Contributing to super from passive investment: yes or no?

Taxpayers have long been trying to find ways to make contributions to superannuation from passive investment, but can it be done?

The Full Federal Court of Australia has recently denied a deduction for superannuation contributions made via a passive investment trust for the directors of the corporate trustee in the case of Kelly v Commissioner of Taxation [2013] FCAFC 88.

There has been some debate over the deductibility of superannuation contributions to a director of a passive investment trust. The general law provisions make it difficult, though some believed that in the right circumstances it was possible. The case sheds further light on this issue, while leaving the door open to future debate.

This case involved a company, which was trustee to the Kelly Family Trust. The directors of the company were Mr and Mrs Kelly, with Mr Kelly the sole shareholder. The family trust (which did not carry on a business) received a distribution from a Holding trust. The expenses for the income year included superannuation contributions for both Mr and Mrs Kelly.

The Kellys' argument was that because they were directors in the company, they were under the expanded definition of "employee" for superannuation purposes and thus entitled to a deduction under section 290-60 of the Income Tax Assessment Act 1997 (ITAA 97).

The Federal Court and then the Full Federal Court looked into the issue of whether the superannuation contributions were deductible.

Section 290-60 of the ITAA 97 says: “You can deduct a contribution you make to a superannuation fund… for the purpose of providing superannuation benefits for another person who is your employee when the contribution is made …"

Mr and Mrs Kelly claimed that they were employees because they were directors of the company.

Under the normal meaning of “employee”, a director of a company is not considered to be an employee. However, the superannuation interpretation of the term employee has an expanded meaning and includes “directors” as employees for superannuation purposes where those directors are entitled to remuneration as a director (Superannuation Guarantee (Administration) Act 1992 (SG Act)).

Subsection 12(a) of the SG Act specifically says: "A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate."

The Kellys claimed that they should be allowed a deduction as directors under this expanded meaning.

Under the common law, however, in the absence of a provision in the company’s constitution to the contrary, directors are not entitled to remuneration for their role as directors. The Kellys claimed that because they did work on behalf of the company they were entitled to remuneration.

The court took these arguments into consideration but found there was no proof of an entitlement to remuneration by the Kellys for any of the work they did for the company. There was nothing in the company’s constitution to allow a payment and there were no directions from the company to make the payments.

In the absence of any proof of a right to the payment, the court found that they were not entitled to a deduction.

This brings up the tantalising proposition - what if there had been a proper resolution from the company authorising the payments, would the contributions have then been deductible?

Tempering such consideration though is the fact that the court was never required to make such a determination. As there was no resolution from the company authorising the payment, there was clearly no case for the deduction.

Furthermore, the ATO has made it clear that it does not think passive income to directors would allow them to get a deduction for contributions to superannuation.

What this case shows is that it will be quite difficult for a passive investment trust to have an allowable deduction for contributions to superannuation. We may yet see someone challenge the ATO’s view expressed in ITR 2010/1 in a situation where a company has made a valid determination to make a contribution to superannuation.

Reece Agland, superannuation products and services manager at Taxpayers Australia

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