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Important reminders as superannuation changes loom

mobile marketing conceptThe biggest changes to superannuation in a decade will take effect from 1 July 2017, due to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Cth).

There are several cases from the past that are particularly relevant for these changes. In this article I detail why some of these changes and why they matter, the relevant cases and the lessons.

What constitutes employment?

Why this matters

There are two key reasons why ‘employment’ matters in the context of the superannuation changes.

Firstly, from 1 July 2017 a fund paying a transition to retirement income stream will no longer be eligible for an income tax exemption. However, a fund paying an account-based pension generally will be eligible for an income tax exemption. For those aged 60–64, typically the determinant as to whether their fund can pay account-based pensions instead of transition to retirement income streams is whether (at the risk of oversimplification) an arrangement under which they have been employed has ceased. As APRA acknowledges in Prudential Practice Guide SPG 280: Payment Standards (paragraph 22), if for example, a 61-year-old had a ‘day job’ and a ‘side hustle’ job (my terms, not APRA’s) and the ‘side hustle’ ceased, then an account-based pension can be paid instead of just a transition to retirement income stream. Accordingly, particularly those aged 60–64 will want to say that (a) there is an employment arrangement and then (b) it has ceased.

The second reason is that those aged 65–74 must generally be gainfully employed on at least a part-time basis in order for the trustee of their superannuation fund to be allowed to accept contributions. This requirement was supposed to be repealed as part of the reforms. However, the repeal will not occur and the requirement will stay.

What is employment?

The mere fact that someone is a director of a company does not necessarily mean that they are an employee. I am not saying that a person is never a director of a company and an employee. However, in order to determine whether someone is both a director of a company and an employee, extra facts are needed. The position was conveniently summarised in the following extract from the 2013 decision of Beljan v Energo Form Act Pty Ltd [2013] ACTMC 21 [22]­–[23]:

A company directorship is an office, not an employment, therefore it cannot be assumed that a person holding the office of director is employed under a contract of service: Hutton v West Cork Railway Co [1883] 23 Ch D 654; Normandy v Ind Coope & Co [1908] 1 Ch 84; Riverwood Legion and Community Club Pty v Morse (2007) 10 DDCR 378.

However, companies are able to enter into contracts of employment with their directors. An example is the managing director who has two separate functions and capacities, namely that of director and that of manager: Anderson v James Sutherland (Peterhead) Ltd [1941] SC 203 cited with approval in Lincoln Mills v Gough [1964] VR 193.

The 2010 Administrative Appeals Tribunal decisions of Brown v FCT [2010] AATA 829 and France v FCT [2010] AATA 858 raised the question of what will constitute employment. Each of those two decisions involved husbands (Mr Brown and Mr France respectively) who had owned rental properties. Each of Mr Brown and Mr France engaged real estate agents. However, there were still certain administrative attendances required of Mr Brown and Mr France, such as calls from the real estate agents, drawing cheques, paying insurance, checking the mail and keeping records for tax time. Mr France had purchased his investment property in 1996 and Mr Brown had purchased his in 2002. Previously, each of their wives had handled these administrative attendances without being paid. However, in the 2007 financial year, for the first time the husbands purported to have commenced to employ their wives. To evidence the employment relationship, they (or their accountant on their behalf) did things like file an ‘Australian Business Registration … registered … as a Pay As You Go Employer’ and made payments for the award rate for administrative work. Mr France paid his wife $5,000 and made a $70,000 contribution to superannuation on her behalf which he sought to deduct on the basis she was his employee. Similarly, Mr Brown paid his wife $25,000 and paid $35,000 to superannuation on her behalf which he also sought to deduct on the basis she was his employee.

The AAT noted that:

Husbands, wives and other family members may contract [eg, enter into a contract of employment] with each other but the proximity of the relationship always raises a question over the nature of the relationship.

… [the wife] did perform some work of an administrative nature in connection with her husband’s rental property. That work was undoubtedly valuable to him … But I am also satisfied that … [the wife] was undertaking the same work in the same way during 2006-2007 that she had been doing since the property was acquired in 1996.

Significantly, nothing in her workload or work pattern changed after she and her husband supposedly entered into a master-servant [ie, employer–employee] relationship. Life continued much as before.

…the taxpayer was merely repacking an existing domestic relationship so it took on some of the appearance of [sic] a employment relationship.

In this case, the relationship between the parties continued to be what it had always been: a spousal relationship in which one of the spouses attended to the management of the family’s affairs.

Accordingly, there was no contract of employment. Therefore, if the wives were between 65–74 of age (unless they had some other employment), they would not have been able to contribute to superannuation. Similarly, if the wives ceased the arrangement that, by itself, would not entitle them to receive an account-based pension.

Paperwork requirements for deductible personal contributions

Why this matters

Until 30 June 2017, in order to be eligible to make deductible personal contributions, a person has to satisfy, among other things, a 10% rule. This 10% rule broadly means that less than 10% of their assessable income can be derived from employment activities if they are to be eligible. As a result, most people are ineligible to make deductible personal contributions.

However, from 1 July 2017 the 10% rule is repealed. Accordingly the vast bulk of working Australians will become eligible for the first time to be make deductible personal contributions.

However, the paperwork requirements in order to be able to claim this deduction will remain. As the AAT noted in Johnston v FCT [2011] AATA 20:

… the requirement for a ‘notice of intent’ is not particularly well highlighted in the public material dealing with the tax treatment of superannuation contributions.

What are the requirements?

Section 290‑170(1) of the Income Tax Assessment Act 1997 (Cth) currently requires, and even after 1 July 2017 will still continue to require:

To deduct the contribution, or a part of the contribution: (a) you must give to the trustee of the fund … a valid notice, in the *approved form, of your intention to claim the deduction; and (b) the notice must be given before:

(i)       if you have lodged your *income tax return for the income year in which the contribution was made on a day before the end of the next income year—the end of that day; or

(ii)      otherwise—the end of the next income year …

The legislation goes on to require that:

  • the trustee of the fund must give you an acknowledgement of the notice (s 290‑170(3)) and
  • you must have that acknowledgement (s 290‑170(1)(c)).

Failure to satisfy any of the above will result in no deduction being allowed.

In Johnston (referred to above), Mr Johnston seemed to satisfy the 10% test. He even gave the notice to his fund. However, he gave the notice late, that is, he gave the notice after the time requirements in s 290‑170. Accordingly, he was not entitled to claim the deductions. In fact, the Johnston decision actually considered how much penalty should apply to Mr Johnston for failing to take reasonable care in incorrectly claiming the deduction. Ultimately, no formal penalty was expressly imposed. However, the substantive penalty still remained, namely, Mr Johnston missed out on claiming the deduction.

Accordingly, those making deductible personal contributions from 1 July 2017 must ensure that a notice of intention in the approved form is given to the trustee of their fund and an acknowledgement is received back within the timeframes set out above.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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