Edited version of your private ruling

Authorisation Number: 1012437575296

Ruling

Subject: Invalidity segment

Issue 1:

Questions

1. Is the payment made in accordance with a deed of release a superannuation lump sum?

2. If the payment is a superannuation lump sum is any part of the taxable component to be modified in accordance with section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answers

1. 1. No

2. 2. Not applicable.

Issue 2:

Question

Is the lump sum payment assessable as a capital gain?

Answer

No

This ruling applies for the following period:

2012-13 income year.

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your client is under preservation age and was employed in an industry.

In the 200X income year, your client was medically assessed to be temporarily totally disabled.

Your client was a member of a complying superannuation fund (the Fund) since the late 1990s.

At all relevant times, the Fund held a group life policy, which included total disability (TD) benefit coverage, for its members through a contract of insurance with the insurer.

During the 200Y calendar year, your client developed a sickness which resulted in them becoming totally disabled.

During 200X income year, the insurer received a claim for TD benefits from your client. The insurer accepted the claim and subsequently paid your client TD benefits for a period from towards the end of the 200X income year to several months into the subsequent income year.

In the second quarter of the subsequent income year, the insurer notified your client and the Fund that it would cease paying TD benefits as your client no longer satisfied the criterion to receive the benefits.

Your client believed they still remained totally disabled and thus entitled to continue receiving TD benefits after the date the insurer ceased benefit payments.

In the third quarter of the subsequent income year, your client commenced proceedings against the insurer (the Second Defendant) and the Fund (the First Defendant) in a Supreme Court seeking damages.

Since the commencement of proceedings, your client signed a Deed of Release (the Deed) in the second quarter of the relevant income year.

Under the Deed, your client agreed to accept an amount inclusive of all legal costs and interest in full and final settle of your client's rights for payment of a TD benefit and their claims for damages or otherwise. In return, your client agreed that they were no longer covered by the insurance policy held by the fund with the insurer for the members of the fund.

Recital N of the Deed states:

Without admission of liability, the Second Defendant has agreed to pay and the plaintiff has agreed to accept the sum of [amount] inclusive of legal costs and interest (the Agreed Sum) in full and final settlement of [your client's] rights for payment of a TD benefit both under the Policy and/or under the Trust Deed and [your client's] claim for damages or otherwise.

Clause 1 of the Deed states:

In consideration of the Second Defendant paying to the Plaintiff the Agreed Sum, and subject to clause 4 of the Deed, the Plaintiff hereby releases and forever discharges the Defendants and all persons associated with the Defendants, or employed at any time by the Defendants, from all present and future claims, demands, actions, proceedings, rights, duties, obligations, costs and expenses, arising in any way from or referrable to:

(a) the Policy;

(b) any claim from for a TD benefit from the Fund; and

(c) the matters referred to in Recitals A to P above.

Clause 4 of the Deed states:

Nothing in this Deed releases the First Defendant from its obligations and duties, or otherwise affects the Plaintiff's rights of entitlements, with respect to the balance of [your client's] member account in the Fund as at the date of the Deed.

Clause 6 of the Deed states:

Within 28 days of receipt by the Defendants of this Deed duly executed by the Plaintiff, the Second Defendant will effect payment of the Agreed Sum in full discharge of its obligation to pay as follows:

(a) Cheque drawn in favour of the Plaintiff in the sum of [amount] forwarded care of the office of the Plaintiff's solicitors, … .

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

The payment made to your client was not made by a superannuation fund therefore the payment is not a superannuation lump sum. Furthermore, this payment is exempted from being assessable under the capital gains provisions.

Detailed reasoning

Superannuation lump sum payment

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), defines a superannuation benefit as having the meaning given by section 307-5.

A lump sum payment made to a person from a superannuation fund is referred to as a superannuation lump sum. A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (section 307-65 of the 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.

Ordinarily, when a claim is made under the total disability provisions of a superannuation fund's trust deed and the fund has effected a group life insurance policy to cover such events, the proceeds from the life policy are paid to the superannuation fund (as the policy owner). The superannuation fund then uses the proceeds of the life policy to meet its obligations under its trust deed to pay a total disability benefit.

In such cases, the resultant benefit paid to the fund member is a superannuation benefit.

However, in this case, the payment was made directly by the insurer to your client as settlement of the dispute under the terms of the Deed of Release. Although the fund was a party to the Deed, the payment was not made by the fund.

The payment was made to your client in return for your client giving up any and all claims in respect of the group life policy held by the fund with the insurer. It is noted that this did not include giving up your client's rights to any superannuation benefits represented by the member balance still held with the fund.

Accordingly, the payment made to your client was not made by the fund because your client is a fund member. The payment was made by the insurer in return for surrendering any and all claims in respect of the group life policy held by the fund.

Therefore the payment made to your client under the Deed is not a superannuation lump sum under subsection 307-5(1) of the ITAA 1997.

Capital gains tax

Taxation Ruling TR 95/35: Income Tax: Capital Gains Tax: Treatment of compensation receipts, suggests that whether a lump sum or other compensation payment is assessable in the hands of the recipient depends on whether it is a receipt of a capital or income nature, which in turn depends upon consideration of all the circumstances surrounding the payment.

The issue to be determined is the character, in your client's hands, of the lump sum payment received from the insurer.

The amounts that have been paid to your client in the past under the policy have been for the fact that your client suffered injuries/sickness during their employment to the extent that your client was no longer able to perform their duties. Your client was deemed to have suffered total disablement within the meaning of the policy and was unable to work due to their conditions. The insurer failed or refused to pay your client a monthly benefit or rehabilitation/proportionate benefit from the first quarter of the relevant income year.

Subsequently, your client took legal action against the fund and the insurer and settled the proceedings by entering into a Deed of Release. Your client received an amount to surrender benefits under that policy. A surrendering of rights is considered to be of a capital nature and as such, the amount of compensation received by your client will also be considered of a capital nature. However an exemption is provided for in paragraphs 118-37(1)(a) and (b) of the ITAA 1997 deals with Capital Gains Tax (CGT) and states:

A capital gain or capital loss you make from a CGT event relating directly to any of these is disregarded:

(a) compensation or damages you receive for any wrong or injury you suffer in your occupation; or

(b) compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally.

The compensation amount your client received meets the above criteria, and will apply to any capital gain or capital loss.

Therefore, the payment received by your client for surrendering all of their rights under the policy is not assessable under the capital gains provisions because of the effect of the exemption contained within section 118-37 of the ITAA 1997.

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