Income tax: eligibility of a deduction for personal superannuation contributions

This Ruling applies to a person who makes personal contributions to a complying superannuation fund. It considers the circumstances in which those personal superannuation contributions qualify for an income tax deduction under Subdivision AB of Division 3 of Part III of the Income Tax Assessment Act 1936 (the Act).

The Ruling provides guidelines for determining when a person is an eligible person in terms of subsection 82AAS(2) and explains how the eligible person test is modified under subsection 82AAS(3).

The Ruling also outlines the notice requirements that need to be satisfied in order to obtain an income tax deduction for personal contributions to a superannuation fund and outlines the superannuation deduction limits.

On its finalisation, this Ruling will replace Taxation Ruling IT 19.

This Ruling applies for years of income commencing on 1 July 1992. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

A taxpayer is entitled to a deduction for personal superannuation contributions under section 82AAT of the Act if he or she is an eligible person in terms of section 82AAS.

Under subsection 82AAS(2), a taxpayer is an eligible person in respect of a year of income unless it was reasonable to expect that superannuation benefits would be provided for the taxpayer in the event of his or her retirement or to dependants in the event of his or her death (paragraph 82AAS(2)(a)). In addition, to the extent that those superannuation benefits relate to a year of income, they must relate wholly or partly to contributions made by another person for the benefit of the taxpayer (subparagraph 82AAS(2)(b)(i)) or must be paid out of moneys that do not represent: • personal contributions paid by the taxpayer to a superannuation fund or public sector scheme (sub-subparagraphs 82AAS(2)(b)(ii)(A) and 82AAS(2)(b)(ii)(B)); • income or accretions on those personal contributions (sub-subparagraph 82AAS(2)(b)(ii)(C)); or • income or accretions on contributions made by another person in an earlier year of income where there is no reasonable likelihood that future superannuation contributions will be made in respect of the taxpayer by that other person (sub-subparagraph 82AAS(2)(b)(ii)(D)). Generally, if a taxpayer has ceased employment with a former employer there will be no reasonable likelihood that future superannuation contributions will be made by that employer. However, if the employer has only temporarily ceased contributions , for example, because adequate provision has been made in previous years or the taxpayer has taken an extended period of leave without pay, then there will be a reasonable likelihood that the employer will make future superannuation contributions for the benefit of the taxpayer.

Generally, a taxpayer will not be an eligible person because it is reasonable to expect that superannuation benefits would be provided for the taxpayer by another person in respect of a year of income if: • another person actually makes contributions to a superannuation fund for the benefit of the taxpayer during the year of income; • another person has an obligation or has made a commitment to make contributions to a superannuation fund for the benefit of the taxpayer in relation to the year of income; • the taxpayer is a member of a public sector superannuation scheme constituted by or under a law of the Commonwealth or a State or Territory which provides superannuation benefits to the taxpayer upon his or her retirement or death where those benefits can be expected to take into account the taxpayer's service in the current year of income; or • another person makes deposits for the benefit of the taxpayer into the Superannuation Holding Accounts Reserve (subsection 82AAS(8)).

A person will have an obligation to make contributions to a superannuation fund for the benefit of a taxpayer if he or she is required to: • make contributions to a superannuation fund for the benefit of the taxpayer under any occupational superannuation arrangement or under the terms of a trust deed; or • make contributions to a superannuation fund for the benefit of the taxpayer under the Superannuation Guarantee (Administration) Act 1992 (SGAA) or pay the Superannuation Guarantee Charge in respect of the taxpayer (subsections 82AAS(4), (5), (6) and (10) of the Act).

There are only very limited circumstances under the provisions of sections 27 and 28 of the SGAA where an employer will not be under an obligation to provide superannuation support for the benefit of an employee. Examples include employees who are: • 65 years of age or older; • paid less than $450 in every month of the year; or • working part-time for the whole year and are under 18 years of age.

In addition, if it is not reasonable to expect that the Superannuation Guarantee Charge will be paid (e.g., because the employer is bankrupt or has been wound up and it has been established that there are no funds available to pay the Superannuation Guarantee Charge), then the employee may be an eligible person under subsection 82AAS(2).

The reference to superannuation benefits in subsection 82AAS(2) does not include benefits provided for the taxpayer in respect of eligible employment if the taxpayer's income from that eligible employment is less than ten percent of his or her total assessable income for the year (subsection 82AAS(3)). That is, the taxpayer will be an eligible person if he or she is substantially self-employed.

