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Edited version of private ruling

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Subject:

Tax treatment of benefits from a superannuation fund

Question

Will a superannuation benefit paid from a superannuation fund be subject to tax where the member has reached age 60 or over?

Advice/Answer

No, unless the superannuation benefit contains an 'element untaxed'.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You intend to receive your superannuation benefits when you are over age 60 in the 2010-11 income year.

You were a member of a super fund (Fund A). Your benefits were transferred from Fund A to Fund B which has both accumulation and defined benefit elements.

Currently, you are a member of Fund C, a defined benefit superannuation fund.

Your superannuation benefits have been transferred from Fund B to Fund C.

You were verbally advised by a financial planner of Fund C that after the age of 60 your superannuation benefits will be tax-free.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-10.

Income Tax Assessment Act 1997 Subsection 301-95(1).

Income Tax Assessment Act 1997 Section 301-100.

Reasons for decision

Issue

Summary

When you are 60 or over and receive a superannuation benefit [regardless of whether this benefit is received as a lump sum or income stream (pension)] the total amount of the tax free component or element taxed in the fund is not assessable income and is not exempt income.

However, the 'element untaxed' in the fund (if any) is still subject to tax and included in your assessable income.

Detailed reasoning

Taxation of a superannuation benefit

From 1 July 2007, a superannuation benefit received from a complying superannuation fund will generally be made up of:

The superannuation fund will calculate these components for each benefit paid. The proportioning rule is generally used to calculate the tax-free and taxable components of a benefit.

These components attract different tax treatments.

How the 'element taxed' of your payout is taxed

The 'element taxed' in the fund is the part of your benefit which has already had income tax paid on it in the fund. Depending on your age, the 'element taxed' may or may not need to have additional tax paid on it once it is paid to you.

Section 301-10 of the ITAA 1997 provides that if a person is 60 years or over when he or she receives a superannuation benefit [regardless of whether this benefit is received as a lump sum or an income stream (pension)], the benefit is not assessable income and is not exempt income.

This means that if you receive a superannuation benefit that consists only of a tax-free component and/or an 'element taxed' component, you do not include the benefit in your personal income tax return and you do not pay any income tax on that amount.

However, this treatment does not apply to the 'element untaxed' in the fund component.

How the 'element untaxed' of your payout is taxed

The 'element untaxed' is the part of your benefit which hasn't been taxed in the fund but which is still taxable. Generally, only Government superannuation funds will pay benefits which contain an 'element untaxed' component.

If you receive a superannuation lump sum benefit on or after age 60, the 'element untaxed' component of the lump sum is included in your assessable income (subsection 301-95(1) of the ITAA 1997) and subject to tax as follows:

You are entitled to a separate 'untaxed plan cap' for each plan from which you receive superannuation lump sum benefits. However, the cap is reduced by the 'element untaxed' of each benefit you receive from the same payer.

If you receive a superannuation income stream on or after age 60, the amount of the 'element untaxed' of your benefit is included as assessable income and subject to tax at your marginal rates plus Medicare levy. However, you will be entitled to claim a tax offset equal to 10% in respect of the 'element untaxed' of the income stream (section 301-100 of the ITAA 1997).

From the information provided in this case, it appears your superannuation benefit to be made from the Fund C will have no 'untaxed element'. Therefore, if your superannuation benefit only consists of a tax-free component and 'element taxed' component, regardless of whether you receive the benefit as a lump sum or a pension, you will not need to include the benefit in your personal income tax return and you do not pay any income tax on the amount.

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