Private ruling: Pension and invalidity
Published: December 2011
Ruling period: Year ending 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: 1. Does the lump sum payment received from your superannuation fund (the Fund) include a post-June 1994 invalidity component? 2. Does section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the lump sum payment from the Fund? 3. Does the pension received from the Fund include a post-June 1994 invalidity component? 4. Does section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the pension from the Fund? 5. Does the pension from the Fund include an undeducted purchase price under section 27H of the Income Tax Assessment Act 1936 ? Advice/Answers 1. No. 2. No. 3. No. 4. No. 5. No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 307-5 | Income Tax Assessment Act 1997 Subsection 307-5(1) | Income Tax Assessment Act 1997 Section 307-145 | Income Tax Assessment Act 1997 Section 307-210 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act 1936 Section 27G | Income Tax Assessment Act 1936 Subsection 27H(2) | Income Tax Regulations 1997 Regulation 995-1.01 | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(1)

Reasons for decision: Detailed Reasoning - Summary of decision: The lump sum payment received from the Fund does not include a post-June 1994 invalidity component as it represents pension payments made in arrears. The entitlement to the lump sum in arrears payment arose as a result of the backdating of your entitlement to the pension to your original exit date from the Fund. Further, the lump sum in arrears payment is not a disability superannuation benefit as defined. Similarly, no part of the pension includes a post - June 1994 invalidity component as the pension commenced in the 2009-10 income year. As the member component of your entitlements in the Fund were paid as a lump sum in the mid-1990s no part of the pension includes an undeducted purchase price. | Detailed Reasoning - Superannuation Benefits: Section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out amounts which are superannuation benefits. Generally, an amount which is paid to a person from a superannuation fund because they are a fund member is a superannuation benefit by virtue of subsection 307-5(1) of the ITAA 1997. Superannuation Lump Sum Payments received Payments made to a person from a superannuation fund will generally comprise: o a tax-free component; and o a taxable component which may include: o an element taxed in the fund; and/or o an element untaxed in the fund. | Detailed Reasoning - Tax free component: Under section 307-210 of the ITAA 1997 the tax free component is comprised of a crystallised segment and a contributions segment . The crystallised segment can include the following existing components (where applicable) as at 30 June 2007: o the concessional component; o the post-June 1994 invalidity component; o undeducted contributions; o the capital gains tax (CGT) exempt component; and o the pre-July 83 component. A post - June 1994 invalidity component is so much of an eligible termination payment as consists of, or is attributable to, an invalidity payment as defined in former section 27G of the Income Tax Assessment Act 1936 (ITAA 1936) made between 1 July 1994 and 30 June 2007. Superannuation funds will calculate these components for each benefit that is paid. The taxation of superannuation member benefits paid from complying superannuation funds are set out in Division 301 of the ITAA 1997. In this case the lump sum payment from your superannuation fund (the Fund) does not include a post-June 1994 invalidity component as it is made after 30 June 2007. | Detailed Reasoning - Modification of tax-free component for disability benefits: Section 307-145 of the ITAA 1997 modifies the tax-free component where the superannuation benefit is a superannuation lump sum and a disability superannuation benefit. Section 307-145 of the ITAA 1997 provides for a modification for disability benefits and states: (1) Work out the tax free component of the superannuation benefit under subsection (2) if the benefit is a superannuation lump sum and a disability superannuation benefit. (2) The tax free component is the sum of: (a) the tax free component of the benefit worked out apart from this section; and (b) the amount worked out under subsection (3). However, the tax free component cannot exceed the amount of the benefit. (3) Work out the amount by applying the following formula: Amount of benefit × Where: days to retirement is the number of days from the day on which the person stopped being capable of being gainfully employed to his or her last retirement day. service days is the number of days in the service period for the lump sum. (4) The balance of the superannuation benefit is the taxable component of the benefit. Subsection 995-1(1) of the ITAA 1997 defines a disability superannuation benefit as follows: disability superannuation benefit means a superannuation benefit if: (a) the benefit is paid to a person because he or she suffered from ill-health (whether physical or mental); and (b) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training In this case section 307-145 of the ITAA 1997 does not apply as the lump sum payment is not a disability superannuation benefit. The lump sum payment has been paid in respect of pension payments made in arrears. | Detailed