Deduction limit for employer defined benefit superannuation contributions

How should the entity determine the deductible contribution limits for the defined benefit contributions it makes on behalf of its employees to an eligible superannuation fund under section 82AAC of the Income Tax Assessment Act 1936 (ITAA 1936)?

Where the entity makes contributions in respect of employees with defined benefits only, the deductible limit of the contributions for a year of income is the sum of the age based limits, in accordance with subsections 82AAC(2), 82AAC(2A) and 82AAC(2B) of the ITAA 1936, of each employee for whom contributions are being made.

Where the entity makes contributions for employees with a combination of defined and accumulation benefits, the deduction limit is determined by firstly applying the age based limit as required under subsections 82AAC(2), 82AAC(2A) and 82AAC(2B) of the ITAA 1936 to any accumulation benefit contributions made in respect of an individual employee.

The deduction limit for contributions made by the entity in respect of defined benefits is then determined by taking the total sum of the reduced age based limits for employees for whom defined benefit contributions are being made. The reduced age based limit for an employee is calculated by taking their age based limit and reducing it by the amount of contributions made in respect of accumulation benefits, for that employee, in the relevant year of income.

The entity in its capacity as an employer makes contributions to a complying superannuation fund for the benefit of employees.

The entity is the fund's standard employer-sponsor.

The fund has several divisions of members with different benefit entitlements including some on a defined benefit basis only, and some on a combination of both accumulation and defined benefit entitlements.

Section 82AAC of the ITAA 1936 allows an employer to claim a deduction for contributions made to complying superannuation funds to provide superannuation benefits for employees.

Subsection 82AAC(2) of the ITAA 1936 imposes a limit on the amount of contributions that may be claimed as a deduction based on the age of the employee. The construction of subsection 82AAC(2) of the ITAA 1936 requires that the limit be applied to the contributions of each employee on an individual basis, that is, if the contribution made for one employee is above the age based limit, the employer cannot claim a deduction for the excess of its contribution in respect of this employee, even if the contribution made in respect of another employee is below the relevant limit.

The administrative difficulties in determining the amount of contributions made in respect of an individual employee where an employer contributes to a defined benefit fund were recognised in the Explanatory Memorandum to the Taxation Laws Amendment (Superannuation) Bill 1992 when the age based limits were introduced.

The Explanatory Memorandum provides an example using the age based limit method such that where an employer makes contributions to a defined benefit fund, the deductible limit of the contributions for a year of income is determined by the sum of the age based limits of each employee for whom contributions were being made.

The Commissioner accepts that the example in the Explanatory Memorandum reflects the intention of the law where the entity makes contributions in respect of employees with defined benefits only, that is, the deductible limit of the contributions for a year of income is the sum of the age based limits, in accordance with subsections 82AAC(2), 82AAC(2A) and 82AAC(2B) of the ITAA 1936, of each employee for whom contributions are being made.

For example, an employer contributes $200,000 in the income year ended 30 June 2006 to a defined benefit superannuation fund for the benefit of eight employees. Five employees are aged under 35 and three are aged between 35 and 49.

The total deduction limit in respect of these employees is the sum of: • 5 x $14,603 (the age based limit for employees aged under 35 for the income year ended 30 June 2006), and • 3 x $40,560 (the age based limit for employees aged between 35 and 49 for the income year ended 30 June 2006)

which equals $194,695.

Therefore the total deduction limit in respect of these employees is $194,695 of the $200,000 contribution made. The remaining $5,305 is not deductible.

While the Explanatory Memorandum provides a basic example of how the deductible limit could be determined for defined benefit contributions, it does not provide clear guidance with respect to defined benefit funds which have different classes of members, or where accumulation benefits are provided in addition to the defined benefit.

To ensure an employer cannot claim a deduction for contributions in excess of the age based limit where the entity makes contributions for employees with a combination of defined and accumulation benefits, the deduction limit is determined by firstly applying the age based limit as required under subsections 82AAC(2), 82AAC(2A) and 82AAC(2B) of the ITAA 1936 to any accumulation benefit contributions made in respect of an individual employee.

The deduction limit for contributions made by the entity in respect of the defined benefits is then determined by taking the total sum of the reduced age based limits for employees for whom defined benefit contributions are being made. The reduced age based limit for an employee is calculated by taking their age based limit and reducing it by the amount of contributions made in respect of accumulation benefits, for that employee, in the relevant year of income.

For example, if an employer makes a contribution of $30,000 for a 40 year old employee (age based limit of $40,560 for the income year ended 30 June 2006) into an accumulation account of a hybrid fund, only $10,560 is allowable in determining the total allowable limit for employees in the defined benefit fund.

Contributions in excess of the employee's age based limit are not deductible under subsection 82AAC(2) of the ITAA 1936. Therefore, where the deduction claimed in respect of the accumulation benefits has reached the age based limit, there is no further deduction available in respect of the defined benefit.

For example, if the employer makes a contribution of $50,000 for another employee of the same age, the employer is then allowed a deduction of the maximum age based limit of $40,560 for that employee. A nil value applies in respect of the employee when determining the total allowable limit for employees in the defined benefit fund. The excess amount of $9,440 is not deductible and cannot be used to offset the deductible limit under the defined benefit fund.