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Ruling

Subject: Total and permanent disability benefit

Questions:

1. Is the payment of the total and permanent disability (TPD) benefit a lump sum superannuation benefit?

2. If the TPD benefit is a lump sum superannuation benefit, will the modification for disability benefits under section 307-145 of the Income Tax Assessment Act 1997 apply?

3. Does the TPD benefit otherwise form part of your taxable income?

Answers:

1. No.

2. Not applicable.

3. No.

This ruling applies for the following periods:

1 July 20XX - 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You sustained injuries in the workplace several years ago.

Prior to its wind up and subsequent transfer, you were a member of an employer-sponsored superannuation fund.

At the time of your injuries, you were insured for a total and permanent disability (TPD) benefit through the former employer-sponsored superannuation fund. An insurance company (the Insurer) was the relevant insurer.

Sometime after you had sustained your injuries, the employer-sponsored superannuation fund was wound up and, at that date (the transfer date), all existing members were transferred to a public offer superannuation fund (the Public Offer Fund).

The wind-up of the employer-sponsored superannuation fund was administered by Company A who also remained as the contact point for any outstanding affairs of the former employer-sponsored superannuation fund after it was wound up.

Your employment with the former employer-sponsor was terminated several years after the fund transfer took place.

You subsequently tried to claim TPD benefits through the Public Offer Fund. However, the Public Offer Fund denied liability for making the payment as you sustained the injuries prior to the transfer date.

In the 200X-XX income year you tried to claim, via Company A, TPD benefits under the policy formerly held by the defunct employer-sponsored superannuation fund.

Your initial application to claim TPD benefits from the Insurer was rejected. Consequently, you sought legal advice to assist you.

Your lawyers advised that you were entitled to receive a payout from your former superannuation fund.

In a letter dated during the 20XX income year, the Insurer notified Company A that the Insurer had obtained additional evidence and, based on this evidence, they had accepted that you had met the definition of TPD. Also enclosed with the notification was a cheque representing the amount payable for a TPD benefit under the policy. This amount was subsequently paid by a separate cheque to your lawyers.

Your lawyers claimed that no PAYG summary or any other release documents for the payment were provided and that there was no tax withheld on the payment.

The former employer-sponsored superannuation fund was a complying superannuation fund as is the Public Offer Fund.

Your lawyers provided the following further information relating to your TPD claim:

· Copy of the letter and cheque received from Company A (administrator of the former employer-sponsored superannuation fund).

· Confirmation that your employment with the former employer was terminated during the 200X income year.

· Confirmation that you applied for TPD benefits from the former employer-sponsored superannuation fund in the 200X income year.

You were under the preservation age on the date of payment of the TPD benefit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Income Tax Assessment Act 1997 Subsection 307-5(1).

Income Tax Assessment Act 1997 Section 307-65.

Income Tax Assessment Act 1997 Subsection 307-145

Reasons for decision

Summary

The TPD payment from the Insurer is not a superannuation member benefit paid to you as a member of the former employer-sponsored superannuation fund as the fund did not exist at the time of your application and when the payment was made to you. Accordingly, modification of the tax-free component for disability benefits is not applicable.

The TPD payment will not form part of your assessable income for the relevant period as it was received by you as a result of your injury and not as direct compensation for loss of income.

Detailed reasoning

Superannuation lump sum benefits made on or after 1 July 2007

A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (section 307-65 of the Income Tax Assessment Act 1997 (ITAA 1997)).

The table contained in subsection 307-5(1) of the ITAA 1997 lists various types of superannuation benefits. One type of superannuation benefit is a superannuation fund payment. Item 1 of the table states that a superannuation fund payment will be a superannuation member benefit if it is:

A payment to you from a superannuation fund because you are a fund member.

Consequently, the payment made to you by the Insurer is not a superannuation member benefit as, at the time of your application for the TPD benefit, the employer-sponsored superannuation fund had already been wound up.

Modification of tax-free component for disability benefits

Section 307-145 of the ITAA 1997 modifies the tax-free component of a superannuation benefit where it is a superannuation lump sum and a disability superannuation benefit.

In your case, however, as the TPD payment made to you by the Insurer is not a superannuation benefit, no modification of the tax-free component for disability benefits is applicable.

Taxation treatment of the TPD payment

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

The lump sum you received was not earned by you as it does not relate to services performed. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the insurance policy held by your former superannuation fund, rather than from a relationship to personal services performed.

Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. Amounts received in respect of personal injury which is not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

A capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you ... suffer personally' is disregarded.

In this case, as you have received the TPD payment as compensation for injury and not as direct compensation for loss of income, the payment made to you by the Insurer will not form part of your assessable income for the relevant period.

Conclusion:

The TPD payment from the Insurer is not a superannuation member benefit as the employer-sponsored superannuation fund no longer existed at the time of your application and when the payment was made to you. Accordingly, modification of the tax-free component for disability benefits is not applicable.

As you received the TPD payment as compensation for injury and not as direct compensation for loss of income, the payment made to you by the Insurer will not form part of your assessable income for the relevant period.

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