributions are invariably forfeited. The forfeited funds are then redirected to the accounts of the young directors of the taxpayer company. Thus, the taxpayer maximises the deductions that are available for superannuation contributions, but the funds are applied for the benefit of its directors. These facts, combined with the fact that the taxpayer has made no effort to make the longstanding employees aware of the election under subsection 19(4) (SGAA 1993) suggests that the taxpayer is not acting with the purpose of making contributions to provide superannuation benefits to the longstanding employees.

In the absence of having the purpose of providing superannuation benefits, no deduction is available to the taxpayer under subsection 82AAC(1) (ITAA 1936) for contributions made to the complying superannuation fund in respect of the employees whose accounts are in excess of their pension RBL.