Edited version of private advice

Authorisation Number: 1052367111264

Date of advice: 11 April 2025

Ruling

Subject: Lump Sum Disability Superannuation Benefit

Question 1

When determining the 'days to retirement'under subsection 307-145(3) of the Income Tax Assessment Act 1997 (ITAA 1997), in relation to the total and permanent disability (TPD) benefit paid into your superannuation account, is the date you 'stopped being capable of being gainfully employed' the last date you attended work?

Answer 1

No.

This ruling applies for the following period:

Income year ended DD MM YYYY

The scheme commenced on:

DMMYYYY

Relevant facts and circumstances

Your date of birth is DD MM YYYY

On DD MM YYYY, you commenced employment with xx and became a member of xx superannuation fund.

You have stated that, on DD MM YYYY, you were diagnosed with a health condition, and that you were unable to work again after that date. You have provided no evidence that this was the last day you attended work.

Youprovided a copy of a TPD benefit quote dated DD MM YYYY, which shows:

•                     a TPD date of event of DD MM YYYY. The notes to the benefit quote refer to the 'TPD date of event' as '...the date you were permanently unable to work due to the illness or injury'.

•                     a TPD date of DD MM YYYY. The notes to the benefit quote refer to the 'TPD date' as '...the date we approved your TPD benefit claim'.

On DD MM YYYY, your TPD claim amount was rolled over into your xx superannuation account, and your previous super account closed.

You have provided a screenshot of what appears to be a part of an undated email, purportedly from xx, with the subject 'RE: Approved IP Update Claim: CLM-xx'. This provides the following information:

•                     Date of Disablement of DD MM YYYY

•                     Waiting period of XXX days

•                     Benefit start date of DD MM YYYY

The document also references a reduction in income protection benefits, based on being in receipt of an amount from both WorkCover and your employer.

You have included salary and wages from your employer in your income tax returns for the YYYY to YYYY income years inclusive.

You have provided copies of two Doctor's Statements (Part C) in support of your TPD benefit claim, as follows:

•                     Statement from Dr xx, Psychiatrist, dated DD MM YYYY. This statement refers to the following relevant dates:

­        Date of patient's symptoms first occurring - DD MM YYYY

­        Date referred - DD MM YYYY

­        Date of first patient treatment/first appointment - DD MM YYYY

•                     Statement from Dr xx, dated DD MM YYYY. This statement refers to the following relevant dates:

­        Date of first patient treatment - DD MM YYYY

­        Date of patient's symptoms first occurring - DD MM YYYY

­        Date referred - DD MM YYYY

­        Date of first appointment - DD MM YYYY

You have also provided a copy of a letter from xx (formerly xx) to xx, dated DD MM YYYY. This letter addresses your complaint to xx, being that you believed the xx Trustee incorrectly used the date of DD MM YYYY (the TPD 'date of event') as the date you stopped being capable of being gainfully employed (for the purposes of section 307-145 of the ITAA 1997), instead of DD MM YYYY (being the date your condition was diagnosed, and the purported last date you attended work). You advised that this resulted in a smaller invalidity segment of your payment, and a resultant higher amount of tax payable.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 307-145

Income Tax Assessment Act 1997 subsection 307-145(2)

Income Tax Assessment Act 1997 subsection 307-145(3)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Detailed Reasoning

Where a person receives a superannuation lump sum which is a disability superannuation benefit, section 307-145 of the ITAA 1997 modifies how the tax free component of the lump sum is calculated. The effect of the modification is to increase the tax free component of the benefit to broadly reflect the period where the person would have expected to have been gainfully employed.

The amount of the tax free component will be modified in accordance with subsection 307-145(2) of the ITAA 1997, which states:

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.

Subsection 307-145(3) of the ITAA 1997 provides that the amount is worked out using 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 (emphasis added) to his or her last retirement day.

service days is the number of days in the service period for the lump sum.

Subsection 995-1(1) of the ITAA 1997 defines a disability superannuation benefit as follows:

disability superannuation benefit means a superannuation benefit if:

(a)           the benefit is paid to a person because he or she suffered 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.

You have provided copies of doctor's statements provided by Dr xx (dated DD MM YYYY), and Dr xx (dated DD MM YYYY). Both of these doctors are considered legally qualified medical practitioners, and both 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.

You have contended that the dates of these statements (DD MM YYYY and DD MM YYYY) are of no relevance in the tax-free component calculation under section 307-145 of the ITAA 1997 as it refers to the 'date the person stopped being gainfully employed'.

