A common query we encounter is whether superannuation contributions made to a complying superannuation fund on behalf of a director by the trustee of a family discretionary trust is deductible. Generally, the trust is an investment vehicle that derives passive income.
This query gives rise to a number of hurdles that have to be overcome for the superannuation contribution to be deductible.
Is the contribution deductible?
The threshold question for determining whether a superannuation contribution is deductible is if the director is an employee of the trustee for the trust. A director will be an employee of the trustee if the director is:
- entitled to be paid for performing their role on the board;
- engaged in producing the assessable income of the trust; or
- an Australian resident engaged in the business of the trust.
Where the trust is a passive investment vehicle, the last two options are unlikely to be satisfied.
Therefore, a director must be remunerated in their capacity as a director of the trustee for a superannuation contribution to be deductible.
Importantly, as non-executive directors do not have a general law right to be remunerated, the constitution of the corporate trustee will need to contain a power to pay the director salary or wages. In addition, the company must resolve to remunerate the director for their services to the corporate trustee.
In contrast, where the contribution is made from the trust funds, the director must be engaged in producing the assessable income of the trust or involved in the business of the trust for the contribution to be deductible to the trustee for the trust (refer to ATO ID 2008/15 – withdrawn). In this circumstance, the director will be an employee of the trustee for the trust. In this scenario, it is generally necessary for the income producing activities of the trust to constitute a business.
Whether a business is being carried on is a factual question that depends on all the circumstances. There are a number of indicia that may indicate a business is being conducted, such as maintaining business records, the size of the operation, quantum of capital involved and the systematic and continuous nature of the activities.
Does the trustee have the funds to pay the director a salary?
A trustee is not entitled to be paid for their fiduciary service except where the trust deed specifically provides for the trustee to be remunerated.
Generally, a discretionary trust deed simply provides that a trustee can be remunerated for any services provided in a separate capacity, such as in their capacity as a lawyer or accountant.
The trust deed may also provide that the trustee has the power to employ any person (including any trustee) in connection with a business carried on by the trustee and to determine the applicable remuneration. However, as the trustee does not engage the directors (they are generally appointed by the shareholders), it is unlikely that they will fall within this power. Similarly, this power ordinarily permits the trustee to employ an additional trustee, rather than the trustee being entitled to be remunerated.
The trustee may have the power under the trust deed to receive a commission. However, it would be unusual to pay the trustee a commission where the trustee acts as trustee for a family trust (as opposed to a complex trust which requires significant effort and expertise on the part of the trustee). In addition, any commission paid would need to be reasonable, which would require an examination of the work done by the trustee.
In cases where the Supreme Court has considered claims for trustee commission made under statutory provisions, the Court generally examines the nature of the activities as well as the skill and ability displayed in carrying out those duties and the success in the trust administration coming from those efforts. Thus it would be difficult to mount an argument that routine and basic administration of an essentially passive investment trust warranted the payment of commission to the trustee.
However, depending on the terms of the trust deed and the services provided to the trustee, it may be possible for an individual to be engaged in their personal capacity by the trustee to provide necessary services. An arrangement of this nature should be properly documented and substantiated by detailed documentary evidence of the services provided and hours undertaken. Further, the individual should be remunerated on a strictly arm’s length basis.
It is also important to keep in mind that the trustee must derive sufficient income at some point to claim the deduction.
Is a contribution to superannuation sufficient to constitute salary or wages for deductibility purposes?
In our view, where the trustee for the trust simply makes a contribution to a superannuation fund on behalf of a director, this will not be sufficient to constitute salary or wages for the purposes of deducting the contribution under the Income Tax Assessment Act 1997 (1997 Act).
However, where the director has a legally enforceable right to be paid salary or wages for services to the corporate trustee, the director could enter into a valid salary sacrifice agreement to forego any salary or wages and receive an equivalent benefit by way of superannuation guarantee contributions being made on his or her behalf.
In this circumstance, the director has an entitlement to receive salary or wages, but has entered into an enforceable agreement to forego all or a proportion of his remuneration in return for superannuation contributions being made on his or her behalf. In our view, this will satisfy the threshold deductibility requirement in section 290-70 of the 1997 Act.
What if the contribution is debited to the director’s beneficiary loan account with the trust?
Where a contribution is made by the trustee for the family trust, but is debited to the director’s beneficiary loan account, it is arguable that the contribution is in fact a constructive payment by the director, rather than a contribution by the trustee.
Therefore, it is important that the trust accounts accurately reflect what has occurred and the intention of the parties, particularly where the trustee intends to claim a deduction for a concessional contribution made on behalf of a director of the trustee.
Before 30 June 2012
Where the trustee of a family trust is considering making a superannuation contribution on behalf of a director, we recommend the trustee consider whether the contribution is in fact deductible and whether the trustee has sufficient funds to make the contribution.
Further, we recommend that the director ensure that any contribution made by them or on their behalf will not breach the contribution caps.