Controlling interest super schemes
The Federal Court has hammered another nail into the coffin for controlling interest superannuation schemes following its decision in Harris v FCT [2001] FCA 1689, denying a taxpayer’s claim for a $315,600 deduction for contributions to a non-complying super fund.
Background
Controlling interest super schemes involve arrangements whereby a person who holds a controlling interest in a company claims a deduction under s 82AAE of the ITAA 1936 for contributions made to a super fund for his or her own benefit as an employee of the company. The schemes attracted small business controllers/employees during 1998 and 1999 by contending that contributions by the taxpayer were fully deductible, unlimited in amount and not assessable to the fund as taxable contributions.
Harris case
In this case, Harris was a director of, and had a controlling interest in, a company that carried on business as a motor vehicle dealer. He set up a non-complying super fund and, during the year ended June 30, 1998, contributed a total of $315,600 as a provision for his own super. Harris claimed the amount as a deduction pursuant to a literal reading of s 82AAE.
Section 82AAE allowed as a deduction an amount paid by a taxpayer as a contribution to a non-complying fund for the purpose of making provision for super benefits for an “eligible employee”. The then definition in s 82AAA(1) of an eligible employee “in relation to” a taxpayer, included an employee of a company in which the taxpayer had a controlling interest. The taxpayer was a director of the company and considered that, as such, he was taken to be employed by the company.
The Court dismissed the taxpayer’s appeal, finding that s 82AAE was referring to amounts paid by one person (the taxpayer) for the benefit of another person, who was an eligible person only if that person’s direct or indirect employment relationship with the taxpayer fell within s 82AAA(1). Furthermore, the use of the words “in relation to” in s 82AAA(1) signified the relationship that must exist between the eligible employee and the taxpayer.
The Court held that it was apparent from s 82AAE and the definition of “eligible employee” in s 82AAA(1) that it was the requisite relationship between the employee and the taxpayer that must be established in order for an employee to be an eligible employee in relation to the taxpayer. The taxpayer’s literal construction gave little or no effect to the relationship signified by the definition of “eligible employee”. Rather, the Court considered that the Tax Commissioner’s construction, which gave operative effect to the words “in relation to”, had a powerful advantage in an ordinary and grammatical sense, and also gave effect to the intended operation of s 82AAE.
Legislative amendments
With effect from June 30, 2000, Taxation Laws Amendment (Superannuation Contributions) Act 2001 repealed s 82AAE and amended the definition of “eligible employee” to clarify that a taxpayer and an eligible employee cannot be the same person.
Note: The Australian Taxation Office has identified just over 3,000 taxpayers who had claimed more than $400 million in deductions in such schemes.
Access to super for departing non-residents
The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, has announced that the measure to allow access to superannuation for departing non-residents will now commence on July 1, 2002, instead of January 1, 2002. The measure was originally announced during the November 2001 election campaign as part of the Government’s package of initiatives to create a better superannuation system.
Under the proposed measure, non-residents who have permanently departed Australia will be able to access their super benefits subject to the withholding of tax concessions provided to the benefits.
Senator Coonan says the measure will only apply to individuals who hold or have held a temporary residence visa, and not to all possible non-residents. In particular, it will not apply to Australian citizens and permanent residents because, although these individuals may leave the country, they always retain the option of returning to, and retiring in, Australia.
