Superannuation: deductibility of superannuation contribution made to a director of a corporate trustee

Is the taxpayer, a corporate trustee of a family trust, entitled to a deduction for a superannuation contribution under section 290-60 of the Income Tax Assessment Act 1997 (ITAA 1997) when calculating the net income of the trust estate, for a contribution made on behalf of a director who is engaged in producing the assessable income of the trust?

Yes. When calculating the net income of the trust estate the taxpayer is entitled to a deduction for a superannuation contribution under section 290-60 of the ITAA 1997, for a contribution made on behalf of a director who is engaged in producing the assessable income of the trust.

The company is the trustee (corporate trustee) of a family trust. The corporate trustee has a director who is a resident of Australia for income tax purposes. No other persons were employed in the income producing activities of the trust during the 2007-08 income year. The activities of the trust constitute a business for income tax purposes. The trust derived assessable income from its business during the 2007-08 year of income.

The director spends approximately 30 hours a week as part of the income producing activities of the trust. The director is not entitled to remuneration. The corporate trustee made a superannuation contribution to the director's self managed superannuation fund (SMSF) during the 2007-08 income year for the purpose of making provision for superannuation benefits payable for the director. The contribution was paid out of the assets of the trust.

The director satisfies the age based requirements in section 290-80 of the ITAA 1997. The SMSF is a complying superannuation fund in the 2007-08 income year.

A trust is not considered to be a 'taxpayer' for the purposes of section 290-60 of the ITAA 1997. 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 corporate trustee of the 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 corporate trustee.

For the corporate trustee to claim a deduction for the superannuation contribution from the trust estate when calculating the 'net income' of the trust estate under subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) the trustee must satisfy the requirements of section 290-60 of the ITAA 1997.

Under section 290-60 of the ITAA 1997, a contribution made by a taxpayer to a complying fund, for the purpose of providing superannuation benefits for another person who is an employee (whether or not the benefits are payable to a dependant of the other person in the event of that person's death), will be an allowable deduction in the income year in which the contribution is made.

Section 290-70 of the ITAA 1997 defines who is an employee for the purposes of section 290-60 of the ITAA 1997. An 'employee' will be a person that is: • an employee within the expanded meaning of employee given in section 12 of the Superannuation Guarantee (Administration) Act 1992 (paragraph 290-70(aa) of the ITAA 1997); • engaged in producing your assessable income (paragraph 290-70(a) of the ITAA 1997); or • an Australian resident who is engaged in your business (paragraph 290-70(b) of the ITAA 1997).

The director is not entitled to payment for the performance of duties in the 2007-08 income year under the company's constitution. However this does not preclude the director from being an employee for the purposes of section 290-60 of the ITAA 1997 as the person may satisfy paragraph 290-70(a) or 290-70(b) of the ITAA 1997.

As stated in the Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 4) Bill 2007: 5.74 However, individuals who are not SG employees will still need to be engaged in producing the assessable income of the business or engaged in the business before a deduction can be claimed.

The term 'engaged' is not defined in the ITAA 1997 and therefore takes its ordinary meaning. The Macquarie Dictionary, 1997, 3rd edition, The Macquarie Library NSW, defines 'engaged' as 'busy or occupied; involved'. The director will be engaged in producing the assessable income of the trust and/or the business of the trust if the director is 'busy', 'occupied' or 'involved' in producing the assessable income of the trust, or in the business of the trust.

In this case the director of the corporate trustee is considered to be involved in producing the assessable income of the trust, and involved in the business of the trust. The director is the only person who is engaged in the income producing activity of the trust which is considered to constitute a business activity. The director spends approximately 30 hours engaged in the business activities each week. It follows that the director is 'engaged' in producing the assessable income of the trust, and is also engaged in the business of the trust. The director is an 'employee' of the corporate trustee as both paragraphs 290-70(a) and 290-70(b) of the ITAA 1997 are satisfied in this case.

Subsection 290-60(2) of the ITAA 1997 contains other requirements that must also be met for a deduction to be claimed. In this case these requirements are met as: • the contribution is made to a complying fund (section 290-75 of the ITAA 1997); and • the employee meets the age related conditions (section 290-80 of the ITAA 1997).

The corporate trustee has satisfied all the conditions required by section 290-60 of the ITAA 1997 to claim a deduction for a superannuation contribution made for an employee. The corporate trustee is entitled to claim a deduction for the contribution made for the benefit of the director in the 2007-08 income year when calculating the 'net income' of the trust estate under subsection 95(1) of the ITAA 1936 for the 2007-08 income year.

[Note: a director that is entitled to remuneration will be an employee within paragraph 290-70(aa) of the ITAA 1997, as a director entitled to remuneration falls within the expanded meaning of employee given in subsection 12(2) of the Superannuation Guarantee (Administration) Act 1992 ].