Company Directors & Gainful Employment

23 Mar 2018

Lyn Formica

Head of SMSF Technical & Education Services

It is a well established principle that company directors are not considered common law employees, unless they are also engaged under a contract of employment to provide non-director duties.

So, if a director is not a common law employee, can they ever qualify as “gainfully employed” for the purpose of making superannuation contributions after age 65? Conversely, if they cease to be a director after age 60, is that sufficient to satisfy the retirement definition?

We recently sought clarification of these issues from the ATO and can now confirm:

  • Whilst not common law employees, directors are included as employees for the purpose of the Superannuation Industry (Supervision) Act & Regulations. Specifically, under section 15A(2) “a person who is entitled to payment for the performance of duties as a member of the executive body of a body corporate is, in relation to those duties, an employee of the body corporate”.
  • This means a director of a company who is entitled and paid fees for their services as a director would qualify as gainfully employed [SIS Reg 1.03(1)]. For individuals aged between 65 and 74, provided they were gainfully employed for the requisite minimum of 40 hours in no more than 30 consecutive days, voluntary employer or personal superannuation contributions could be made.
  • Similarly, where a director has received remuneration for their services as a director and subsequently ceases that directorship, an arrangement under which they were gainfully employed has come to an end. For individuals aged 60 or over, where that cessation occurs after their 60th birthday, they will have met the second limb of the retirement definition and thus satisfied a condition of release [SIS Reg 6.01(7)]. This will be case even if the individual has continued in other forms of gainful employment.

Of course, given the incentive post 1 July 2017 for individuals to satisfy a retirement definition and commence a pension which will generate tax exempt earnings in the fund, the ATO is likely to pay closer attention to such arrangements.

If you have any concerns about whether you or your client is gainfully employed or has satisfied a retirement definition, feel free to give the team at Heffron a call.