Deductibility of superannuation contributions made for directors of a corporate trustee

Is the corporate trustee of a family trust entitled to a deduction under section 82AAC of the Income Tax Assessment Act 1936 (ITAA 1936), in respect of contributions made out of the assets of the trust estate to a complying superannuation fund for the two directors of the corporate trustee during the 2006-07 year of income when calculating the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the year of income?

Yes. The corporate trustee of a family trust is entitled to a deduction under section 82AAC of the ITAA 1936, in respect of contributions made out of the assets of the trust estate to a complying superannuation fund for the two directors of the corporate trustee during the 2006-07 year of income when calculating the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the year of income.

The company is the trustee of a family trust (the corporate trustee).

The corporate trustee has two directors, Director 1 and Director 2. Both directors are residents of Australia for income tax purposes.

No other persons were employed in the income producing activities of the trust during the 2006-07 year of income.

The activities of the trust constitute a business for income tax purposes.

The trust derived assessable income from its business during the 2006-07 year of income.

Director 1 spends approximately 30 hours a week and Director 2 spends approximately 15 hours a week as part of the income producing activities of the trust.

The corporate trustee made superannuation contributions to a complying superannuation fund during the 2006-07 year of income for the purpose of making provision for superannuation benefits payable for Director 1 and Director 2.

The contributions were paid out of the assets of the trust.

Both directors satisfy the age based requirements in section 26-80 of the Income Tax Assessment Act 1997 .

For a contribution made by the trustee of a trust estate to be an allowable deduction to the trustee when calculating the 'net income' of the trust estate under subsection 95(1) of the ITAA 1936 the trustee must satisfy the requirements of section 82AAC of the ITAA 1936. Under subsection 82AAC(1) of the ITAA 1936, the amount of a contribution made by a taxpayer will be allowable as a deduction to the taxpayer for the year of income in which the contribution was made if the following conditions have been satisfied: • the contribution was made to a fund for the purpose of making provision for superannuation benefits payable for another person (whether or not the benefits are payable to a dependant of the other person in the event of the person's death) (paragraph 82AAC(1)(a) of the ITAA 1936) • the fund is a complying superannuation fund in the year of income in which the contribution is made (paragraph 82AAC(1)(b) of the ITAA 1936), and • one or more of these applies: i. the other person was an eligible employee (subparagraph 82AAC(1)(c)(i) of the ITAA 1936) ii. the contribution reduces the taxpayer's charge percentage in respect of the other person under section 22 or 23 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) (subparagraph 82AAC(1)(c)(ii) of the ITAA 1936) iii. the other person was an employee for the purposes of that Act (subparagraph 82AAC(1)(c)(iii) of the ITAA 1936).

A trust is not considered to be a 'taxpayer' for the purposes of section 82AAC of the ITAA 1936. This is because unlike a person or a company, a trust has no separate legal identity. The legal identity of the trust lies with the trustee. It is for this reason that the trustee of a trust is considered to be 'the taxpayer' and not the trust. For the same reason, a person will not be an employee of the trust but rather they will be an employee of the trustee.

In the circumstances of this case, the corporate trustee (the taxpayer) proposes to make contributions for the benefit of the two directors of the corporate trustee in the 2006-07 year of income out of the assets of the trust. The proposed contributions are to be made: 1) to a complying superannuation fund, and 2) for the purpose of providing superannuation benefits for another person (that is, the two directors).

Therefore, the first two limbs of subsection 82AAC(1) of the ITAA 1936 have been satisfied.

However, for the contributions to be an allowable deduction when calculating the net income of the trust under subsection 95(1) of the ITAA 1936 one or more of the three conditions in paragraph 82AAC(1)(c) of the ITAA 1936 must also be satisfied. Relevantly, subparagraph 82AAC(1)(c)(i) of the ITAA 1936 will be satisfied if the other person was an 'eligible employee' of the taxpayer in the year of income in which the contribution was made. Importantly, a person will only qualify as an 'eligible employee' under subsection 82AAA(1) of the ITAA 1936 if they are a person other than the taxpayer who is also an 'employee' of the taxpayer as defined in subsection 82AAA(1) of the ITAA 1936.

An 'employee' is defined in subsection 82AAA(1) of the ITAA 1936 to mean a person who is 'employed' by a taxpayer and who is either: (a) engaged in producing assessable income of the taxpayer, or (b) a resident of Australia engaged in the business of the taxpayer.

In this case, the directors of the corporate trustee are deemed to be 'employed' by the corporate trustee under subsection 82AAA(2) of the ITAA 1936.

However, for each director to be considered an 'employee' as defined in subsection 82AAA(1) of the ITAA 1936, they must also either be: (a) engaged in producing assessable income of the trust, or (b) a resident of Australia engaged in the business of the trust.

The term 'engaged' is not defined in the ITAA 1936 and therefore has its ordinary or common law meaning. The Macquarie Dictionary , 1997, 3rd edn. The Macquarie Library NSW defines 'engaged' as: 'busy or occupied; involved'. Therefore, the directors will be engaged in producing the assessable income and/or the business of the trust if they are 'busy', 'occupied' or 'involved' in the trust.

The nature of the relationship between a director of a company that acts as trustee and the corporate trustee was considered in Re James; Bagot's Executor and Trustee Co Ltd v. McGregor [1949] SASR 143 ( Re James ). Relevantly, Mayo J states at 146: ...A director of a trustee company, acting as trustee, may himself be deemed by virtue of his office to be involved 'in the duties and responsibilities of a trustee'. He is one of the persons charged with those obligations; he is hardly a stranger to the trust. The duty which the company owes ... to the beneficiaries is imposed upon the agents of the company whose office it is to carry out these duties for the company.

In this case, the directors of the trustee company are considered to be involved 'in the duties and responsibilities of a trustee' (as per the decision in Re James ). Director 1 spends approximately 30 hours a week and Director 2 spends approximately 15 hours a week as part of the activities of the trust. No other persons are engaged in the income producing activities of the trust. It therefore follows that the directors are 'engaged' in producing the assessable income of the trust. For the same reasons the directors are also engaged in the business of the trust. Each director is therefore an 'employee' of the corporate trustee under subsection 82AAA(1) of the ITAA 1936.

Because each director is an 'employee' of the corporate trustee, and is a person other than the corporate trustee, each director is also an 'eligible employee' of the corporate trustee under subsection 82AAA(1) of the ITAA 1936. Accordingly, in the year of income in which the contribution is made, the corporate trustee will satisfy subparagraph 82AAC(1)(c)(i) of the ITAA 1936 in respect of the directors.

As the corporate trustee has satisfied one of the three conditions in paragraph 82AAC(1)(c) of the ITAA 1936 (that is, subparagraph 82AAC(1)(c)(i) of the ITAA 1936), and is only required to satisfy one of the three conditions, the corporate trustee is not required to satisfy the other two conditions (that is, subparagraphs 82AAC(1)(c)(ii) and 82AAC(1)(c)(iii) of the ITAA 1936). By satisfying one of the conditions in subsection 82AAC(1)(c) of the ITAA 1936, the corporate trustee has satisfied the third limb of subsection 82AAC(1) of the ITAA 1936.

Since the corporate trustee has satisfied all three limbs of subsection 82AAC(1) of the ITAA 1936, the corporate trustee is entitled to claim a deduction for contributions made for the benefit of the directors in the 2006-07 year of income when calculating the 'net income' of the trust estate under subsection 95(1) of the ITAA 1936.

The corporate trustee can claim a deduction for the amount of the contribution up to the age based deduction limit that applies to each director under subsection 82AAC(2) of the ITAA 1936 for the 2006-07 year of income.