Edited version of your private ruling

Authorisation Number: 1012616087657

Ruling

Subject: Lump sum superannuation payment - disability

Questions

1. Is the lump sum payment you received from your superannuation fund (the Fund) a disability superannuation benefit?

2. Are you entitled to a lump sum payment in arrears tax offset on the lump sum payment from the insurance provider?

Answers

1. No.

2. Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You are less than 55 years of age.

You were a member of a public offer superannuation fund (the Fund).

In the 20XX income year you lodged a claim form (the Form) with the Fund's insurer (the Insurer) in relation to income protection.

In the Form it shows, amongst other matters:

(a) that you suffered an illness (the illness);

(b) the date when the symptoms relating to your illness first occurred;

(c) the date of your last physical day at work; and

(d) your medical history.

As part of the income protection claim your general medical practitioner completed a statement (the Statement) which certified:

(a) your illness;

(b) the other doctors and practitioners you consulted over the years; and

(c) the general medical practitioner's description that the level of your disability as being totally disabled.

During the 20YY income year the Insurer advised you in a letter that your salary continuance insurance claim had been accepted. The letter also stated:

(a) the date of total disability;

(b) the date benefits commence under the policy;

(c) the benefits payable to you and the period the benefits would be provided under the policy;

(d) your claim, which was treated as an entitlement to a partial disability benefit, was calculated in accordance with a formula which resulted in:

(i) a lump sum payment which spanned the 20XX to 20YY income years;

(ii) tax withheld from the payment; and

(iii) the net payment being electronically credited to your bank account.

A 'PAYG Payment Summary - Individual Non-Business' for the 20YY income year was provided to you which shows:

(a) the gross payment;

(b) tax was withheld; and

(c) the payer was the Insurer on behalf of the Fund.

A letter from the Insurer shows the breakdown of the lump sum payment made to you for each specific income year.

Details have been obtained in relation to your taxable incomes for the 20XX and 20YY income years.

You state you were advised by the Fund that you could access your benefits from the Fund on hardship grounds.

You state you completed a Fund form which you returned to the Fund along with a supporting letter from Centrelink stating you had been on disability payments for a specific period of time.

Early in the 20YY income year you received a lump sum payment (the lump sum) from the Fund.

The lump sum compromised wholly of a taxable component and tax was withheld from the payment.

Documentation has been provided by you from one legally qualified medical practitioner which states:

(a) you suffer from an illness;

(b) how long you have been that a patient of that practitioner;

(c) the severity of your illness and that it precludes you from working in a capacity for which you have been trained;

(d) your previous treating specialist medical practitioner has retired and is unable to provide a supporting statement; and

(d) your current specialist medical practitioner has only met you at the end of the 20YY income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 159ZRA.

Income Tax Assessment Act 1936 Section 159ZRB.

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Subsection 6-5(4).

Income Tax Assessment Act 1997 Section 307-120.

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

Reasons for decision

Summary

No part of the lump sum payment you received from the Fund includes a tax free component of a disability superannuation benefit as:

(a) the payment was made to you on the grounds of hardship; and

(b) notwithstanding the above, the requirement that certification be obtained from two legally qualified medical practitioners was not fully satisfied.

In relation to the lump sum payment from the Fund's insurer you are entitled to a lump sum payment in arrears tax offset in the 20YY income year.

Detailed reasoning

Disability superannuation benefit

A superannuation benefit includes a superannuation fund payment made to a person from a superannuation fund because the person is a fund member. When the benefit is paid to a person as a lump sum, this is referred to as a superannuation lump sum.

Further, the components of a superannuation benefit, which are relevant in the tax treatment of the benefit, are worked out under section 307-120 of the Income Tax Assessment Act 1997 (ITAA 1997) to determine the benefit's tax free component and taxable component.

In cases where a superannuation lump sum satisfies the definition of disability superannuation benefit the tax free component of the benefit is increased to broadly reflect the period where the fund member would have expected to have been gainfully employed (that is, the member's future employment service period).

