Private ruling: Invalidity payment
Date of advice: 17 August 2017
Published: January 2018
Ruling period: Income year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Does an MSBS Invalidity pension constitute a superannuation income stream as that term is defined in section 307-70 of the Income Tax Assessment Act 1997 (ITAA 1997) and subregulation 995-1.01(1) of the Income Tax Assessment Regulations 1997 (ITAR 1997)? | A1: Yes. | Q2: Do the payments from the MSBS invalidity pension meet the definition of ‘superannuation lump sum’ in section 307-65 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: As a member of the Australian Defence Force (ADF), you became a member of the MSBS. The MSBS is a scheme which was established to provide benefits that are payable when an individual retires from the ADF. Amongst other things, the MSBS Rules provide for the payment of an invalidity pension to certain individuals who have been retired from the ADF because of their invalidity. To determine whether an invalidity pension is payable, the MSBS Rules provide for a mechanism by which a determination is made of a particular individual’s capacity/incapacity to engage in civil employment after their retirement from the ADF (rule 22 of the MSBS Rules). Under that rule, an individual is assessed as having a Class A, Class B or Class C incapacity for civil employment. The MSBS Rules provide that a person whose incapacity for civil employment is classified as Class A is eligible for an invalidity pension, the starting amount for which is worked out having regard to an amount called the ‘employer benefit’ (rule 27 of the MSBS Rules). A person whose incapacity for civil employment is classified as Class B is entitled to a pension of a different amount, which in very broad terms, may be half of the amount payable to a Class A recipient (rule 28 of the MSBS Rules). However, no invalidity pension is payable to a person whose incapacity for civil employment is classified as Class C (rule 31 of the MSBS Rules). In very simple terms, the ‘employer benefit’ is worked out having regard to your final average salary and your eligible service period. Schedule 8 to the MSBS Rules sets out the rules for the calculation of the employer benefit for some members, including a person who is retired from the ADF because of invalidity. Schedule 5 to the MSBS Rules sets out the rules used to calculate the rate of pension that is payable by conversion from the amount of the employer benefit. The MSBS Rules require an individual to undergo periodic reviews of their level of incapacity for civil employment (rule 25 of the MSBS Rules). The MSBS Rules generally provide that if an individual’s level of incapacity for civil employment is adjusted to the extent that they are reclassified to another classification, the amount payable may be adjusted. If an individual is reclassified to Class C, the invalidity pension that had been payable to them (as either a Class A or Class B individual) is cancelled and the individual will have a preserved benefit of the amount of their employer benefit (rule 29 of the MSBS Rules). However, an individual who has reached the age of 55, cannot be reclassified to Class C incapacity for civil employment (subrule 23(2) of the MSBS Rules). Upon becoming entitled to receive an invalidity pension under the MSBS, an amount equal to the funded employer benefit is paid by the CSC to the Commonwealth and the invalidity pension is payable to the individual by the Commonwealth from the Consolidated Revenue Fund (section 13 of the MSBA). If an invalidity pension that was payable to an individual who was classified as having a Class A or Class B incapacity for civil employment is cancelled because the individual is reclassified to Class C, the Commonwealth must pay to the Commonwealth Superannuation Corporation (CSC) an amount equal to the individual’s funded employer benefit (section 15 of the MSBA). The CSC is currently withholding amounts from your invalidity pension on the basis that each fortnightly payment of the pension is a superannuation income stream benefit that you are required to include in your assessable income. You are under your preservation age. Your pension commenced after 20 September 2007.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 307-65 | Income Tax Assessment Act 1997 section 307-70 | Income Tax Assessment Act 1997 subsection 307-70(1) | Income Tax Assessment Act 1997 subsection 307-70(2) | Income Tax Assessment Regulations 1997 subregulation 995-1.01(1) | Income Tax Assessment Regulations 1997 subregulation 995-1.01(2) | Superannuation Industry (Supervision) Regulations 1994 subregulation 1.06(1)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subsection 307-70(2) of the ITAA 1997 provides that a ‘superannuation income stream’ has the meaning given by the regulations. Subregulation 995-1.01(1) of the ITAR 1997 provides that a superannuation income stream means, relevantly, an income stream that is taken to be a pension for the purposes of the Superannuation Industry (Supervision) Act 1993 (SISA) in accordance with subregulation 1.06(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR); or is an income stream that is a pension within the meaning of the SISA that commenced before 20 September 2007. The expression ‘income stream’ is not defined by either the income tax or superannuation laws. Therefore, it must be given its ordinary meaning. The Commissioner sets out his view in TR 2013/5 Income Tax: when a superannuation income stream commences and ceases that an income stream is a series of periodic payments that relate to each other and that are payable over an identifiable period. We consider a fundamental characteristic of the invalidity pension paid under the rules of the MSBS is that it involves a series of periodic payments that are related and that are payable over an identifiable period. Hence, we consider the invalidity pension to be an income stream per the ordinary meaning of the term. You commenced to receive your invalidity pension after 20 September 2007. Hence for your invalidity pension to be a ‘superannuation income stream’ it must, as outlined above, be an income stream that is taken to be a pension in accordance with subregulation 1.06(1) of the SISR. Having examined the terms under which the invalidity pension is payable under the MSBA and MSBS, we are satisfied that the invalidity pension is a pension that satisfies the requirements of subregulation 1.06(1) of the SISR. Accordingly, we consider your invalidity pension paid from the MSBS to be a superannuation income stream as defined. | Detailed Reasoning - Question 2:: Do the payments from the MSBS invalidity pension meet the definition of ‘superannuation lump sum’ in section 307-65 of the ITAA 1997? | Detailed Reasoning - Answer 2:: No. | Detailed Reasoning - Detailed reasoning: Subsection 307-70(1) of the ITAA 1997 provides that a ‘superannuation income stream benefit’ is a superannuation benefit specified in the regulations that is paid from a superannuation income stream. Subregulation 995-1.01(2) of the ITAR 1997 provides relevantly that ‘superannuation income stream benefit’ means a payment from an interest that supports a superannuation income stream. As we have found above that the invalidity pension paid from the MSBS is a superannuation income stream, it follows that payments from the invalidity pension are superannuation income stream benefits as defined. Subsection 307-65(1) of the ITAA 1997 relevantly provides that a ‘superannuation lump sum’ is a superannuation benefit that is not a superannuation income stream benefit. Accordingly, it follows further that a payment from the MSBS invalidity pension being a superannuation income stream benefit cannot be a superannuation lump sum as defined in section 307-65.

Question 1: Does an MSBS Invalidity pension constitute a superannuation income stream as that term is defined in section 307-70 of the Income Tax Assessment Act (ITAA 1997) and subregulation 995-1.01(1) of the Income Tax Assessment Regulations (ITAR 1997)?