Private ruling: Superannuation lump sum - disability superannuation benefit
Published: March 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the lump sum payments received from your superannuation fund included in your assessable income? | A1: Yes.

Relevant facts and circumstances: You are under age 45. You commenced employment with your employer in 1990s. You were a member of the relevant employment superannuation fund (the Fund). You suffered from ill health which was work related and you were medically discharged in 20XX. You lodged a total and permanent disablement (TPD) claim in 20XX through the Fund which was subsequently approved. You received two payments in respect of your TPD claim in late 20YY. The PAYG superannuation lump sum payment summary details included the taxable and tax free components for each payment. You received a letter from the Fund in the recent year in regards to your TPD Benefit Claim including the details of the two TPD benefit payments (TPD Payment 1 and TPD Payment 2) in respect of the two policies under which you were covered in respect of your fund membership. You also provided a letter from the Fund in respect of your fund membership which confirmed the details of TPD Payment 1 and TPD Payment 2. The Fund also advised the break up of the taxable and tax-free components of the two payments In addition the Fund also advised you: · the tax free components of both payments were modified in accordance with section 307-145 of the ITAA 1997. · the crystallised segment for each payment was nil. The tax free component for each payment was nil before the modification under section 307-145 of the ITAA 1997. · the details for the calculations using the eligible service start date, last day of service, days to retirement and total service period in respect of the TPD Payment 1 and TPD Payment 2. · the above payments were both the result of insurance claims (TPD Benefit Claims) and were paid after the account balance had already been paid. · the components of TPD Payment 1 were calculated by the administration system: Tax free component before the modification: Nil · The components of TPD Payment 2 were calculated manually: · Tax free component before the modification: Nil The Fund noted the taxable component calculated above differ to the amount in the actual payment because of rounding used in the administration system. You provided copies of the relevant medical certification from two legally qualified medical practitioners who have certified that because of your ill-health, it is unlikely that you can ever be gainfully employed in a capacity for which you are reasonably qualified because of education, experience or training.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 307-120(3). | Income Tax Assessment Act 1997 Subsection 307-145(3). | Income Tax Assessment Act 1997 Subsection 995-1(1). | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: The modification for disability benefits in accordance with section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997) has been applied to the two superannuation lump sum payments made to you by your superannuation fund (the Fund). TPD Payment 1 The tax free component of the superannuation lump sum payment was previously nil and has been modified to increase the tax free component to X . TPD Payment 2 The tax free component of the superannuation lump sum payment was previously nil and has been modified to increase the tax free component to Y . Accordingly, the taxable component - taxed element A for TPD Payment 1 and the taxable component - taxed element B for TPD Payment 2 as shown on the PAYG payment summary for year ending 30 June in the recent year for each superannuation lump sum payment are included as assessable income for the income year. | Detailed Reasoning - Disability superannuation benefit: A disability superannuation benefit is defined under subsection 995-1(1) of the Income Tax Assessment Act 1997 (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) 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 a capacity for which he or she is reasonably qualified because of education, experience or training. If 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 (that is, their future employment service period). The above is referred to as the modification for disability superannuation benefits if the benefit is a superannuation lump sum and a disability superannuation benefit. | Detailed Reasoning - Medical certification for disability superannuation benefits: On the basis of the information provided, it can be established you have received medical reports from two legally qualified medical practitioners which meet the requirements of a disability superannuation benefit as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Superannuation benefit: A superannuation benefit includes a superannuation fund payment made to you from a superannuation fund because you are a fund member. When it is paid to you as a lump sum, this is referred to as a superannuation lump sum payment. The components of a superannuation benefit are worked out under section 307-120 of the ITAA 1997 and will consist of the tax free component and the taxable component. | Detailed Reasoning - Modification for disability superannuation benefits: Section 307-145 of the ITAA 1997 provides for the modification for disability superannuation benefits and is as follows: 307-145(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. 307-145(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. 307-145(3) Work out the amount 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. 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. 307-145(4) The balance of the superannuation benefit is the taxable component of the benefit. The service period for a superannuation lump sum is defined in section 307-400 of the ITAA 1997. If some or all of the superannuation lump sum accrued while you were a member of the superannuation fund - the service period includes the period of membership. If some or all of the superannuation lump sum accrued while you were employed, then the service period includes each period of employment to which the lump sum relates. 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. As the payment of each superannuation lump sum payment received from the Fund is also a disability superannuation benefit, therefore, the modification for disability benefits under section 307-145 will apply to increase the tax-free component (previously NIL) for each superannuation lump sum payment. You received a letter from the Fund in regards to your TPD Benefit Claim which included the details of the two TPD benefit payments (TPD Payment 1 and TPD Payment 2) received for the two policies under which you were covered in respect of your fund membership. From the information provided by the Fund in the letter to you, the superannuation lump sum payments have been calculated based on your eligible service start date, last day of service, days to retirement and your total service period relevant to your fund membership. The Fund also confirmed the above payments were both the result of insurance claims (TPD Benefit Claims) in respect of your membership. The Fund also advised the break up of the taxable and tax-free components of the two payments In addition the Fund also advised you: · the tax free components of both payments were modified in accordance with section 307-145 of the ITAA 1997. · the crystallised segment for each payment was nil. The tax free component for each payment was nil before the modification under section 307-145 of the ITAA 1997. · the details for the calculations using the eligible service start date, last day of service, days to retirement and total service period in respect of TPD Payment 1 and TPD Payment 2. · the above payments were both the result of insurance claims (TPD Benefit Claims) and were paid after the account balance had already been paid. · The components of TPD Payment 1 were calculated by the administration system: | Detailed Reasoning - Tax free component before the modification: Nil: · The components of TPD Payment 2 were calculated manually: | Detailed Reasoning - Tax free component before the modification: Nil: Therefore it can be seen that the modification under section 307-145 of the ITAA 1997 has been applied by the Fund to each of the superannuation lump sum payment received to reflect the period where you, the member, could have expected to be gainfully employed if the disability had not occurred. The modification applied has increased the previously nil tax free components to X for TPD Payment 1 and to Y for TPD Payment 2. Accordingly, the taxable component - taxed element A for TPD Payment 1 and the taxable component - taxed element B for TPD Payment 2 as shown on the PAYG payment summary for year ending 30 June in the recent year for each superannuation lump sum payment are included as assessable income for the income year.

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