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Ruling

Subject: Superannuation income stream tax offset

Question

Is your client entitled to a 15% tax offset on their superannuation income stream for the relevant income year?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

Your client is under 50 years of age.

They were medically discharged from their occupation.

A minute dated during the previous income year states that your client will be released from their occupation under the terms 'Medically Unfit' following a Medical Employment Review held during the previous income year.

The review board found that your client was not employable within their current trade. Further, it was stated that your client was unable to regain a deployable profile in any trade and is unsuitable for retention via trade transfer.

You have provided reports from two independent medical practitioners.

In the medical report completed by a medical practitioner (Doctor 1), dated during the subsequent income year, it states that your client suffers from Post Traumatic Stress Disorder and Major Depressive Disorder related to traumas experienced during their time in their occupation. It further states that it is in their opinion that your client's illness is permanent and they will not be able to go back to any kind of work in the near future.

In the medical report completed by a medical practitioner (Doctor 2), dated during the subsequent income year, they state that having reviewed your client's physiatrist reports and other past history available to them, it is their opinion that your client will not be able to return to any kind of work in the near future.

Your client is a member of a superannuation fund (the Fund) where benefits comprise of member, ancillary and employer benefits. Both member and ancillary benefits are 'taxed' components. The employer benefits are made up of both 'taxed' and 'untaxed' components. Productivity contributions make up the 'taxed' component.

Your client received the following amounts as detailed on their relevant PAYG payment summary:

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 301-B

Income Tax Assessment Act 1997 Subdivision 301-C

Income Tax Assessment Act 1997 Section 301-25.

Income Tax Assessment Act 1997 Section 301-40.

Income Tax Assessment Act 1997 Subsection 301-40(1).

Income Tax Assessment Act 1997 Subsection 301-40(2).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Summary

As your client is under their preservation age for the relevant income year, both the taxed and untaxed elements in the fund are assessable income.

A 15% tax offset is only available on the portion of the superannuation income stream benefits that represent the taxable component - taxed element. There is no offset available for the elements untaxed in the fund under the subdivision.

Detailed reasoning

Subdivision 301-B of the Income Tax Assessment Act 1997 (ITAA 1997) applies to superannuation income stream benefits that are received from complying superannuation funds. In particular, section 301-40 of the ITAA 1997 governs the taxation treatment of superannuation income stream benefits where the recipient is under their preservation age.

Superannuation income streams where the recipient is aged under the preservation age

Subsection 301-40(1) of the ITAA 1997 states:

If you are under your preservation age when you receive a superannuation income stream benefit, the taxable component of the benefit is assessable income.

Your client receives a superannuation income stream from a complying superannuation fund, which is a partly funded defined benefits scheme.

Your client's superannuation income stream benefit contains both a taxed element and an untaxed element of a taxable component. The tax treatment of the taxable component depends on the age of the taxpayer.

Preservation age is the age at which retirees can access their superannuation benefits. This is 60 years of age for persons born after 1 July 1964. Your client's preservation age is 60 years and therefore your client is under their preservation age during the relevant income year.

As your client is under the preservation age, both the taxed element and untaxed element of the taxable component are included in full in your client's assessable income in accordance with subsection 301-40(1) of the ITAA 1997.

Tax offset for disability superannuation benefit

Your client was medically released from their occupation, having sustained Post Traumatic Stress Disorder and Major Depressive Disorder resulting from traumas experienced during their occupation and now receives an income stream from the Fund.

You have also provided certificates from two independent medical practitioners confirming that because of ill-health, it is unlikely that your client can ever be gainfully employed in capacity for which they are reasonably qualified because of education, experience or training. Therefore it is accepted that the superannuation income stream benefit is a disability superannuation benefit within the meaning of subsection 995-1(1) of the ITAA 1997.

Subdivision 301-B of the ITAA 1997 encompasses member benefits that are taxed elements of a taxable component. Under this subdivision, subsection 301-40(2) operates to allow for a 15% tax offset on superannuation income streams that are disability superannuation benefits. As such, your client is entitled to a 15% tax offset on the portion of the benefits that represent the taxable component - taxed element. Please note, once your client reaches their preservation age, subsection 301-40(2) will no longer apply and will be replaced by section 301-25 of the ITAA 1997.

For the relevant income year, your client's taxable component - taxed element benefits totalled A plus C.

Subdivision 301-C of the ITAA 1997 encompasses member benefits that are untaxed elements of a taxable component. Under this subdivision, subsection 301-120 states that if you are under your preservation age when you receive a superannuation income stream benefit, the potion of the benefit with an untaxed element is assessable income. The modification for disability benefits found under subdivision 301-B is not available in subdivision 301-C and therefore no offset available for elements untaxed in the fund. Please note the same treatment applies for when your client reaches their preservation age pursuant to section 301-110 of the ITAA 1997.

For the relevant income year, your client's taxable component - untaxed element benefits totalled B plus D.

Conclusion

A 15% tax offset is only available on the portion of the superannuation income stream benefits that represent the taxable component - taxed element. There is no offset available for the elements untaxed in the fund under the subdivision.

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