ATO ID 2009/109: Disability superannuation benefit
Date of decision: 9 September 2009
Year of income: Year ended 30 June 2008
Business line: Superannuation

Issue
Can a superannuation lump sum be a disability superannuation benefit as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) even if it is not paid to the member of the fund under the permanent incapacity condition of release in the Superannuation Industry (Supervision) Regulations 1994 (SIS regulations)?

Decision
Yes. A superannuation lump sum can be a disability superannuation benefit even if it is not paid under the permanent incapacity condition of release of the SIS regulations.

Facts
A member of a complying superannuation fund receives four superannuation lump sum benefits from the fund during one income year. The member is below preservation age throughout the income year. The member's benefits in the fund are all preserved benefits. The fund's rules authorise the trustee to pay a benefit to a member who suffers ill-health (whether physical or mental), providing other regulatory requirements are met. The fund's rules also authorise the trustee to pay a member their unrestricted non-preserved benefits at any time. The member satisfies the permanent incapacity condition of release Two medical practitioners have certified that the member is incapable of ever being gainfully employed in a capacity for which the member is reasonably qualified because of education, training or experience. These certificates are presented to the fund before the trustee makes a payment. The trustee pays the member a superannuation lump sum in November 2007. This benefit is a disability superannuation benefit. No investment earnings accrue or are allocated after the payment in November 2007. Three subsequent superannuation lump sums are paid in the same financial year, the last payment being made in April 2008.

