In our update on
15 May 2012, we discussed the issues associated with the
trustee of a family trust making superannuation contributions on
behalf of directors and claiming a tax deduction.
The issue was recently litigated in the Federal Court in the
case of Kelly v Commissioner of Taxation (No 2)  FCA
689. The Court denied the deduction for superannuation
contributions made on behalf of the Taxpayer by the trustee for the
family trust on the basis that directors of a company are not
entitled to claim remuneration from the company for services
performed unless specifically provided for in the company's
constitution or approved by shareholders.
In brief, the family trust did not trade, carry on business,
engage any employees or pay any wages. The family trust primarily
received income from distributions from a Partnership Trust to
which the taxpayer has assigned a proportion of his income
entitlement as a partner in a partnership. (The validity of the
assignment of the partnership interest was litigated in Kelly v
Commissioner of Taxation  FCA 423).
The threshold for determining whether the superannuation
contribution is deductible is whether the director is an employee
of the trustee. Importantly, a director will be an employee of the
trustee if the director is entitled to be paid for performing their
role on the board.
The taxpayer argued that he was an employee of the trustee under
section 12(2) of the Superannuation Guarantee (Administration)
Act 1992 (SGA Act) on the basis that:
he received a superannuation benefit of $50,000 and thus,
payment is within the concept of 'entitlement to payment';
actual payment is strong evidence of an entitlement to payment;
he had an entitlement to payment for services he performed for
the trustee and that that entitlement arose as a matter of
quasi-contract or on the basis of a claim for quantum meruit (ie
the reasonable value of the services undertaken).
The taxpayer further argued that it was sufficient to prove an
entitlement to a claim for services performed and that it is not
necessary to match the value of the services to the actual
The Court considered that there is a well-established principle
at common law that directors of a company are not entitled to claim
remuneration from the company for services performed unless
specifically provided for in the company's constitution or
approved by shareholders. A director as a fiduciary has no right to
be paid for the services he or she provides or the efforts he or
she expends. An express contract (such as a provision in the
company's constitution) may displace the rule, but if there is
such a contract there can be no claim on a quantum meruit.
On this basis, the Court determined that:
payment and entitlement to payment are different concepts for
the purposes of the superannuation law;
payment is not evidence of an entitlement to payment in this
the taxpayer did not have an entitlement to payment based on a
quasi-contractual right or claim for quantum meruit. The
constitution of the corporate trustee provides that the
remuneration of directors shall be such sums (if any) as shall from
time to time be voted to them by resolution of the company in
general meeting. There was no evidence before the Court of a
resolution by the corporate trustee as required by the
The trust deed for the Kelly Family Trust gives the trustee the
power to pay superannuation to directors in the case of a corporate
trustee. However, that was not determinative in considering whether
the provisions of section 12(2) of the SGA Act were satisfied.
The Court held that there was no evidence that the taxpayer was
entitled to payment for any of the duties he performed as a
director of the trust, and therefore he did not fall within the
definition of an employee under section 12 of the SGA Act. Thus,
the superannuation contribution was not an allowable deduction
under section 290-60 of the Income Tax Assessment Act 1997.
What should you do?
Where the trustee of a family trust is considering making a
superannuation contribution on behalf of a director, the trustee
the terms of the trust deed; and
the terms of the constitution;
to determine if the trustee can remunerate the director and if
so, what approval process is required.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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