In 2013, DBA Lawyers released an article that considered the ability to deduct superannuation contributions for directors of trustees of 'passive' investment trusts. The article proved to be quite controversial. However, a recent ATO decision impact statement confirms that the ATO agree with DBA Lawyers' position in that article.
This article seeks to recap on last year's material and also introduce new ATO commentary.
The basic conundrum
Section 290-60 of the Income Tax Assessment Act 1997 (Cth) ('ITAA 1997') provides that (in addition to other requirements):
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...
Directors of corporate trustees of 'passive' investment trusts are rarely employees of the trust under the usual (common law) meaning of 'employee'. However, there is an expanded (statutory) meaning of employee.
Under the expanded (statutory) meaning, if an individual is an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth) ('SG Act'), they are also deemed to be an employee for the purposes of claiming the deduction. Some therefore rely on the fact that a person is a director of the corporate trustee as being enough to satisfy the deductibility requirement. The recent Full Federal Court decision of Kelly v Commissioner of Taxation  FCAFC 88 ('Kelly') suggests on its face that this is correct. However, a close analysis reveals that there is more to the story.
What was the issue in Kelly?
The decision in Kelly and the preceding lower decisions involved the claiming of a tax deduction for superannuation contributions made by the trustee of the Kelly Family Trust for Mr and Mrs Kelly, who were directors its corporate trustee. The availability of the deduction was first considered by the Federal Court in Kelly v Commissioner of Taxation (No 2)  FCA 689 and again on appeal to the Full Federal Court in 2013. In both cases, the deduction was denied.
The trust did not trade or carry on business. Further, it did not have any employees or pay any wages. The superannuation deduction of $100,000 related to Mr and Mrs Kelly, and was argued by the trustee to have been made on basis that they were directors of the corporate trustee who did everything for the trust. Although Mr and Mrs Kelly were not common law employees of the trust or the company, they argued that they fell within the expanded meaning in the SG Act. The expanded meaning is as follows:
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 Federal Court found that there was no evidence that Mr and Mrs Kelly were entitled to payment for any of the duties they performed as directors of the corporate trustee. That is, although superannuation contributions were made in respect of Mr and Mrs Kelly, they failed to show that they were entitled to payment. Besanko J rejected the argument that actual payment was evidence that there was an entitlement to payment. Although they could have been entitled to remuneration if the company so resolved, there was no evidence of any such resolution.
Accordingly, Mr and Mrs Kelly were not 'employees' within the expanded definition in the SG Act. In turn, they did not meet the deductibility requirements in s 290-160 (set out above).
Therefore, the superannuation deduction was not allowed.
The 2013 Full Federal Court decision did not vary the prior decision by the Federal Court.
The real meaning of the Kelly decision
The decision in Kelly on first glance suggests that, had a satisfactory directors' resolution been in place to the effect that directors were entitled to remuneration, this would have been enough to claim the deduction. However, the judgment only discussed some of the reasons that the deduction failed, rather than standing for a positive method that would allow the deduction to succeed.
Further, even if Mr and Mrs Kelly were entitled to payment from the corporate trustee, this would only have made them employees of the trustee company. There is nothing to suggest this would allow the trust (a separate entity for tax purposes) to claim a deduction.
An additional angle not explored in Kelly is the ATO's view expressed in paragraph 243 of TR 2010/1 (emphasis added):
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.
The above may well have been one of the Commissioner's arguments, except that there was no need for the Court to consider it (because only one fatal shortcoming in the taxpayer's argument was needed). Indeed, Besanko J in the Federal Court noted that the Commissioner advanced a number of arguments, stating:
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.
In any case, according to the strict view in TR 2010/1, Mr and Mrs Kelly's entitlement to payment from the company is a moot point if a deduction is claimed by a corporate trustee of a family trust.
The ATO confirmed this strict view in July this year when releasing a decision impact statement for the case. The ATO stated that the Full Federal Court's decision was:
consistent with the Commissioner's view in paragraph 243 of Taxation Ruling TR 2010/1 that a superannuation contribution for the director of a corporate trustee 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.
Interestingly, many do not realise this point and seek to claim deductions for directors of passive investment trusts on the basis of their director duties alone.
This can be contrasted to an active trading trust where the mum and dad directors are actively engaged in running the business or producing assessable income on behalf of the trust. In this situation, having regard to the ATO's comments in TR 2010/1 para 243, a deduction would be allowed only if a common law employee relationship existed. Moreover, it is strongly recommended that ample supporting material evidences this employment relationship. This is reinforced by the Administrative Appeals Tribunal's decision in Davies v FCT  AATA 297. In Davies, the Tribunal had to consider whether an employment relationship existed in view of the following facts:
- Mr and Mrs Davies worked on the farms owned by their family trusts.
- · They were directors of the corporate trustee, they received no wages and had no written contracts of employment.
- · They expected to be rewarded for their work from the eventual capital gain made on the sale of the property owned by their family trusts.
The Tribunal stated at paragraphs 13 and 17, respectively:
... there is no evidence to show that the applicants were ever
in fact employees of the trustee. While it is clear that the
applicants worked on the farms there is nothing by way of evidence
before the Tribunal which supports their contention that an
employment contract arose by implication. There is nothing to say
what the terms and conditions of their alleged employment were
other than a vague statement that they would be remunerated at some
In the Tribunal's view no contract of employment is to be implied merely from the fact that one person performs work for or provides services to another. Modern commercial life abounds with arrangements for the performance of work or services for others by persons who are not employees.
What practical solutions then exist to facilitate deductions for directors of the trustees of 'passive' trusts?
Consider the following:
- Bryan is a director of the corporate trustee of his family trust.
- The trustee of a family trust distributes money to a corporate beneficiary.
- Bryan is also a director of the corporate beneficiary.
- Under the constitution of the corporate beneficiary, Bryan is entitled to payment of $100 for the performance of duties as a member of the executive body (ie, for acting as a director).
- The corporate beneficiary contributes money to a complying superannuation fund and the corporate beneficiary claims a deduction.
The above scenario sidesteps the added 'layer' of difficulty presented by TR 2010/1. If the constitution of the corporate beneficiary did not enshrine director remuneration, whatever process is stipulated to make Bryan 'entitled to payment' would need to be followed. Pursuant to paragraphs 237–238 of TR 2010/1, there would be no reason why the ATO would disallow a deduction in these circumstances.
Claiming a deduction for a director of a corporate trustee of a family trust generally requires a director to be in a common law employment relationship before the ATO is satisfied that a deduction is available for superannuation contributions. Typically, these facts will only exist when the trust is conducting an active business or the director is actively involved in producing assessable income for the trust. In contrast, if a director is entitled to payment as a director of a family company (which is not acting as a trustee), then a deduction is generally available.
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.