Issue
Is the taxpayer, as the controlling shareholder, entitled to claim a deduction under section 82AAC of the Income Tax Assessment Act 1936 (ITAA 1936) for the superannuation contribution made for the benefit of his wife?
Decision
No, because his wife is not an 'employee' of the company in which he has a controlling interest.
Facts
The taxpayer and his wife set up a private company during the 1999 financial year, in which the taxpayer has ownership of 60% of the issued shares.
The company's principal activities related to: • Direct investment, including shares in listed corporations; • Development of computer; • Database development; • Related consulting services.
The taxpayer's wife was appointed to the position of secretary and research officer on a casual basis. A State Award covers the appointment.
The company paid cash wages to the taxpayer's wife. The company also paid the minimum statutory superannuation contributions.
The company did not deduct tax instalments from the wages paid and was not registered as a group employer. The taxpayer's wife did not complete an employment declaration.
The taxpayer decided to make an additional superannuation contribution for the benefit of his wife, in his capacity as the controlling shareholder of the company.
The company's assessable income for the period consisted solely of interest from deposits.
Reasons for Decision
Subsection 82AAC(1) of the ITAA 1936 states a contribution is an allowable deduction: 'Where - (a) a taxpayer makes a contribution to a fund for the purpose of making provision for superannuation benefits payable for an eligible employee (whether or not the benefits are payable to a dependant of the eligible employee if the eligible employee dies before or after becoming entitled to receive the benefits); and (b) the fund is a complying superannuation fund, within the meaning of Part IX, in relation to the year of income of the fund in which the contribution is made;
the amount of the contribution is an allowable deduction in respect of the year of income of the taxpayer in which the contribution is made.'
In this case, the taxpayer made a contribution to a fund for the benefit of his wife.
Subsection 82AAA(1) of the ITAA 1936 contains the definition of an 'eligble employee'. For the taxpayer to be able to claim a deduction his wife must be an employee of the company. '" Eligible employee ", in relation to a taxpayer means - (a) in the case of a taxpayer whether a company or a person other than a company - (i) an employee of the taxpayer; (ii) an employee of a company in which the taxpayer has a controlling interest; or (emphasis added) (iii) .......
For the taxpayer to be able to claim a deduction his wife must be an 'employee' of the company.
Subsection 82AAA(1) contains the following definition: '" employee " means a person who is employed by a taxpayer and - (a) is engaged in producing assessable income of the taxpayer; or (b) is a resident of Australia and is engaged in the business of the taxpayer'
For the year ended 30 June 1999 the assessable income of the company consisted solely of interest on a deposit with a financial institution. Notwithstanding, the taxpayer's wife attended the financial institution to open the account it cannot be said she is engaged in producing the assessable income of the company.
In considering if directors (who are deemed to be employees under subsection 82AAA(2) of the ITAA 1936 for the purposes of section 82AAC) are eligible employees, Canberra Income Tax Circular Memorandum No. 852 (CITCM 852) states: '..if an investment company merely collects income from a fixed investment portfolio, the services rendered by directors to the company concerned would ordinarily amount to nothing more than the disposition of income after it had been derived. In these instances, superannuation contributions in respect of directors may be regarded as being made for the benefit of employees not engaged in producing the company's assessable income.'
This supports the view the taxpayer's wife is not engaged in producing the assessable income of the company and is therefore not an 'employee' under paragraph (a) of the definition.
For the taxpayer's wife to be an 'employee' she must be engaged in the business of the company. The applicant contends that as the taxpayer's wife was appointed as secretary and research officer she falls within the definition.
This view is supported by the decision in Case K.71 , 10 T.B.R.D. 378 which was discussed in paragraph 28 of CITCM 852: 'The majority decision of Board of Review No. 2 in Case K.71, 10 T.B.R.D. 378 indicates that a person may be engaged in the business of his employer for the purposes of the definition even though that business may produce only exempt income or may produce no income whatever and that the requirement may be satisfied by engagement in the business, however short or fleeting the period may be, provided it is real and that the extent or degree of the engagement, i.e., whether full-time or otherwise is unimportant.'
The Administrative Appeals Tribunal (AAT) in affirming the decision of the Commissioner stated: 'The contribution of Mrs Egan was minimal in relation to AOS. She signed a few cheques over the years and took messages for and from Mr Egan when he was overseas or interstate. Her contribution to the business of AOS appeared to be little more, if any, than a spouse of a busy consultant might provide.'
While no one factor is determinative, viewed in the overall context of the relationship and bearing in mind the decision in Egan's Case it could be said the taxpayer's wife was not engaged in the business of the company but was merely assisting her husband when required. Accordingly, as the taxpayer's wife is not engaged in a real capacity in the business of the company she is not an "employee" under paragraph (b) of the definition.
Therefore, the taxpayer is not entitled to claim a deduction under section 82AAC of the ITAA 1936 for the superannuation contribution.