Private ruling: Disability Payment
Date of advice: 5 July 2017
Published: November 2017
Ruling period: The income year ended 30 June 2016
Date scheme commenced: 1 July 2015.

Ruling: Q1: Will the modification for disability benefits apply to increase the tax free component of the superannuation lump sum? | A1: Yes

Relevant facts and circumstances: You are a member of an Australian superannuation fund (the Fund). Your date of birth is in 19xx. You were employed by your Employer from 2012. You suffered an injury resulting in permanent disability in 2013. This injury was unrelated to your work. Following on from your accident, you took leave from your employment. During 2013, you attempted to return to work on a limited basis, However, you found you were unable to perform the duties of your role. Your last physical day of work was in December 2013. After this time, you did not return to work because you were unable to perform the duties of your role. In November 2015, you resigned from your employment. Until this time, you were still on your Employer’s payroll. You were paid a total permanent disability payment by the insurance company through your superannuation. The total amount received was a certain amount, with a tax-free amount. The insurance company calculated the period of the payment for the Total Permanent Disability payment from the date of resignation. You have supplied medical certificates from two legally qualified medical practitioners which meet the requirements of a disability superannuation benefit as defined in subsection 995-1(1) of the ITAA 1997. Your last retirement day (at age 65) will be in 20xx. The number of days from the date you ceased to be capable of being gainfully employed to your last retirement day is 9641. The total number of days from when you started work with the Employer to your last retirement day is 10064

Relevant legislative provisions: Income Tax Assessment Act 1997 section 307-120 | Income Tax Assessment Act 1997 section 307-145 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Based on the information provided, the tax-free component should be increased on the basis that you stopped being capable of being gainfully in December 2013. | Detailed Reasoning - Disability superannuation benefit: A disability superannuation benefit is defined under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as follows: disability superannuation benefit means a superannuation benefit if: (a) the benefit is paid to a person because he or she suffers 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 a capacity for which he or she is reasonably qualified because of education, experience or training. If a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed (that is, their future employment service period). The above is referred to as the modification for disability superannuation benefits if the benefit is a superannuation lump sum and a disability superannuation benefit. | Detailed Reasoning - Day you stopped being capable of being gainfully employed: The insurance company has calculated the period of the payment for the Total Permanent Disability payment from the date of resignation, rather than the date of disability or your last physical day of work. Under section 307-145 of the ITAA 1997, where a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed. This calculation requires identifying the date you stopped being capable of being gainfully employed. In your case, you suffered an injury resulting in permanent disability in 2013. Between that time and December 2013, you took sick leave (paid and unpaid), as well as paid annual leave. You returned to work on a limited basis, but were not able to continue due to your injuries. Your last physical day of work was in December 2013. In November 2015, you resigned from your employment. Until this time, you were still on your Employer’s payroll. Given the facts above, it is considered that your last day of work, being during December 2013, was the last date you were capable of being gainfully employed, as this was the last date you undertook paid work. | Detailed Reasoning - Medical certification for disability superannuation benefits: You have provided two medical reports from a legally qualified medical practitioner which meets the requirements of a disability superannuation benefit as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Superannuation benefit: A superannuation benefit includes a superannuation fund payment made to you from a superannuation fund because you are a fund member. When it is paid to you as a lump sum, this is referred to as a superannuation lump sum payment. The components of a superannuation benefit are worked out under section 307-120 of the ITAA 1997 and consist of the tax free component and the taxable component. | Detailed Reasoning - Modification for disability superannuation benefits: As discussed above, section 307-145 of the ITAA 1997 specifies that where a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed. The taxable and tax-free components of a superannuation disability superannuation lump sum are calculated according to section 307-145 of the Income Tax Assessment Act 1997 . This provision contains a formula in subsection 307-145(3) which increases the tax-free component to broadly reflect the period where the relevant person would have expected to have been gainfully employed. The formula to calculate the disability lump sum benefit modification is: Amount of benefit * (days to retirement / [services days + days to retirement]) Where: ● any days that are included in both 'service days’ and 'days to retirement’ In the formula’s denominator are to be counted only once. ● Therefore, the denominator is equal to the number of days in the period from the start of the 'service period’ for the disability lump sum to the person’s 'last retirement day’ You have advised that the payment of the superannuation lump sum from the Fund has already had the modification for disability benefits under section 307-145 of the ITAA 1997 applied, using the date of resignation as the 'date you stopped being capable of being gainfully employed.’ However, if the date used is your last day of work, the following information should be used in the calculation: Amount of the superannuation lump sum | Detailed Reasoning - $X: Existing tax free component $Y Date service period commenced: 2012 Date you stopped being capable of being gainfully employed December 2013 Last retirement day (age 65) 2040 Days from ceasing to be capable of being gainfully employed to normal retirement 9641 Days from start date to normal retirement 10064 Tax free component $X Taxable component $0.00 Therefore, the calculation for the modification for disability benefits under section 307-145 of the ITAA 1997 is as follows: $x * (9641 / 10064) Resulting in a tax-free component due to disability of $Z