Private ruling: Assessability of superannuation lump sum
Date of advice: 22 July 2016
Published: September 2016
Ruling period: The income year ended 30 June 20zz
Date scheme commenced: 1 July 20yy.

Ruling: Q1: Is the superannuation lump sum payment received from an Australian superannuation fund taxable? | A1: Yes. | Q2: Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in obtaining their superannuation lump sum payment before retirement age? | A2: No.

Relevant facts and circumstances: You are below your preservation age. You have been a member of an Australian superannuation fund (the Fund) since the 20vv-ww income year. As the result of the physical demands of your work, you suffered from a medical condition, and went on compensation in 20xx. You continue to suffer from this injury. You were employed full-time prior to your workplace injury. You stopped working because you were no longer able to perform your duties due to your ill health. You lodged a claim for a Total and Permanent Disablement (TPD) Insurance Benefit in respect of your fund membership. In a letter dated in 20aa, you received confirmation from your solicitor that your TPD benefit had been paid. In 20aa you received a PAYG payment summary - superannuation lump sum from your Fund finalising the release of the TPD benefit. Subsequently, you received a TPD benefit comprising a taxable component and tax-free component. Of this total, an amount was withheld as tax, and a further amount was paid as legal fees to your solicitors. According to the information you provided, you contacted your superannuation fund and were informed that they believed the modification for disability superannuation benefits to have been applied by the Fund to the TPD benefit.

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: Section 301-35 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where a member is below preservation age when receiving a superannuation lump sum, the taxable component of the superannuation lump sum is assessable income. | Detailed Reasoning - Question 1: A superannuation lump sum benefit will generally be comprised of: • 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 . The amount of each of these components is calculated by your superannuation fund in accordance with the proportion of the value of your overall superannuation interest that those components represent. However, section 307-145 of the ITAA 1997 operates to effectively increase the tax-free component where the superannuation lump sum is also a 'disability superannuation benefit.' If the relevant medical certification requirements are met, a modification is applied in accordance with a formula under subsection 307-145(3) of the ITAA 1997 when calculating the tax-free component of the superannuation lump sum. According to the information you provided, you contacted your superannuation fund and were informed that they believed the modification for disability superannuation benefits to have been applied by the Fund to the TPD benefit. As the modification has already been applied, the tax free component cannot be increased further. Section 301-35 of the ITAA 1997 provides that where a member is below preservation age when receiving a superannuation lump sum, the taxable component of the superannuation lump sum is assessable income. You were granted an early release of your superannuation benefits on the grounds of total and permanent disability in 20aa. You were below preservation age at the time you received the superannuation lump sum. As such, the taxable component of the lump sum will be included in your assessable income for the 20zz-aa income year. However, a tax offset under section 301-35 of the of the ITAA 1997 will apply to ensure that the tax payable in respect of the element taxed in the fund will not exceed 20% plus Medicare levy and, if applicable, Medicare levy surcharge. It should be noted that the Commissioner of Taxation does not have any discretionary powers to waive the imposition of tax in respect of an item of income. | Detailed Reasoning - Question 2: In accordance with ATO ID 2001/622 Income Tax: Legal Expenses - to obtain superannuation payment before retirement age , the facts of which mirror your case, it was held that legal expenses incurred in obtaining a superannuation lump sum payment before retirement age are not deductible. Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; [1946] HCA 34). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. The legal expenses were not incurred in asserting your right to the superannuation payment but rather for early withdrawal of the monies from your superannuation fund. The early withdrawal of monies from your superannuation fund is an issue of a private nature. There is an insufficient nexus between incurring the legal expenses and the gaining of assessable income. The legal expenses are also private in nature and therefore not deductible under section 8-1 of the ITAA 1997.