This information is for super funds who pay a disability lump sum benefit after 1 July 2007.
A disability superannuation benefit is a benefit that is paid to a person because:
- he or she suffers from ill-health (whether physical or mental), and
- two 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.
A disability superannuation benefit may be paid as either an income stream benefit or a lump sum benefit.
A disability lump sum benefit may consist of:
- a tax-free component, and
- a taxable component which includes an element
- taxed in the fund, and/or
- untaxed in the fund.
Funds will need to calculate these components for each benefit that is paid. The proportioning rule is generally used to calculate the tax-free and taxable components of a benefit.
When any benefit is paid out from a 'superannuation interest', the benefit will be taken to be paid in the same proportion of tax-free and taxable components as made up the total value of the superannuation interest just before the benefit was paid.
A modified version of the proportioning rule is applied to work out the tax-free and taxable components of a disability lump sum benefit. This modification results in an increase of the tax-free component of the benefit to broadly reflect the period the member would have been expected to be gainfully employed. Refer to the example in this fact sheet on the application of the modified proportioning rule.
The tax-free component of a superannuation interest is the total value of the following segments:
- the 'contributions segment', and
- the 'crystallised segment'.
What is the contributions segment?
The contributions segment generally includes all contributions made from 1 July 2007 that have not been included in the assessable income of the fund. Typically, these would be member contributions where no personal tax deduction has been claimed by the member.
What is the crystallised segment?
The crystallised segment includes the following existing components of an interest that are consolidated into the tax-free component:
- the concessional component
- the post-June 1994 invalidity component
- undeducted contributions
- the capital gains tax (CGT) exempt component
- the pre-July 83 component.
The crystallised segment is calculated by assuming that an eligible termination payment (ETP) representing the full value of the superannuation interest is made in respect of the member just before 1 July 2007.
The tax-free component of a disability lump sum benefit is calculated as the sum of the tax-free component worked out under the proportioning rule, and the amount worked out under the following formula:
Amount of benefit
|
x
|
Days to retirement
Service days + Days to retirement
|
where:
Days to retirement is the number of days from the day on which the member stopped being capable of being gainfully employed to his or her last retirement day (usually age 65), and
Service days is the number of days in the service period for the lump sum.
The taxable component is calculated by subtracting the tax-free component from the total amount of the superannuation benefit.
The taxable component of a superannuation benefit may consist of an element taxed in the fund or an element untaxed in the fund, depending on whether the benefit is paid from a taxed or untaxed source. Funds will need to determine these elements before paying any superannuation benefits.
Applying the proportioning rule when paying a disability lump sum benefit
As previously explained, a modified version of the proportioning rule is applied to work out the tax-free and taxable components of a disability lump sum benefit.
Example
As a result of a serious work injury, Kelly stops being capable of being gainfully employed on 3 September 2007 and receives a disability lump sum benefit of $160,000 from her superannuation fund.
The number of days from 3 September 2007 to Kelly's last retirement day (the day she turns 65) is 6512. The number of days in the service period for the lump sum is 8099.
The total value of Kelly's superannuation interest is $400,000 just before the lump sum benefit is paid. The superannuation interest includes a tax-free component of $100,000 and a taxable component of $300,000, made up solely of an element taxed in the fund.
Step 1
Calculate the tax-free proportions of the superannuation interest just before the benefit is paid:
Tax-free component = $100,000 = 25%
Value of the interest $400,000
Apply the proportion to calculate the tax-free component of the lump sum benefit as if it was a normal lump sum benefit:
$160,000 x 25% = $40,000
|
Step 2
Calculate the additional tax-free component of the superannuation benefit using the formula below:
where the amount of the benefit is $160,000; the days to retirement 6,512 days and the number of service days is 8,099 days. The amount is therefore $71,310.66 ($160,000 x 6512/14611).
|
Step 3
Calculate the total tax-free and taxable components of the disability superannuation benefit as follows:
The tax-free component is the sum of the amounts worked out under Step 1 and Step 2:
$40,000 + $71,310.66 = $111,310.66
The taxable component is the remaining amount of the benefit:
$160,000 - $111,310.66 = $48,689.34
|
If the member has previously quoted their tax file number (TFN), withhold an amount from the lump sum benefit according to the rates set out in the table below.
If the member has not provided their TFN before the payment is made, withhold tax at the rate of 46.5% from the total taxable component.
Funds must provide a payment summary within 14 days of making the lump sum payment.
Income component derived by the recipient in the income year
|
Age of person at the date the payment is received
|
Component subject to PAYG withholding
|
Rate of withholding (including Medicare Levy)
|
Member benefit - taxable component - element taxed
|
Below preservation age
|
Whole amount
|
21.5%
|
Preservation age to age 59
|
Amount up to the low rate cap
|
Nil
|
Amount above the low rate cap
|
16.5%
|
Age 60 and above
|
Whole amount
|
Nil
|
Member benefit - taxable component - element untaxed
|
Below preservation age
|
Amount up to untaxed plan cap
|
31.5%
|
Amount above untaxed plan cap
|
46.5%
|
Preservation age to age 59
|
Amount up to low rate cap
|
16.5%
|
Amount above low rate cap up to the untaxed plan cap
|
31.5%
|
Amount above untaxed plan cap
|
46.5%
|
Age 60 and above
|
Amount up to untaxed plan cap
|
16.5%
|
Amount above untaxed plan cap
|
46.5%
|
Last Modified: Friday, 18 September 2009