Section 307-145 does not, in fact, refer to the 'date the person stopped being gainfully employed', but rather to the 'day on which the person stopped being capable (emphasis added) of being gainfully employed...'.

As such, the issue for consideration is what is the day on which you stopped being capable of being gainfully employed.

Subsection 995-1(1) of the ITAA 1997 states:

gainfully employed means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

The Macquarie Dictionary defines 'gainful' as 'profitable; lucrative'.

In the context of the term 'gainfully employed', the adverb 'gainfully' describes the nature of the employment, being that it is a profitable pursuit, and within that term, 'gainfully' refers to the employment being for gain or reward.

The Macquarie Dictionary also defines 'employ' as 'to use the services (of a person); have or keep in one's service; keep busy or at work.' Applying this to the context in which it appears, 'employed' refers to where a person's services will be used, or kept available for use, by the employer, in one of the named pursuits, and to be 'gainfully employed', they must be employed for reward or gain.

As can be seen from the above, a person does not have to attend work and carry out the day-to-day duties of their role in order to be 'employed'. A person on annual leave continues to be employed during that time, as does a person on sick leave.

When a person is receiving income protection payments, they are receiving payments for the loss of salary or wages due to illness or an accident. The amount of the payments received is a percentage of employment income, prior to a claim. As such, it cannot be said that a person in receipt of such payments has stopped being capable of being gainfully employed by their employer at that time.

You have provided a document which suggests you were in receipt of WorkCover payments, resulting in the reduction of the amounts of income protection benefits you received, for a time.

WorkCover payments are a form of insurance payment paid to employees if they are injured at work or become sick due to their work. This is so the employee can take time off work while they recover, and still receive an income.

The fact that you were receiving WorkCover payments indicates that you had not been determined to be suffering from a permanent incapacity at that time.

Your tax returns show you continued to receive salary and wages, from your employer, into the xx income year.

In your private ruling application, you have stated that you stopped working on DD MM YYYY, and that this was the date you stopped 'being capable of being gainfully employed.'

No evidence has been provided that you stopped working on that date. The only reference to that date in the documentation provided was in the statement from Dr xx, which referred to your symptoms first occurring on that date. Regardless, the relevant date is the date you stopped being capable of being gainfully employed, not the last day you attended work.

Elsewhere, you have stated that you have been unable to work since DD MM YYYY, referencing this as your 'date of disablement', for the purposes of your WorkCover and income protection claims.

In support of this statement, you have provided a screenshot of a purported (undated) email from xx, referring to a 'date of disablement' of DD MM YYYY.

Section 307-145 makes no reference to a 'date of disablement', for the purposes of calculating the tax-free component of a superannuation lump sum. It is the day on which the person stopped being capable of being gainfully employed, which is relevant for the purposes of the calculation.

The doctor's statements provided by Dr xx (dated DD MM YYYY), and Dr xx (dated DD MM YYYY), show the date of first treatment/appointment as DD MM YYYY, and DD MM YYYY, respectively. These dates are well after you have stated you first showed symptoms or were first unable to attend work. As such, neither doctor could state that you were not capable of being gainfully employed in either MM, or MM, 2021.

You have provided documentation which references the date of DD MM YYYY, as follows:

•                     TPD benefit quote, dated DD MM YYYY, refers to a TPD date of event of DD MM YYYY. The notes on this document refer to the 'TPD date of event' as '...the date you were permanently unable to work due to the illness or injury'.

•                     The letter from xx Trust references DD MM YYYY as 'the first date that a medical practitioner certified in writing that you were unable to return to work because of his condition.'

The doctor in question is identified as Dr xx, a psychiatrist, who in their report dated Dd MM YYYY, stated '...In my opinion, there is no prospect of you returning to [their] substantive role or any other alternative duties within the xx...Similarly, there is no realistic prospect of you returning to other employment for which [they] is suited by education, training or experience.'

For there to be a payment of a superannuation lump sum disability benefit, two legally qualified medical practitioners must have stated that, because of 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.

For the purposes of the calculation in section 307-145 of the ITAA 1997, the relevant dates are, the date on which the person stopped being capable of being gainfully employed, and the last retirement day.

The date on which you stopped being capable of being gainfully employed, is the date by which two legally qualified medical practitioners have determined that, because of 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.

It is not the date on which you stopped working, or last attended work. No determination had been made at that time, that you were no longer capable of being gainfully employed at that date. You continued to be in receipt of both WorkCover payments, and salary and wages from your employer. As such, it cannot be said that you had stopped being capable of being gainfully employed, at that time.