Private ruling: Disability benefit
Date of advice: 3 August 2017
Published: November 2017
Ruling period: The income year ended 30 June 2017.
Date scheme commenced: 1 July 2016.

Ruling: Q1: Can the tax free component of the superannuation lump sum be further increased by applying the modification for disability benefits under section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You have provided your date of birth. You were employed as a Laboratory Scientist. Following on from an injury in 2014 you have suffered from severe pain and have been unable to work. You have been a member of a superannuation fund (the Fund) since 2009. You were in receipt of income protection benefits from the Fund from the day after your injury until May 2016. You lodged a claim for a Total and Permanent Disablement (TPD) Insurance Benefit which was subsequently approved. Two qualified medical practitioners have certified that you will no longer ever to be able to perform a job for which you are reasonably suited by education, training and experience. You also applied for the early release of your preserved employer benefits in the Fund by way of an application for “early release of preserved employer benefits on the grounds of invalidity before age 55” which has been approved. A Termination statement from the Fund shows your total superannuation benefit. A PAYG payment summary – Superannuation Lump Sum from the Fund shows a payment was made to you comprising of a tax free-component, a taxable component taxed element and the total tax withheld. You resigned from your job in January 2017.

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 by applying the modification for disability superannuation benefits. | 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. | Detailed Reasoning - 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. | 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: | Detailed Reasoning - Amount of benefit × Days to retirement ÷ Service Days + Days to retirement: 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, two qualified medical practitioners have 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 payment is a disability superannuation benefit. Accordingly, section 307-145 of the ITAA 1997 applies to modify the tax-free component.