A Federal Court ruling denying a deduction for superannuation contributions made for directors sends a strong warning to corporate Australia, according to business advisors BDO.

BDO explains the case, Kelly v Federal Commissioner of Taxation (No. 2), held that a trust was not entitled to a deduction for superannuation contributions made on behalf of the directors of its corporate trustee, as they were not technically “employees”, and the company had not appropriately authorised the payment of remuneration to its directors.

Under common law, directors are not entitled to remuneration for their role as directors unless specifically provided for in the company’s constitution.

BDO Tax Partner Mark Molesworth says the Court’s decision highlights the need for companies to review their constitutions regarding payment of remuneration to directors.

“The Court’s decision should be seen as a warning to Australian companies whose directors are not also employees under common law,” Mark says.

“If a company or trust pays superannuation contributions on behalf of directors, it should ensure that the company has complied with its constitutional requirements around the remuneration of directors.

“Australian companies should use the recent ruling as a timely reminder to review their current constitution, ensuring all appropriate steps are taken to authorise the payment of remuneration to directors.”

While technically correct, the decision by the Federal Court is expected to add further administrative burdens for companies, especially small and medium enterprises.

“The arguments put forward by the Australian Tax Office in this instance are technical ones, and do not demonstrate much understanding of the overarching business context in which taxpayers operate,” Mark says.

“While technically correct, the ruling by the Federal Court will no doubt place further administrative burdens on SMEs wanting to pay superannuation contributions on behalf of directors who are not also employees.”
 

Updated 13 July 2012