{"id":4559,"date":"2013-09-20T11:41:19","date_gmt":"2013-09-20T01:41:19","guid":{"rendered":"http:\/\/www.dbalawyers.com.au\/?p=4559"},"modified":"2022-03-07T16:14:40","modified_gmt":"2022-03-07T05:14:40","slug":"deductions-in-passive-investment-trusts","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/smsf-strategy\/deductions-in-passive-investment-trusts\/","title":{"rendered":"How to claim super deductions in passive investment trusts \u2026 and where most people get it wrong!"},"content":{"rendered":"

Many people want their family trusts to be able to contribute to super and claim a deduction for this. However, many people are missing an important paragraph from an ATO ruling that could spell trouble. (This is in spite of the recent decision of Kelly v FCT<\/em> [2013] FCAFC 88<\/a>.)<\/p>\n

Luckily, there is a simple solution, which is set out at the end of this article.<\/p>\n

Background \u2014 where most people go wrong\"Passive<\/h2>\n

Consider the \u2018usual\u2019 type of family trust: A married couple are trustees or directors of the corporate trustee. The trust is not running a business. Rather, it is a passive trust, receiving its income from passive investments.<\/p>\n

The trust can only deduct superannuation contributions under subdivision 290-B of the Income Tax Assessment Act 1997<\/a><\/i> (Cth) (this is due to section 290-10(1)<\/a>). This legislation provides that the trust can \u2018only deduct a contribution [made] to a superannuation fund \u2026 for another person who is [the trust\u2019s] employee\u2019.<\/p>\n

This raises the question of when a trustee or a director of a trustee is an employee.<\/p>\n

Constituting an \u2018employee\u2019 is tougher than it seems! Doing work for the trust \u2014 even very real, physical, laborious work \u2014 is not necessarily going to \u2018cut the mustard\u2019 (see Davies and FCT<\/em> [2009] AATA 297<\/a>). Further, doing work, even where wages are paid, and the alleged employer has filed a \u2018registered Australian Business Registration form … and registered [for] as a Pay As You Go employer\u2019 is not necessarily enough (see France and FCT<\/i> [2010] AATA 858<\/a> and also see Brown and FCT<\/em> [2010] AATA 829<\/a>).<\/p>\n

Accordingly, few people would actually constitute employees of passive investment trusts.<\/p>\n

However, there is an exception that many think they can apply. The exception is in section 290-70(aa)<\/a>. It essentially provides that a director who is entitled to remuneration for their director duties is an employee.<\/p>\n

ATO interpretative decision ATO ID 2007\/144<\/a> considered a passive investment company <\/i>(not a passive investment trust<\/i>). Here, directors were entitled to directors\u2019 fees of $100 and the company made and claimed superannuation deductions. The ATO held the deduction was allowable.<\/p>\n

Therefore, many feel that if a director of a trustee company is entitled to be paid for their work as a director (even if they are not an \u2018employee\u2019 under the usual meaning), the trust can claim a deduction.<\/p>\n

However, the ATO has very clearly disagreed. In taxation ruling TR 2010\/1<\/a> at paragraph 238, the ATO states:<\/p>\n

A superannuation contribution for a director of the corporate trustee of a trust can only be deducted from the income of the trust if the director is a common law employee of the trust engaged in producing the assessable income of the trust or its business.<\/p>\n

Therefore, hardly any passive investment trusts are able to claim superannuation contributions for directors. (This is because hardly any passive investment trusts have directors who are \u2018common law employee[s] of the trust engaged in producing the assessable income of the trust or its business\u2019.)<\/p>\n

Did the Kelly <\/i>decision change anything?<\/h2>\n

Many have asked whether the recent decision of Kelly v FCT<\/em> [2013] FCAFC 88<\/a> (on appeal from Kelly v FCT (No 2)<\/em> [2012] FCA 689<\/a>) changed anything. The short answer is no, Kelly<\/i> has not changed anything.<\/p>\n

Kelly <\/i>involved the sort of facts that I mentioned earlier: A family trust that derives passive income and directors who were not employees under the usual meaning of the word. The trust made super contributions for the directors and the ATO denied a deduction for the contributions. The taxpayer argued that the directors were employees and the trust was thus eligible for the deduction under the exception in section 290-70(aa)<\/a>. The Full Federal Court held that due to a lack of proper paperwork, the directors were not entitled to payment for director duties and the taxpayer\u2019s appeal was dismissed.<\/p>\n

Therefore, some have interpreted Kelly <\/i>as meaning <\/i>that had the right paperwork been in place, the deduction would have been allowable. Kelly <\/i>did not hold this. Rather, it only held that the deduction was not allowable (a subtle yet important distinction). Indeed, in the original Federal Court decision, the judge noted that the ATO made a number of arguments, stating:<\/p>\n

The Commissioner put a number of submissions in answer to these claims. It is sufficient to address only one group of those submissions because they are decisive against Mr Kelly.<\/p>\n

Remember, the ATO\u2019s comments in ruling TR 2010\/1<\/a> at paragraph 238:<\/p>\n

A superannuation contribution for a director of the corporate trustee of a trust can only be deducted from the income of the trust if the director is a common law employee of the trust engaged in producing the assessable income of the trust or its business.<\/p>\n

The ATO seem to have no plans to change their position. As at the date of writing, the ATO does not appear to feel that Kelly <\/i>was important or novel enough to warrant a decision impact statement<\/a> or to alter TR 2010\/1<\/a>.<\/p>\n

The \u2018sure fire\u2019 method<\/h2>\n

Luckily, there is a far more \u2018sure fire\u2019 method! If the following occurs the deduction should be far more sure and certain:<\/p>\n