Edited version of your written advice

Authorisation Number: 1051272614240

Date of advice: 7 September 2017

Ruling

Subject: Lump sum disability payment

Question 1

Can the tax free component of the superannuation lump sum be further increased by applying the modification for disability benefits?

Answer

No.

Question 2

Can you claim a deduction for legal expenses incurred in securing the payment of the superannuation lump sum after you ceased work due to ill health?

Answer

No.

This ruling applies for the following periods:

30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You are a member of an Australian Superannuation Fund (the Fund).

You suffered a workplace injury resulting in permanent disability and chronic pain.

You were employed prior to your workplace accident. You stopped working because you were no longer able to perform your duties due to your ill health. Your last day of work was in 2016.

You lodged a claim for a Total and Permanent Disablement (TPD) Insurance Benefit in respect of your fund membership.

In a letter, you received confirmation from the Fund that your TPD benefit had been approved and is ready to be paid.

Subsequently, you received a TPD benefit.

The TPD benefit received is broken down as follows:

Tax free-component $X

Taxable component

Taxed element $Y

Total Tax withheld $Z

You confirmed that the modification for disability superannuation benefits had been applied by the Fund to the TPD benefit.

You engaged solicitors to assist you with your claim. You incurred professional fees and disbursements in relation to the legal services provided.

Your date of birth is in XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 8-5

Income Tax Assessment Act 1997 Section 301-35

Reasons for decision

Question 1

Summary

The amount of the taxable component - taxed element of superannuation lump sums received from the Fund is your assessable income in the income year they are received. Therefore, these amounts should be included in your 2016-17 income tax return.

The amount of the tax free components of superannuation lumps is not your assessable income. Therefore, these amounts should not be included in your 2016-17 income tax return.

Detailed reasoning

Disability superannuation benefit

A disability superannuation benefit is defined under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

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.

If a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed (that is, their future employment service period).

The above is referred to as the modification for disability superannuation benefits if the benefit is a superannuation lump sum and a disability superannuation benefit.

Medical certification for disability superannuation benefits

You have not provided two medical reports from two legally qualified medical practitioners which meets the requirements of a disability superannuation benefit as defined in subsection 995-1(1) of the ITAA 1997.

As two medical reports are required, it cannot be established that the superannuation lump sum payment you received is a disability superannuation benefit. However, as you have advised that the Fund has already applied the modification for disability superannuation benefits, we will accept that the superannuation lump sum payment you received is a disability superannuation benefit.

Superannuation benefit

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

The components of a superannuation benefit are worked out under section 307-120 of the ITAA 1997 and will consist of the tax free component and the taxable component.

Modification for disability superannuation benefits

Under section 307-145 of the ITAA 1997, where a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed.

You have advised that the payment of the superannuation lump sum from the Fund has already had the modification for disability benefits under section 307-145 of the ITAA 1997 applied.

Discretion to vary the tax treatment of superannuation lump sums

The facts show that when the superannuation lump sum benefits were paid to you by the Fund, you had not reached your preservation age. Therefore, the taxable component-taxed element is included in your assessable income in accordance with subsection 301-35 of the ITAA 1997.

The wording in this section is quite specific and clearly states that taxpayers who are within a certain age range must include the amount of taxable component of the lump sum in their assessable income. As such, extraneous matters, such as the taxpayer’s personal circumstances or the taxpayer’s purpose for withdrawing the benefit, cannot be taken into account in determining the tax treatment.

Furthermore, there is no discretion under Division 301 of the ITAA 1997 or elsewhere in the tax legislation that would allow the Commissioner to alter the rate of income tax prescribed by section 307-120 of the ITAA 1997. Therefore, the entire taxable component of the lump sums must be included in your assessable income for the relevant income year.

Question 2

All legislative references refer to the Income Tax Assessment Act 1997 (ITAA 1997) unless advised otherwise.

Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Section 8-5 deals with specific deductions, and allows deductions where an amount can be deducted under a specific provision of the ITAA 1997, other than within Section 8-1.

Legal expenses

In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered: Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Superannuation lump sum

The fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer.

The Superannuation lump sum is a capital receipt

You incurred legal expenses in order to obtain the TPD Insurance Benefit from the fund. The payment was received for the loss of your earning capacity and is a capital receipt.

Although the taxed element of the payment will be included in your assessable income under section 301-35, the lump sum retains its character as a capital receipt.

As the payment you received is capital in nature, the expenses incurred in securing that payment are also capital in nature. Consequently, no deduction is allowable under section 8-1 for the legal expenses you incurred.

Further, there is no specific provision that would allow the legal expenses you incurred under section 8-5.

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