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'; or
- actual payment is strong evidence of an entitlement to payment; or
- 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 payment.
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 case; and
- 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 constitution.
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 must review:
- 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.