Reasoning - Superannuation income stream: A superannuation income stream is defined in regulation 995-1.01 of the Income Tax Regulations 1997 (ITR) as: (a) an income stream that is taken to be: (i) an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations; or (ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or (iii) a pension for the purposes of the RSA Act in accordance with regulation 1.07 of the RSA Regulations; or (b) an income stream that: (i) is an annuity or pension within the meaning of the SIS Act; and (ii) commenced before 20 September 2007. In this case, the pension paid from the CSS must meet the requirements of subregulation 1.06(1) of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations), which includes: o the pension must be paid at least annually; o it must be paid for the life of the beneficiary (including any reversionary beneficiary); and o compliance with the payment standards in subregulation 105.01(11A) of the SIS Regulations. The pension from the Fund is a superannuation income stream. As the pension commenced in the 2009-10 income year no part of the payment includes a post-June 1994 invalidity component. Further, section 307-145 of the ITAA 1997 only applies to a superannuation lump sum and does not apply to an income stream payment. | Detailed Reasoning - Undeducted purchase price (UPP): Subsection 27H(2) of the ITAA 1936 sets out the formula for calculating the deductible amount of an annuity that is excluded from assessable income. The deductible amount calculated by this formula requires the calculation of the UPP of the annuity. If the Commissioner considers that the deductible amount calculated under subsection 27H(2) of the ITAA 1936 is inappropriate, he may substitute another amount. The legislation is clear and only a member's contributions to a superannuation fund will qualify as forming the purchase price of a pension paid by a superannuation fund (foreign or domestic). On or after 1 July 1994 and prior to 1 July 2007 the UPP of a superannuation pension is generally comprised of undeducted contributions and, where appropriate, the post-June 1994 invalidity component. You advised of your UPP amount. However, it is noted that you were paid the whole amount of your UPP (undeducted contributions) when you received your original superannuation payment. Therefore, no part of the pension includes an undeducted purchase price that is excluded from assessable income under subsection 27H(2) of the ITAA 1936.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: Whilst employed by your employer you developed a serious medical condition. | Due to your ill health you were unlikely to ever be able to undertake gainful employment in a capacity for which you are reasonably qualified because of education, experience or training. | As a consequence of your medical condition you were unable to adequately perform your duties and your employment was terminated in the mid 1990s. | During your employment with the employer you were a member of an employer-sponsored superannuation fund (the Fund). The Fund is currently administered by an administration company (the Fund Administrator). | Shortly after your termination of employment in the mid-1990s you received a gross lump sum (less tax withheld) from the Fund. Included in this amount were undeducted contributions. Also, an amount was compulsorily rolled over to another superannuation fund. | It was only much later that you made an application for retrospective invalidity to the Fund Administrator after becoming aware of the process. | You have been in receipt of a superannuation invalidity pension since the end of the 2009 calendar year. | A letter from the Fund Administrator dated a year later shows that, as a result of an increase in the Consumer Price Index ,your gross pension has increased from the beginning of the next calendar year and comprises: | o a Tax-free fortnightly component; | o a Taxed fortnightly component; and | o a Untaxed fortnightly component. | Several months later a letter from the Fund Administrator, in relation to the calculation of your superannuation fund benefits, stated that an arrears payment was made at the time of you commenced to receive your pension. The letter advised that the arrears were broken up into (then) current financial year pension payments of a certain amount and previous financial year payments of another amount. | The letter went on to say what the arrears that should have been paid (a slightly larger amount) and broke them up into (then) current financial year pension payments and previous financial year payments. The letter then advised that the net outstanding amount would be paid into your nominated bank account on the next pension payday. | The Fund Administrator has classified the lump sum payment as a Superannuation Income Stream Lump Sum in Arrears. The ongoing pension payment has been classified as a Superannuation Income Stream Benefit. | In relation to the lump sum payment the Fund Administrator states that the benefit has been paid retrospectively back to the mid-1990s and therefore no tax legislation since that date are effective when determining the tax components of your pension. | You were advised of your undeducted purchase price (UPP) amount. You were paid the whole amount of your UPP when you received your redundancy package on the termination of your employment.