Private ruling: Taxation of temporary incapacity benefit payments
Date of advice: 22 April 2020
Published: June 2020
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Should the payment you received during the 20XX-XX income year as a temporary incapacity benefit payment from a superannuation fund for a period during the 20XX-XX income year, be included in your assessable income? | A1: Yes.

Relevant facts and circumstances: You applied for a private ruling about the taxation of the lump sum payment you received from the superannuation provider. In the private ruling request we received, you advised the following: The retrospective lump sum payment you received from the superannuation provider was awarded to you by the Australian Financial Complaints Authority (AFCA). The superannuation provider paid the lump sum payment through the PAYG system. The tax withheld from the lump sum payment should be refunded to you and the provided PAYG payment summary - individual non-business should be deleted. You are not familiar with the legislation relating to superannuation or remuneration and therefore sought advice from the Australian Taxation Office (ATO) that indicated that the lump sum payment should not be taxable. Further information about the retrospective lump sum payment awarded to you by the AFCA has been provided within your previous complaint made to the ATO. In an email addressed to you sent from a tax officer at the ATO, we requested the following supporting documentation: Your original application made to the superannuation fund for a temporary incapacity benefit payment. Any other associated documents you may have that has not already been provided. In an email sent from you addressed to a tax officer at the ATO, you advised the following: · You held onto very few documents in relation to this matter once you had received the revised superannuation determination from the AFCA regarding the lump sum payment you received from the superannuation provider. Within this email we also received the following documentation: · Your temporary incapacity benefit application form. · Your medical panel assessment information. · Your serious injury certificate. In an email addressed to you sent from a tax officer at the ATO, we asked for an explanation from the superannuation provider detailing the reasons why the lump sum payment was classified as an income payment and not a superannuation benefit. In another email sent from you addressed to a tax officer from the AAT, you advised that the payments you receive from Centrelink may be reduced and that the AFCA informed you: · The temporary incapacity benefit payment you received had been correctly taxed. · You could apply to the ATO for a refund or lodge a separate complaint with the AFCA about the tax treatment of the temporary incapacity benefit payment you received if you disagree. Within this email we received, the following supporting documentation: · An email from an Ombudsman for Superannuation, Advice, Investment and Life Insurance from the AFCA addressed to you, which advised the following: - She has spoken with the superannuation provider about the taxation of the temporary incapacity benefit payment paid to you as a result of the substituted decision of the AFCA. - The tax treatment you have previously mentioned is relevant to lump sum benefits. - The temporary incapacity benefit payment is a self-insured income benefit under the trust deed of the superannuation provider and was payable in respect of the period during the 20XX-XX income year. - It is not a lump sum compensation payment and therefore the superannuation provider has deducted PAYG tax from the benefit as if it had been paid at that time even though there was a delay in the payment. - Interest for the delay is being calculated and paid separately. - She is satisfied that the temporary incapacity benefit payment has been taxed correctly. - You could apply to the ATO for a refund or lodge a separate complaint with the AFCA if you disagree with the tax treatment of the temporary incapacity benefit payment you received. In an email addressed to you sent from a tax officer from the ATO, we asked if we could contact the insurance and claims technical specialist for the superannuation provider to directly discuss the lump sum payment you had received. In an email sent from you addressed to a tax officer from the ATO you authorised the ATO to contact your superannuation provider to discuss the lump sum payment you received. In a telephone conversation between the insurance and claims technical specialist for the superannuation provider and a tax officer from the ATO, we were advised the following: The temporary incapacity benefit payment had been paid retrospectively for a period during the 20XX-XX income year. The temporary incapacity benefit payment was not a withdrawal from her superannuation fund. The trust deed for the superannuation provider provides under its defined benefit rules formulas for payments relating to illness or injury as well as how to calculate the appropriate amount of tax. Interest was paid on top of the temporary incapacity benefit payment you received and no tax was calculated on that. In an email sent from you addressed to a tax officer at the ATO and another tax officer at the ATO, you advised the following: The lump sum payment was calculated under a formula within the trust deed for the superannuation provider. · You may not be eligible for the tax free threshold. · The payments you receive from Centrelink may be reduced. Within the email we received, the following supporting documentation: · The revised superannuation determination you received from the AFCA regarding the lump sum payment you received from the superannuation provider. · Document from the insurance and claims technical specialist for the superannuation provider showing the breakdown and calculation of the temporary incapacity benefit payment and interest you received.


Reasons for decision: Summary: The payment you received during the 20XX-XX income year as a temporary incapacity benefit payment from the superannuation fund for a period during the 20XX-XX income year is your assessable income. | Detailed Reasoning - Division 307 of the Income Tax Assessment Act 1997: Division 307 of the Income Tax Assessment Act 1997 explains the term 'superannuation benefit'. Paragraph 307-10(a) of the Income Tax Assessment Act 1997 states that the following payment is not a superannuation benefit: · an amount payable to a person under an income stream because of the person's temporary inability to engage in gainful employment. The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 (EM) explains that payments under an income stream because a person is temporarily unable to perform his or her normal duties as an employee are not considered superannuation benefits in order to maintain their current tax treatment. This EMconfirms that these payments are to be considered replacement of regular income and therefore taxable at marginal rates. | Detailed Reasoning - Application to your circumstances: You received a revised superannuation determination from the AFCA, which stated that the superannuation provider will pay you an amount of temporary incapacity benefits that would have been payable for a period during the 20XX-XX income year, with interest at the Reserve Bank of Australia cash rate (at the relevant time), from the date each monthly benefit would have been made to the date of payment of the aggregated amount. You received a lump sum payment from the superannuation provider during the 20XX-XX income year as a temporary incapacity benefit payment for a period during the 20XX-XX income year which had an amount withheld for tax. You also received an amount for interest from the superannuation provider. The payment you received from the superannuation fund as a temporary incapacity benefit payment for a period during the 20XX-XX income year is considered replacement of regular income and therefore represents your assessable income to be taxed at your marginal rate. As you received the lump sum payment from the superannuation provider during the 20XX-XX income year, you need to include this payment in your assessable income for the 20XX-XX income year.