Edited version of private ruling

Authorisation Number: 1011833382974

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Ruling

Subject: Tax on Lump Sum Superannuation Payment

Question

Is the taxable component of a superannuation lump sum released on hardship grounds tax-free?

Answer

No

This ruling applies for the following period<s>:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are on a disability pension

You want to access your superannuation early in order to meet unexpected relocation and re-establishment costs due to being a flood victim.

You were in contact with your Superannuation Fund, who indicated that they would deduct 20% in tax from the lump sum payment and forward it to the ATO.

As your total superannuation interest is only around $5,000, you are requesting a letter from the ATO that you can hand to your super fund exempting you from tax from being deducted from the payment.

You are under 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-30

Income Tax Assessment Act 1997 Section 301-35

Income Tax Assessment Act 1997 Subsection 301-35(2)

Income Tax Assessment Act 1997 Section 301-115

Reasons for decision

Summary

Your payout from your Superannuation Fund will be taxed as a superannuation benefit at no more than 20% plus the Medicare levy, and is not exempt from taxation.

Detailed reasoning

Components of a superannuation lump sum benefit

A superannuation lump sum benefit can include a:

· taxable component, and

· tax-free component.

The taxable component may include two parts. These are called taxed and untaxed elements of the taxable component:

· A taxed element is the amount of your benefit that has already had tax paid within the fund. You may need to pay additional tax on it when it is paid out, depending on your age when you take the lump sum. You may need to include the taxed element in your tax return. Typically, this component comprises employer contributions and earnings within the fund.

· An untaxed element is the part of your benefit that hasn't had any tax paid on it in the fund, but is still taxable. You must include it in your tax return. This element typically arises due to a person's membership of an untaxed government fund.

The tax-free component is the part of a benefit that is not included in your tax return. Typically this will comprise a person's personal superannuation contributions.

Your Superannuation Fund advised you of the components that will comprise your payment. Most commonly, a person's superannuation interest will comprise a taxed element of a taxable component, and possibly a smaller tax-free component.

You have stated that your superannuation fund plans to deduct 20% from your superannuation payout. Section 301-35 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you are under your preservation age when you receive a superannuation lump sum:

· the taxable component of the lump sum is assessable income; and

· that you are entitled to a tax offset that ensures that the rate of income tax on the taxed element of the taxable component of the lump sum does not exceed 20%.

In your situation, as you will be receiving the monies when you are under your preservation age you will pay tax on any taxed element at a maximum rate of 20% plus the Medicare levy. If you receive any untaxed element, a maximum rate of 30% plus the Medicare levy will apply in accordance with section 301-115 of the ITAA 1997.

While certain superannuation payments are often tax-free, such as a payment made to a dependant of a deceased person, receiving a superannuation benefit as a result of financial hardship does not make the payment tax-free.

Further, the Commissioner can only treat a payment as tax-free when the law he administers states that it is tax-free.

However, we note that you stated you are receiving a disability pension. Provided that you do not earn a substantial amount of other taxable income, you may ultimately pay less than 20% tax on your superannuation benefit. Should this be the case, any excess tax paid will be refunded after you have lodged your income tax return, for the year in which you receive the payment and received your notice of assessment from the ATO.

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