Private ruling: Superannuation lump sum - disability superannuation benefit
Published: March 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the superannuation lump sum received a tax free disability superannuation benefit? If yes, can the tax free component of the superannuation lump sum be increased by applying the modification for disability benefits? | A1: Yes.

Relevant facts and circumstances: You are under aged 65. You were employed by an entity (the employer). You were a member of the relevant employer superannuation fund (the Fund). Some years after you commenced your employment you suffered an injury which left you incapacitated. You tried to return back into the work force, however you stated the injury worsened forcing you to stop work. Due to your financial hardship, you applied to your Fund for early release of your superannuation benefits in respect of your fund membership on the grounds of permanent incapacity. You also lodged a claim for a Total and Permanent Disablement (TPD) Insurance Benefit in respect of your fund membership. You supplied two medical reports to support your application (copies of the relevant medical reports were provided). The two medical practitioners certified: • that in their opinion you suffered from ill-health; and • that due to your ill-health, it is unlikely that you can ever be gainfully employed in a capacity for which you are reasonably qualified by education, training or experience; and • the date at which you stopped being capable of being gainfully employed. You received confirmation from the Fund that your application for early release of your superannuation benefits in respect of your fund membership on the grounds of permanent incapacity had been approved and the total superannuation benefits (less tax withheld of) was paid to your nominated account. You provided a copy of the relevant PAYG payment summary for the superannuation lump sum benefits which included the details of the taxable and tax-free components of the superannuation lump sum payment and the tax which was withheld. To date you are unemployed and still unable to work due to your injuries sustained and you receive fortnightly work cover payments. You lodged a private ruling request for the refund of the tax withheld from your superannuation lump sum benefits. You provided a copy of the letter from your former employer certifying your employment service period. You confirmed you never made any additional personal contributions to your superannuation fund during your employment service period.

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 307-400(1). | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: The tax-free component of the superannuation lump sum received from the Fund should be increased by applying the modification for disability benefits when calculating the components of the superannuation lump sum. The tax-free component is increased and the taxable component is correspondingly reduced. | 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: 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 the superannuation lump sum from the Fund in respect of your membership is also a disability superannuation benefit, the modification for disability benefits under section 307-145 will apply to increase the original tax-free component and calculated on the basis of the information provided for the following : • Amount of the superannuation lump sum • Tax free component • Date service period commenced • Date service period ended • Date you stopped being capable of being gainfully employed • Your date of birth • Last retirement day (age 65) The tax-free component is then increased by the amount worked out using the subsection 307-145(3) formula: Amount of lump sum benefit x days to retirement/service days + days to retirement