The definition of a disability superannuation benefit under subsection 995-1(1) of the ITAA 1997 states:

disability superannuation benefit means a superannuation benefit if:

(a) the benefit is paid to a person because he or she suffers from ill-health (whether physical or mental); and

(b) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

In your case the superannuation lump sum you received from your superannuation fund is not a disability superannuation benefit as the benefit was paid to you on the grounds of hardship and not ill-health. Further, the requirement that certification be obtained from two legally qualified medical practitioners was not fully satisfied.

In view of the above, as the superannuation lump sum payment is not a disability superannuation benefit, and the payment comprised wholly of a taxable component, no part of the part of the payment is tax-free.

Further, it should be noted that a check made of the amounts withheld on the lump sum shows that it was correctly taxed i.e. it corresponds with the rate applied on the taxable component of a superannuation lump sum payment which is paid to a member who was under preservation age when the payment was made.

Lump sum payment in arrears tax offset

Taxation Ruling TR 98/1 considers the appropriate method of determining when income is derived under subsection 6-5(2) of the ITAA 1997 where income is earned in one tax year but received in another.

Paragraph 42 of TR 98/1 states that salary and wages or other employment remuneration, which includes compensation or disability/income protection payments, is assessable on a receipts basis. This is irrespective of whether that income relates to a past or future income period. Therefore, a lump sum amount of assessable income in arrears, or paid in advance, will be included in a taxpayer's taxable income in the year in which it is received. The income would be assessable on a receipts basis in accordance with TR 98/1.

Individual taxpayers who receive certain assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued. Accordingly, the offset does not relate to prepaid income i.e. income paid in relation to a future income year.

To be eligible for the lump sum payment in arrears tax offset, the conditions specified in section 159ZRA of the ITAA 1936 must be met. Broadly, the tax offset may be available where a taxpayer receives an amount of specified income in a lump sum payment that contains an amount in arrears, and the arrears amount has been accrued for more than 12 months before the payment date, and is not less than 10% of the taxpayer's normal taxable income of the year in which payment is received.

In your case, as the lump sum payment you received is greater than 10% of your taxable income, you are eligible for the tax offset under section 159ZRA of the ITAA 1936 as part of your lump sum payment was for the pension payment in arrears which accrued in earlier income years.

We have calculated a lump sum payments in arrears tax offset, to which you are entitled.

You provided the following information:

Tax year you received the lump sum payment

Taxable income in year of receipt

Lump sum attributable to the tax year you received the lump sum payment

Most recent past year that relates to the payment

Taxable income in most recent past tax year

Lump sum attributable to most recent past tax year

We calculated your lump sum payment in arrears tax offset in the

following way:

Determine eligibility for the offset

Lump sum amount related to most recent past tax year (2011-12)

Total lump sum for past tax years

plus lump sum amount for the tax year the payment was received (2012-13)

Total lump sum in arrears amount

Taxable income in year of receipt

less lump sum amount for past tax years

Taxable income without past year amounts

Lump sum amount that accrued in past tax years

divided by taxable income without past year amounts

multiplied by

Threshold percentage is

Tax on lump sum received in arrears

Taxable income in year of receipt

less lump sum amount for past tax years

Taxable income without past year amounts

Gross tax on taxable income in year of receipt

less gross tax on taxable income without amounts from past tax years

Tax on lump sum received in arrears

Calculate notional tax amount on most recent past tax year (2011-12)

Taxable income for most recent past tax year

plus lump sum related to most recent past tax year

Increased income for most recent past tax year

Gross tax on increased taxable income for most recent past tax year

less gross tax on taxable income for most recent past tax year

Notional tax payable on most recent past year amount

Tax on lump sum received in arrears

less notional tax on arrears

Tax offset amount

Conclusion

No part of the superannuation lump sum payment made to you is tax-free.

You are entitled to a lump sum payment in arrears tax offset in the 20YY income year in relation to the lump sum payment you received in that income year.

You should request an amendment to your income tax return for the 20YY income year to receive a lump sum payment in arrears tax offset. You should also attach a copy of this letter to your request for amendment.

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