The biggest reforms to superannuation in a decade will take effect on July 1, 2017, due to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016. There are several cases from the past that illustrate legal points related to these changes. Here’s why they matter.
The definition of employment is of great importance in determining eligibility for tax exemptions under the superannuation changes.
Firstly, from July 1, 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 the Australian Prudential Regulation Authority 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 could be paid, instead of just a transition-to-retirement income stream. Accordingly, particularly those aged 60-64 will want to say first that there was an employment arrangement and then that it has ceased.
The second reason employment matters is that those aged 65-74 must generally be gainfully employed at least part-time 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 This requirement was supposed to be repealed as part of the reforms.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.
Directors aren’t necessarily employees
The mere fact that someone is a director of a company does not necessarily mean they are an employee as well. In order to be a director of a company and an employee, certain requirements must be met. This was conveniently summarised in the following 2013 decision for Beljan v Energo Form Act Pty Ltd : 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…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.
Working for a spouse
Two 2010 Administrative Appeals Tribunal decisions involving the Federal Commissioner of Taxation (FCT) – Brown v FCT  AATA 829 and France v FCT  AATA 858 – raise the question of
what constitutes employment of a spouse. Both of these decisions involved husbands (Brown and France) who had owned rental properties. They both engaged real-estate agents. However, there were still certain administrative duties they required, such as calls from the real estate agents, drawing cheques, paying insurance, checking the mail and keeping records for tax time. Previously, each of their wives had handled these administrative attendances without being paid. However, in 2006-07, 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. France paid his wife $5000 and made a $70,000 contribution to superannuation on her behalf, which he sought to deduct on the basis she was his employee. Similarly, 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.
Neither husband successfully demonstrated that their spouse was an employee. The appeals tribunal noted that:
Husbands, wives and other family members may 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 [i.e., 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 65-74 (unless they had some other employment), they would not have been able to contribute to superannuation. Similarly, if the wives ceased the arrangement, that, per se, would not entitle
them to receive an account-based pension.
Rules change but no escaping paperwork
Until June 30, 2017, in order to be eligible to make deductible personal contributions, a person has to satisfy, among other things, a 10 per cent rule. This broadly means that less than 10 per cent 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.
From July 1, 2017, the 10 per cent rule is repealed. Accordingly, the vast bulk of working Australia will become eligible for the first time
to 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  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.”
Section 290 170(1) currently requires, and even after July 1, 2017, will 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
- you must have that acknowledgement. Failure to satisfy any of the above will result in no deduction being allowable.
In Johnston v FCT (referred to above), Johnston seemed to satisfy the 10 per cent test. He had even given the notice to his fund. However, he gave the notice late, that is, he gave it after the time requirements in s 290 170.
Accordingly, he was not entitled to claim the deductions. In fact, the Johnston decision considered how much penalty should apply to him for failing to take reasonable care in incorrectly claiming the deduction. Ultimately, no formal penalty was expressly imposed; however, the substantive penalty still remained – he missed out on claiming the deduction.
Those making deductible personal contributions from July 1 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.
TOPICS: APRA, Australian Prudential Regulation Authority, definition of employment, pension, retirement, superannuation reform, TAX