House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Clarification of the meaning of 'eligible employee'

Outline of Chapter

1.1 The amendment made by item 3 of Schedule 1 clarifies the meaning of the term 'eligible employee', as defined in Subdivision AA, to ensure that the controlling interest holder and the employee cannot be the same person.

Background to the legislation

1.2 Subdivision AA of Division 3, Part III of the Income Tax Assessment Act 1936 provides a code for deductions for contributions to superannuation funds made by employers for the benefit of eligible employees.

1.3 The definition of eligible employee found in section 82AAA includes an individual who is an employee of a company in which the taxpayer, including an individual taxpayer, holds a controlling interest. A taxpayer who holds a controlling interest in a company can claim a deduction for a contribution to a superannuation fund for an employee of the company, subject to certain limits which have varied over time.

1.4 The purpose of introducing the term eligible employeewas to allow business some flexibility in making deductible contributions for employees of the business, for example, through a controlling entity rather than the direct employer.

1.5 However, tax promoters have been abusing these provisions, arguing that taxpayers can claim deductions under these provisions for contributions made for their own benefit. They argue that they can be an eligible employee of themselves if they are employed by an entity controlled by themselves.

1.6 It was not intended that an individual could be treated as an employee of themselves. The well established general principle under common law, that an individual cannot enter into a contract with themselves, is not overturned by anything specific in this section.

1.7 Subdivision AB, on the other hand, contains specific provisions for the deductibility of contributions made to a superannuation fund by an individual on their own behalf. Subdivision AA was never intended to allow a deduction for personal contributions.

Summary of the clarification

1.8 The concessions made available for contributions to superannuation funds have been targeted by some tax planners who seek to gain much greater tax concessions than those that were intended to be available.

1.9 The Subdivision is being amended to ensure that the taxpayer and the employee must be different people. This amendment is for the purpose of clarification.

Detailed explanation of the clarification

1.10 The definition of eligible employee in section 82AAA is amended to make clear that an eligible employee must be a person other than the taxpayer. The taxpayer cannot be an eligible employee of themselves. [Schedule 1, item 3]

1.11 This amendment is for the purpose of clarification. It should be read as a confirmation of the effect of the current law, rather than a change. It should not be read to mean that the current law was in any way defective.

1.12 This amendment will not affect the ability of an individual taxpayer to claim a deduction for contributions made in respect of employees of a company other than themselves in which the individual taxpayer has a controlling interest.

Example 1.1

Jim runs a small business through a company called Jim's Realty. Jim holds a controlling interest in the company, which employs Jim, Spiro and Tina. The company could claim a deduction for contributions made for all 3 employees, because they are all eligible employees of the company.

Jim is unable to claim a deduction through the controlling interest provisions for contributions made for himself because he cannot be an eligible employee of himself.

Application and transitional provisions

1.13 This measure, which is for the purpose of clarification only, was announced in the Assistant Treasurer's Media Release No. 35 of 30 June 2000.

1.14 The amendments will apply to any superannuation contributions made after 4.00 pm, by legal time in the Australian Capital Territory, on 30 June 2000. [Schedule 1, subitem 11(1)]