In determining whether a person is substantially self-employed, both assessable and exempt income are included for the purposes of applying the ten percent rule. According to subsection 25(1), assessable income is gross income of a resident taxpayer that is derived directly or indirectly from all sources in Australia which is not exempt income.

Income from eligible employment includes salary or wages, eligible termination payments from the employer, unused leave payments, bona fide redundancy payments and approved early retirement payments.

Any superannuation contribution that is made for the benefit of the person and relates to that eligible employment will not preclude the person from being an eligible person, if the person can satisfy the ten percent rule.

When applying the ten percent rule, the term 'particular eligible employment', as it applies in subsection 82AAS(3), includes multiple periods of employment by virtue of paragraph 23(b) of the Acts Interpretation Act 1901 . That paragraph provides that words in the singular number include the plural and vice versa, unless the contrary intention appears. This Office considers that a contrary intention does not appear here.

On this basis, under subsection 82AAS(3), income received by the person for the same or a combination of periods of employment from identical or different employers for the year of income is aggregated in the calculation and is not treated separately. This amount is then compared to the person's total assessable income for the year. If the result is less than ten percent of the person's total assessable income, then the person is an eligible person for purposes of subsection 82AAS(2).

If a taxpayer is an eligible person, he or she must give a written notice to the trustee of each fund to which he or she has made a contribution and receive an acknowledgement of the notice from the trustee in order to obtain a deduction for personal superannuation contributions. The acknowledgment must be given by the trustee to the person without delay (subsection 82AAT(1A)) and before the Commissioner makes an assessment of the person's income for the relevant year (subsection 82AAT(1E)).

The specific information that must be provided by the person for the purposes of subsection 82AAT(1D) is set out in Taxation Determination TD 93/224.

The total deduction that may be claimed by a person must not exceed the lesser of: • the first $3,000 contributed by the person plus 75% of the total amount contributed in excess of $3,000; and • the person's deduction limits (subsection 82AAT(2)).

The deduction limit is based on the person's age at the time that the last contribution for the income year was made (subsection 82AAT(2A)).

These amounts are indexed each year (subsection 82AAT(2B)).

The meaning of the term 'reasonable to expect' in the context of determining whether a particular person was an eligible person in terms of subsection 82AAS(2) was decided in two court cases. They were decided prior to the introduction of the SGAA and the current provisions of subsection 82AAS(2) which commenced on 1 July 1992.

In FC of T v. Arklay 89 ATC 4563; (1989) 20 ATR 276; 85 ALR 368; (1989) 22 FCR 298 (Arklay's case), the applicant commenced employment with the Queensland Railways as a temporary porter. As a temporary employee, he was not entitled to become a member of the State Service Superannuation Scheme. However, under the by-laws made by the Queensland Commissioner of Railways, he was entitled to be paid a Retiring Allowance, if applicable, upon retirement from the Railway Department. The Retiring Allowance only became payable after the taxpayer had been employed for a number of years' service and not before.

In FC of T v. McCabe 90 ATC 4968; (1990) 21 ATR 992; (1990) 26 FCR 431 (McCabe's case), the applicant was employed by a university in a number of positions. The applicant had five appointments from 1978, each being for a term of five years. In 1984 the applicant was employed as a lecturer on a fixed term appointment for five years and for the first time qualified to become a member of the State Superannuation Fund. However, the applicant would not qualify for employer-sponsored superannuation benefits unless she remained employed by the university for 10 years, retired due to ill health or died.

In Arklay's case, the Full Federal Court said (ATC at 4567; ATR at 279; ALR at 372; FCR at 302-303): 'We are of the opinion that the phrase with which we are concerned in the context of sec. 82AAS of the Act requires a determination whether or not circumstances exist by reason of which the decision-maker is able to expect on reasonable grounds that superannuation benefits would be provided as stipulated in the section. That test is an objective one. However, in applying the test the decision-maker, in considering the circumstances, should have regard to any relevant matters concerning the taxpayer personally. Put another way our understanding of the meaning of the expression is one which involves the application of an objective test, but, as one of the concomitant elements of that test, the subjective intentions of the taxpayer may be relevant.'

