Private ruling: Modification of disability benefits
Published: November 2012
Ruling period: Year ending 30 June 2008 | Year ending 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Can the tax free components of superannuation lump sums paid in the 2007-08 income year be modified under section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997) to reflect that they are disability superannuation benefits? Has the tax free component of the superannuation lump sum paid in the 2009-10 income year been correctly modified under section 307-145 of the ITAA 1997? Advice/Answers No. Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Division 301 | 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)

Reasons for decision: Detailed Reasoning - Summary of decision: At the time of the payments made in the 2007-08 income year two legally qualified medical practitioners had not certified that you were suffering from a medical condition which, in their opinion, is likely to preclude you from ever being able to be employed again in a capacity for which they are reasonably qualified by education, training or experience. Therefore, the payments made in the 2007-08 income year are not disability superannuation payments. However, in the 2009-10 income year, you had obtained the required certification by two legally qualified medical practitioners. Therefore, the payment made in the 2009-10 income year satisfies the definition of disability superannuation benefit. In this case, the tax-free component has been correctly modified. | Detailed Reasoning - 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: · a tax-free component; and · a taxable component which may include: · an element taxed in the fund; and/or · an element untaxed in the fund. 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: · the concessional component; · the post-June 1994 invalidity component; · undeducted contributions; · the capital gains tax (CGT) exempt component; and · the pre-July 83 component. 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. 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. At the time of the payments that were made during the 2007-08 income year, two qualified medical practitioners did not certify that you were suffering from a medical condition which, in their opinion, is likely to preclude you from ever being able to be employed again in a capacity for which they are reasonably qualified by education, training or experience. Therefore, the payments that were made during the 2007-08 income years are not disability superannuation benefits. Accordingly, section 307-145 of the ITAA 1997 does not apply to modify the tax-free component. In the two medical certificates dated during the 2009-10 income year, two legally qualified medical practitioners have certified that you are in their opinion, because of ill health, unlikely to be engaged in gainful employment for which you are reasonably qualified by education, training or experience. Therefore, the payment made to you in the 2009-10 income year satisfies the definition of disability superannuation benefit. Accordingly, section 307-145 of the ITAA 1997 applies to modify the tax-free component. In this case, the tax free component has been correctly modified under section 307-145.

Relevant facts: You are currently under preservation age. | In the late 1990s you ceased employment with your employer as a result of disablement. | As a result you became entitled to a lump sum payment from a superannuation fund. This was shown as comprising of undeducted contributions, a post-June 1994 invalidity component and a post June 83 component. | Shortly after you ceased employment an amount was rolled over to a superannuation fund (Fund 1). | Over the next several income years withdrawals were made. These withdrawals were comprised entirely of post June 1994 invalidity components. | In the early 2000s the balance in Fund 1 was rolled over to another superannuation fund (Fund 2). | Over the next several income years withdrawals were made. These withdrawals comprised of post June 1994 invalidity components and undeducted contributions. | During the 2007-08 income year two PAYG payment summaries - superannuation lump sum were issued, each disclosing a payment comprising of a tax-free component, taxable component - taxed element and total tax withheld. | During the 2009-10 income year you contacted Fund 2 to apply for early release of your preserved superannuation benefits. | Just prior to you applying for the early release of your benefits, two legally qualified medical practitioners certified that you are unlikely, because of ill-health, to engage in gainful employment for which you were reasonably qualified by education, training or experience. | Several weeks after applying for the early release of your benefits Fund 2 wrote to you confirming that they had fully redeemed your investment in the Superannuation Fund and a benefit was paid out as a result of Total & Permanent Disablement. | The resultant PAYG payment summary - superannuation lump sum from Fund 2 shows that a payment was made to you in the 2009-10 income year comprised entirely of a tax-free component. | A letter provided to you by Fund 2 in the 2012-13 income year shows the calculation of the components of the superannuation lump sum.