Private ruling: Taxation of superannuation member benefits
Date of advice: 28 August 2017
Published: December 2017
Ruling period: Income year ended 20 June 2017
Date scheme commenced: 1 July 2016

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

Relevant facts and circumstances: A person (the Taxpayer) became a member of an Australian superannuation fund (the Fund). The Taxpayer is aged less than 65 years. The Taxpayer suffers from a medical condition. This illness has prevented the Taxpayer from continuing their employment from mid-2014. Two qualified medical practitioners have certified that, because of ill-health, it is unlikely that the Taxpayer can ever be gainfully employed in a capacity for which they are reasonably qualified. The Taxpayer received a lump sum payment from the Fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 301-1 | Income Tax Assessment Act 1997 section 307-5 | 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: Detailed Reasoning - Superannuation benefit: Payments that are superannuation benefits are set out in subsection 307-5(1) of the ITAA 1997 and include a payment made to person from a superannuation fund because the person is a member of the fund. Consequently, payments to the Taxpayer from the Fund are superannuation benefits. In accordance with subsection 307-120(1) of the ITAA 1997, a superannuation benefit may consist of the tax free component and the taxable component. The tax free component of a superannuation benefit is not assessable income and is not exempt income. The tax treatment of the taxable component varies depending on the age of the member when they receive the benefit (section 301-1 of the ITAA 1997). | Detailed Reasoning - Modification for disability superannuation benefits: 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. A disability superannuation benefit is defined under subsection 995-1(1) of the 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) two 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. In accordance with section 307-145 of the ITAA 1997, the tax free component of a disability superannuation benefit is increased by an amount worked out by applying the following formula: 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. As it relates to superannuation fund payments, ‘ service period ’ is defined in subsection 307-400(1) of the ITAA 1997 as: (a) if some or all of the *superannuation lump sum accrued while you were, or the deceased was, a member of the *superannuation fund - the period of membership; (b) if some or all of the superannuation lump sum accrued while you were, or the deceased was, employed (or you or the deceased held office) - each period of employment (or of holding office) to which the lump sum relates. Based on the information provided, it appears that the Fund has calculated the modification in accordance with the legislation.