Reasons for decision
Summary: Paragraph (a) of the definition of 'disability superannuation benefit' in subsection 995-1(1) of the ITAA 1997 requires that a superannuation benefit is paid to a person because he or she suffers from ill-health (whether physical or mental). In Human Rights and Equal Opportunity Commission v. Mount Isa Mines Ltd [1993] FCA 535; (1993) 46 FCR 301; (1993) 118 ALR 80; (1993) 51 IR 364 Lockhart J stated: In my opinion the phrase "by reason of" in s. 5(1) of the SD Act should be interpreted as meaning "because of", "due to", "based on" or words of similar import which bring something about or cause it to occur. The phrase implies a relationship of cause and effect between the sex (or characteristic of the kind mentioned in s. 5(1)(b) or (c)) of the aggrieved person and the less favourable treatment by the discriminator of that person. In the context of paragraph (a) of the definition of 'disability superannuation benefit' in subsection 995-1(1) of the ITAA 1997, there must be a causal connection between the ill-health and the payment of the superannuation benefit. As a result of suffering from ill-health the person is paid the benefit. Some support for this is also provided by the decision in Federal Commissioner of Taxation v. Scully [2000] HCA 6; (2000) 201 CLR 148; 2000 ATC 4111; 43 ATR 718 ( Scully's case). In Scully's case the High Court had to determine whether an invalidity superannuation benefit was an eligible termination payment (ETP) or whether it fell within the ETP exclusion for consideration of a capital nature for, or in respect of, personal injury. The High Court considered that by the use of the word 'payment', as distinct from 'consideration', a 'rational connection' or factual causation would be enough. This can be seen to accord with the dictionary meaning of the phrase 'because of'. The Macquarie Dictionary , 2001, rev 3rd edn, The Macquarie Library Pty Ltd, NSW defines 'because of' as meaning 'by reason of' and 'on account of'. As stated in subsection 307-5(1) of the ITAA 1997, a superannuation benefit is a payment described in the table. Column 2 of item 1 of that table refers to a superannuation fund payment as a payment to you from a superannuation fund because you are a fund member. Section 307-65 of the ITAA 1997 provides a meaning for the term 'superannuation lump sum'. This payment is a superannuation benefit that is not a superannuation income stream benefit. Retail Employees Superannuation Pty Ltd v. Crocker [2001] FCA 1330; 48 ATR 359 involved a claim a member made upon a superannuation fund for benefits payable upon total and permanent disablement. It was an appeal from a decision of the Superannuation Complaints Tribunal (SCT). According to Allsop J the task of the SCT was to form a view, from the perspective of the trustee or insurer, as to whether the decision of either was (recognising the overriding framework given by the governing rules and policy terms, respectively) unfair or unreasonable. In reaching their decision the High Court in Scully's case also had regard to the rules of the fund. These decisions support an approach based on looking at a fund's rules to determine why a benefit was paid. Under the SIS regulations voluntary cashing of preserved benefits and restricted non-preserved benefits may only occur on or after the satisfaction by the member of a condition of release (COR). But there is nothing in the income tax law definition of disability superannuation benefit that requires the benefit to be paid under a particular COR. It is a question of fact, to be determined objectively, whether a particular superannuation benefit is paid because of a member's ill-health. Satisfaction of a particular COR, such as the permanent incapacity COR, would be a relevant fact to consider, and could in some circumstances in itself be sufficient for it to be said that payments are made because of a member's ill-health. According to subregulation 6.01(2) of the SIS regulations a 'condition of release' is a COR specified in column 2 of Schedule 1 and subject to regulation 6.01B a member of a fund is taken to have satisfied a COR if the event specified in that condition has occurred in relation to that member. The term 'cashing restriction' is also defined in the subregulation. It means a cashing restriction specified in column 3 of the item in Schedule 1 that mentions the COR. CORs do not apply to unrestricted non-preserved benefits (UNPBs) as is made clear by subregulation 6.20(1) of the SIS regulations which states that a member's unrestricted non-preserved benefits may be cashed at any time. Subregulation 6.12(1) of the SIS regulations provides that: Items 103 and 203 in Schedule 1 to the SIS regulations deal with the permanent incapacity COR. This particular COR has a 'nil' cashing restriction. Permanent incapacity is defined in regulation 1.03C as: ".. a member of a superannuation fund or an approved deposit fund is taken to be suffering permanent incapacity if a trustee of the fund is reasonably satisfied that the member's ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience." This definition is effective from 1 July 2013. A payment made as a result of satisfying the permanent incapacity COR is therefore clearly a payment made to a person because he or she suffers from ill-health (whether physical or mental). Once the permanent incapacity COR is satisfied, the member's benefits in the fund were converted from preserved benefits to UNPBs. This occurred prior to the payment of the first superannuation lump sum in November 2007. As no earnings accrued to the member's account after payment of that benefit, the member did not need to satisfy any COR to obtain payment of the remaining benefits in the fund. As the rules of the fund permitted payment of UNPBs at any time the member had to simply apply for payment. On one view, no later payments could be said to be connected to the member satisfying the COR, and that a separate basis would need to be found for saying that the payments were made because of the member's ill-health. However, subregulation 6.18(3)(b)(i) of the SIS regulations provides preserved benefits may be cashed as one or more lump sums when the COR that has been satisfied has a 'nil' cashing restriction. That is, the provision specifically contemplates a person's benefits may be paid as a series of lump sum benefits in relation to a particular COR. As the last of the superannuation lump sums was paid 5 months after the first lump sum paid in November 2007 each of the later lump sums could be seen as one of a series of lump sums that were paid in relation to the member satisfying the permanent incapacity COR. As the payments in this case were only UNPBs because of the permanent incapacity COR being satisfied there is a rational connection or the necessary causation between the COR being satisfied and each of the later superannuation lump sums being paid, and hence from the member's ill-health to each payment. Ill-health led to the permanent incapacity COR being satisfied and this in turn resulted in the member's benefits becoming UNPBs. These lump sums would not otherwise have been paid if it were not for the fund trustee being satisfied of the member's permanent incapacity or ill-health. In this instance the later superannuation lump sums were made because the member suffers from ill-health. These lump sums are thus capable of being disability superannuation benefits.

Legislative references: Income Tax Assessment Act 1936 section 27G
Case references: Human Rights and Equal Opportunity Commission v Mount Isa Mines Ltd [1993] FCA 535 (1993) 46 FCR 301 (1993) 118 ALR 80 (1993) 51 IR 364
Subject references: Lump sum - superannuation benefits