Private ruling: Invalidity Segment
Published: November 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will section 307-145 of the Income Tax Assessment Act 1997 be applied to modify the tax-free component of the superannuation lump sums made in the 2012-13 income year? | A1: Yes

Relevant facts and circumstances: You are under age 40. You commenced employment with your former employer a number of years ago. You last date of work was on a specific date in the relevant income year. Your employment was terminated on a specific date in the relevant income year on medical grounds. You were a member of a superannuation fund. The administrator of the Fund is a Government body. In the relevant income year, you applied for salary continuance insurance and total and permanent disability (TPD) insurance payment from the Fund. The trustee of the Fund determined that you were entitled to a partial permanent disability payment (PPD). In the subsequent income year, you received two PPD payments from the Fund: In the subsequent income year, you requested a review of your PPD status to TPD. The policy insurer allowed the TPD insurance claim. In the subsequent income year, an amount represented the TPD claimed was paid into the Fund. The Fund reassessed your claim for TPD and approved the insurance amount with a requirement of re-imbursement to the Fund of the original PPD benefits. The Fund wrote to your representatives requesting additional medical certificates and documentation to determine the tax concessional treatment of your TPD payment under invalidity. The Fund received two medical certificates from your representatives. You have 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 able to work in a job for which you are reasonably qualified by education, training or experience. In the beginning of the 20XX income year, the Fund assessed and approved the early release of your future superannuation benefit. You lodged a benefit access form in the beginning of the 20XX income year with the Fund for the remaining balance of your benefits under an early released of preserved benefit due to permanent disability. Your account with the Fund closed in mm/yyyy.. In the 20XX income year, a net amount had been paid to you by the Fund. The detail of the payment is as follows: Tax-free component Taxable untaxed element You have not been employed so far in the 20XX income year. In accordance with the payment summaries provided, you received the following payments from the Fund: · PPD Payment 1 and PPD Payment 2 in the subsequent income year; and · TPD Payment in the 20XX income year.

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 307-145(1) | Income Tax Assessment Act 1997 Section 307-145(2) | Income Tax Assessment Act 1997 Section 307-145(3) | Income Tax Assessment Act 1997 Section 307-145(4) | Income Tax Assessment Act 1997 Subsection 995-1 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act 1997 Subsection 301-35(1) | Income Tax Assessment Act 1997 Subsection 301-35(2) 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 the Fund. PPD Payment 1 | The tax-free component of the superannuation lump sum payment was previously nil and has been modified to allow the tax-free component. | PPD Payment 2 | The tax-free component of the superannuation lump sum payment was previously nil and has been modified to allow the tax-free component. | Accordingly, the taxable component - untaxed element for PPD Payment 1 and the taxable component - untaxed element for PPD Payment 2 as shown on the PAYG payment summary for subsequent income year for each superannuation lump sum payment are included as assessable income for the income year. | Detailed reasoning | Superannuation benefit | A superannuation benefit includes a superannuation fund payment made to a person from a superannuation fund because the person is a fund member. When the benefit is paid to a person as a lump sum, this is referred to as a superannuation lump sum. | Further, the components of a superannuation benefit, which are relevant in the tax treatment of the benefit, are worked out under section 307-120 of the ITAA 1997 and consist of the tax free component and the taxable component. | 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. | 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. | 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. | 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. | In your case, you received two superannuation lump sums the Fund in the subsequent income year. At that time, the Fund classified that your ill-health was a partial permanent disability (PPD). | You requested the Fund review your PPD to a total and permanent disability (TPD). After reviewed of your circumstances by the policy insurer of the Fund, you were granted the total and permanently disabled (TPD). | As the payment of each superannuation lump sum payment received from the Fund is 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 received by you in the subsequent income year. | From the information provided by you, the superannuation lump sums payments will be calculated based on the following: | · Date of birth | · Date service period commenced | · Date service period ended | · Date attains age 65 | · Date stopped being gainfully employed | Service days = commencement date of service - Last day of service | (dd/mm/yyyy dd/mm/yyyy) = X days | Days to retirement = Last day of service - Date attains age 65 years | Total service period = Service days + Days to retirement | Based on the above formula and information provided the modification applied has increased the previously nil tax-free components for PPD Payment 1 and PPD Payment 2. Therefore, the amount worked out in the above formula is the invalidity segment included in the superannuation lump sum payment which is tax-free. The remaining balance (that is, original PPD amount less the tax-free amount) is the taxable component - untaxed element to be included in your income tax return for the subsequent income year. | Tax treatment | Division 301 of the ITAA 1997 sets out the tax treatment of superannuation benefits received by members of complying plans (which includes superannuation funds). The treatment varies depending on the age of the member when they receive the benefit and whether the benefit is paid as a lump sum or an income stream. | As you were under your preservation age at the time the lump sum superannuation payments were made by the Fund, the taxable component - untaxed element of each superannuation lump sum payment is included in your assessable income in accordance with subsection 301-35(1) of the ITAA 1997 in the subsequent income year. | Further, in accordance with subsection 301-35(2) of the ITAA 1997, a tax-offset applies to ensure that the rate of tax payable on the taxable component - untaxed element of each lump sum payment is not greater than 31.5% plus Medicare levy.