In McCabe's case, the Federal Court said (ATC at 4971-4972; ATR at 995-996; FCR at 436): 'The words "reasonable to expect" are not ambiguous and it is undesirable to paraphrase them or to use other words. In particular, they are words appropriate to the task of making an assessment as to the future. It is not useful to adopt other words. The adoption of words such as "probability" or "balance of probabilities" tend to introduce a concept or to have a connotation of proof, which may detract from the application of the section by an administrative decision-maker.'

In the above cases, the Courts placed emphasis on the subjective intentions of the taxpayers involved. It was decided that it was not reasonable to expect that the respective person would remain employed in that employment until retirement and receive superannuation benefits at that time.

It is accepted that Arklay's case and McCabe's case were correctly decided on their facts. However, amendments made to paragraph 82AAS(2)(a) by Taxation Laws Amendment (Superannuation) Act 1992 changed the reasonable expectation test to ensure that a taxpayer would not be an eligible person if superannuation benefits would have been provided to dependants of the taxpayer in the event of the taxpayer's death during the year. The test is now an objective one which does not require an estimation of the likelihood that death or retirement would occur during the year. If the Courts had applied an objective test in Arklay's case and McCabe's case, a different outcome may have been reached. In any event, given the advent of the Superannuation Guarantee scheme, it is unlikely that factual situations like those in Arklay's case and McCabe's case will arise in the future.

Subsection 82AAS(3) provides that, if a taxpayer is engaged in eligible employment, the reference to superannuation benefits in subsection 82AAS(2) does not include benefits provided for the taxpayer in respect of that eligible employment if the taxpayer's income from that eligible employment is less than ten percent of his or her total assessable income for the year. This is referred to as the 'ten percent rule'.

Eligible employment is defined in subsection 82AAS(1) and means in relation to a person: '(a) the holding of any office or appointment; or (b) the performing of any functions or duties; or (c) the engaging in of any work; or (d) the doing of any acts or things; that result in the person being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 ...'

Any superannuation contribution that is made for the benefit of the person and relates to that eligible employment will not preclude the person from being an eligible person, if the person can satisfy the ten percent rule.

The following examples display the operation of various provisions of sections 82AAS and 82AAT of the Act.

Louise, a self-employed person, works part-time, and her employer makes contributions to a superannuation fund for her. The assessable income from her part-time employment is less than ten percent of her assessable income earned during the year of income. Louise is eligible to claim a deduction for her personal superannuation contributions.

Tania is accruing benefits in a superannuation fund as a result of contributions made by a former employer that related to a previous year of income. Tania is now self-employed and is entitled to claim any personal superannuation contributions as a deduction in the current year of income.

Kylie, a self-employed person, earns an additional $400 per month from casual employment. As Kylie is paid less than $450 per month from her casual employment, that employer is not required to provide superannuation support under the SGAA. Therefore, Kylie can claim a deduction for any personal superannuation contributions.

Mike, who is now a self-employed person, worked full-time for an employer during the first three months of the year. Mike's employer provided superannuation support during the period of his employment. On termination, Mike received an Eligible Termination Payment (ETP) from his employer and a payment for unused annual leave. The sum of these payments and Mike's wages was greater than ten percent of his assessable income for the year. Therefore, Mike cannot claim a deduction for any personal superannuation contributions.

Alcoe Pty Ltd did not provide superannuation support for the benefit of their employees during the year of income. John, an employee of Alcoe Pty Ltd, was making personal superannuation contributions into a complying superannuation fund. Based on the facts, John should not be entitled to claim a deduction for his personal superannuation contributions as Alcoe Pty Ltd has a liability for a Superannuation Guarantee Charge.

A review was made by the ATO to determine the company's liability to pay the Superannuation Guarantee Charge. During this review, it was discovered that the company had been wound up. Also, there are no funds to pay the Superannuation Guarantee Charge. Where this is the case, John is entitled to claim a deduction for any personal superannuation contributions made to a complying superannuation fund.

Matt, a self-employed plumber, received an ETP to the value of $50,000 from his former employer on 1 July 1995. Matt's other income for the year ending 30 June 1996 consisted of $5,000 in interest and $10,000 from his business. As the ETP is more than ten percent of Matt's total assessable income, he is not entitled to claim a deduction for any personal superannuation contributions made to a complying superannuation fund.

If you wish to comment on this Draft Ruling, please send your comments by: 16 August 1996 to: Contact officer details have been removed following publication of the final ruling.