Senate

Tax Laws Amendment (2008 Measures No. 2) Bill 2008

Revised Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP
This memorandum takes account of amendments made by the house of representatives to the bill as introduced

Chapter 7 Superannuation lump sum paid to a person with a terminal medical condition

Outline of chapter

14.1 Schedule 7 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 so that a superannuation lump sum paid to a person who has a terminal medical condition is tax free.

Context of amendments

14.2 The taxation treatment of a superannuation lump sum payment differs depending on the age of the recipient and whether the payment is from a taxed or an untaxed source. For example, superannuation lump sums paid to members of taxed schemes below preservation age are taxed at a maximum rate of 21.5 per cent (inclusive of the Medicare levy). For members of untaxed schemes below preservation age, superannuation lump sums are taxed at a maximum rate of 31.5 per cent up to $1 million, and at the top marginal rate plus the Medicare levy for amounts above $1 million.

14.3 These amendments provide that a superannuation lump sum paid from either a taxed or an untaxed source to a person with a terminal medical condition is tax free.

Summary of new law

14.4 Section 303-10 is inserted into Division 303 of the ITAA 1997 with the effect that a superannuation lump sum paid to a person with a terminal medical condition is non-assessable and non-exempt income.

Comparison of key features of new law and current law

New law Current law
A superannuation lump sum paid to a member in respect of whom a terminal medical condition exists is non-assessable and non-exempt income. The taxation treatment of a superannuation lump sum payment to a fund member differs depending on the age of the member and whether the payment is from a taxed or an untaxed source.

Detailed explanation of new law

14.5 Division 303 of the ITAA 1997 deals with the taxation of superannuation benefits paid in special circumstances. Section 303-10 is inserted into Division 303 with the effect that a superannuation lump sum member benefit received by a person is not assessable income and is not exempt income if a 'terminal medical condition' exists in relation to the person at the time they receive the payment or within 90 days after they receive it. The circumstances in which a 'terminal medical condition' will be taken to exist in relation to a person will be prescribed in the Income Tax Assessment Regulations 1997 . [ Schedule 7, item 2, section 303-10 of the ITAA 1997, and item 3, definition of ' terminal medical condition' in subsection 995-1(1 ) of the ITAA 1997 ]

14.6 A consequential amendment is made to section 11-55 of the ITAA 1997 to include a reference to section 303-10 in the list of non-assessable non-exempt income provisions. [ Schedule 7, item 1, section 11-55 of the ITAA 1997 ]

Application and transitional provisions

14.7 The amendments made by this Schedule apply to payments made on or after 1 July 2007. As the amendments remove tax on the affected payments, the retrospective application of the changes will not disadvantage taxpayers. [ Schedule 7, item 5 ]

14.8 A transitional provision will apply for the 2007-08 financial year. Under this transitional provision the 90-day period from when a payment is received (referred to in section 303-10) can be extended to 30 June 2008 if this results in a longer period. [ Schedule 7, item 2, note to section 303-10 of the ITAA 1997, and item 4, section 303-10 of the Income Tax ( Transitional Provisions ) Act 1997 ]


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