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Ruling
Subject: Lump sum superannuation benefit
Questions:
Is any part of the superannuation lump sum benefit received by your client in the 2011-12 income year a tax free component of a disability superannuation benefit in accordance with section 307-145 of the Income Tax Assessment Act 1997?
Advice/Answers:
Yes.
This ruling applies for the following period:
1 July 2011 to 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts:
Your client is under 55 years of age.
Between leaving school and joining an employer (the employer) your client worked in a different field.
Your client joined the employer more than 10 years ago. Whilst working for the employer your client was posted overseas.
Your client left the employer some years ago to pursue another career.
Your client worked in his new field up until a few years back after which he was unable to work due to ill health.
Your client was diagnosed with an illness.
Your client was unable to be gainfully employed.
Your client received a superannuation lump sum.
You have provided medical certificates from 2 legally qualified medical practitioners. Both certificates certify that your client is unlikely to be able to undertake any employment in the future.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 307-145.
Reasons for decision
Summary
The superannuation lump sum payment received by your client from the government superannuation scheme includes a tax free component.
Detailed reasoning
Lump sum payments from a superannuation fund
When a person receives a disability benefit from a superannuation fund, in order to work out the components of a superannuation benefit, the proportioning rule in section 307-125 of the Income Tax Assessment Act 1997 (ITAA 1997) is modified so that the tax free component is increased to reflect the period where the member could have expected to be gainfully employed if the disability had not occurred.
Calculation of disability benefit - payments from the superannuation fund
The amount of the disability segment is worked out by applying the formula in subsection 307-145(3) of the ITAA 1997 which states:
Work out the amount of the invalidity segment by applying 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 to his or her last retirement day.
service days is the number of days in the service period for the lump sum.
As per subsection 307-145(3) of the ITAA 1997 the tax free component is the sum of:
disability modification $X.00 (calculated by the above formula)
crystallised component $0.00
contributions component $0.00
Total $X.00
Therefore, the amount of $X.00 is the tax-free component included in the superannuation lump sum payment. The remaining (that is, the lump sum benefit less the tax free component calculated above) is a taxable component to be included in your client's income tax return for the 2011-12 income year.
As your client is below preservation age, your client will be eligible to a tax offset under subsection 301-35(2) of the ITAA 1997. The tax offset will ensure that the rate of tax on the taxable component will be no more than 20% (plus Medicare levy).
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