Lyn Formica, head of technical and education for Heffron, said in a recent SMSF online clinic that when determining when an employer can make contributions to an employee, it is first necessary to ascertain whether the contribution can be accepted under the superannuation rules.
Formica responded to a question regarding whether an employer can make a salary sacrifice for an employee between 67 and 74, but doesn’t meet the work test, nor will they qualify for the work test exemption. Further, does it matter if the employer is a family trust compared with a company?
“Remember, the work test rules changed a few years ago. The question is really whether the employer is going to get a tax deduction for this contribution, because the work test only applies to contributions that are made by an individual, and they want to claim a tax deduction for that contribution personally,” she said.
“[Regarding] member deductible contributions, in this case, we’ve got an employer contribution being made, so the work test, whether we work 40 hours and no more 30 consecutive days, is actually irrelevant for this particular question.
“What we instead have to look at is the rules for planning a tax deduction for the contribution, and that comes down to things like employment activity tests.”
She continued that in relation to this particular example, it is first necessary to determine whether the individual is a common law employee.
“We’re all familiar with the general concepts in the sense of someone’s going to be employed as a common law employee if the employer can direct what they need to do, where they need to do it, and the fact that they can’t outsource that work to somebody else,” she said.
“If we’ve got someone who qualifies as a common law employee, then the next thing we have to do is work out whether that particular individual is engaged in producing the employer’s accessible income, or they’re a resident of Australia, and they’re engaged in the employer’s business.”
If those tests can all be met, then the super contribution will be deductible if it’s an award or a super guarantee contribution, or more relevant to this example, if at the time of the contribution, the individual is under age 75.
“With this case, we’ve got a salary sacrifice. It’s not an award or an SG, but so long as the individual is under age 75 then we’re going to get a tax deduction for that. Alternatively, if we don’t meet those rules, and the contribution is not going to be tax deductible, or if they’re not a common law employee, we have another option.”
She said that option involved seeing where this particular individual is going to qualify as an employee under section 12 of the superannuation guarantee provisions.
“This is where company directors would come in if they’re entitled to payment. If the individual is a director of the employer entity, and they’re entitled to payment for their director’s duties, then again, the employer would get a tax deduction for that, provided the individual is under age 75 at the time of making the contribution,” she said.
“Summarising that from the issues for directors, you’re looking to make sure the directors are SG employees. If what you’re dealing with is a director of a company, make sure they’re an employee for SG purposes, which requires reading the constitution of that company to ensure the particular individual is entitled to payment for their director’s duties under that constitution, and then pass any necessary resolutions.”
She added that the constitution may indicate that directors can be remunerated if the majority of the shareholders agree.
