Edited version of your written advice

Authorisation Number: 1051328909181

Date of advice: 27 February 2018

Ruling

Subject: Assessability of lump sum compensation payment

Question 1

Is the lump sum benefit shortfall amount to be included in your assessable income under section

6-5 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Is the compensation for pension loss amount to be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 3

Is the interest component to be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 5

Are you entitled to claim the superannuation lump sum tax offset in relation to the lump sum amounts that are not interest payments?

Answer

No

This ruling applies for the following period

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts and circumstances

You received a lump sum compensation payment. You were under 60 years of age and over your preservation age at that time.

The compensation was calculated based on your life expectancy multiplied by the annual pension loss then a discount rate of 3% was applied. You also received the full amount of the lump sum that was short paid, plus an additional interest component.

The payment was dissected into three separate categories: lump sum benefit shortfall; compensation for pension loss and interest.

Under the terms of the settlement, you agreed to the following:

● your claim against the fund is fully resolved upon payment;

● the compensation payment is a gross amount and you are responsible for any tax that may be payable; and

● you were to sign the Deed of Release and withdraw your complaint before the Tribunal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 301-95

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Section 307-65

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

Superannuation Industry (Supervision) Act 1993 Section 10

Reasons for Decision

Assessable income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

● are earned;

● are expected;

● are relied upon; and

● have an element of periodicity, recurrence or regularity.

The amounts you received were not income from rendering personal services, income from property or income from carrying on a business. The amounts were also one off payments and thus they do not have an element of recurrence or regularity.

Compensation income

A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for loss of income, it will be assessable as ordinary income. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

You received an amount in full and final resolution of your claim after raising concerns with the superannuation fund about the investment advice you had received from them. The superannuation fund did not admit any liability but made the offer to you to resolve the claim. You signed a Deed of Release in order to receive this lump sum.

The lump sum was dissected into three individual amounts:

● lump sum benefit shortfall;

● compensation for pension loss; and

● interest

Lump sum benefit shortfall and compensation for pension loss

As indicated above, when determining if an amount paid in compensation is assessable it is also necessary to look at what you are being compensated for. A payment compensating an individual for lost wages has been determined by the courts to be income under ordinary concepts on many previous occasions.

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? provides guidance in this matter. The determination states that where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.

Your lump sum identified two individual amounts as

1. a ‘benefit shortfall’ for loss of pension income; and

2. ‘compensation for pension loss’

as a result of incorrect advice received from your superannuation fund. Although these sums were initiated due to the incorrect advice provided, the payments were paid to you to compensate for the shortfall in pension you experienced having taken the advice provided.

The payments take on the characteristics of ordinary income as they were paid to replace ‘shortfall’ and compensate you for the pension loss that resulted These portions of your lump sum are therefore ordinary income and assessable under section 6-5 of the ITAA 1997.

Interest component

Interest income is ordinary income for the purposes of section 6-5 of the ITAA 1997 and is therefore assessable income.

Accordingly, the interest component of the compensation you received is assessable as ordinary income under section 6-5 of ITAA 1997.

Is the superannuation lump sum offset available?

Under subsection 995-1(1) of (ITAA 1997, a ‘superannuation fund’ is defined to have the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

A ‘public sector superannuation scheme’ is also defined in subsection 995-1(1) of the ITAA 1997 as having the same meaning as in the SIS Act.

Section 10 of the SIS Act defines a ‘public sector superannuation scheme’ as a scheme for the payment of superannuation, retirement or death benefits, where the scheme is established:

(a) by or under a law of the Commonwealth or of a State or Territory; or

(b) under the authority of:

(i) the Commonwealth or the government of a State or Territory …

Your superannuation fund

Your superannuation fund is what is known as a hybrid superannuation scheme. That is, it’s a combination of two types of funds, a defined benefit fund and an accumulation fund.

In a defined benefit fund, member benefits are ‘defined’ by a formula. In your superannuation fund, the defined benefit component is generally the indexed pension which is defined by a formula based on the member’s final super salary, length of contributory service and age at exit (this is known as the ‘employer-financed component’).

In the case of your superannuation fund, the defined benefit component does not accrue in a superannuation fund. Rather, it is paid out of consolidated revenue. Because of this, the defined benefit component has not been subject to the 15% tax payable by most superannuation funds and is referred to as the ‘element untaxed in the fund’ or, more simply, the ‘untaxed element’.

In an accumulation fund, member benefits are determined by the value of contributions and investment returns. The accumulation component is the member’s contributions plus fund earnings (known as the ‘member component’) and the employer’s fortnightly contributions to superannuation (known as the ‘productivity component’).

Unlike the defined benefit component, the accumulation portion accrues in a superannuation fund: your superannuation fund. Consequently, the accumulation portion has been subject to the 15% tax payable by most superannuation funds and is referred to as the ‘taxed element’.

Superannuation fund payment

A ‘superannuation fund payment’ is defined has having the meaning given in section 307-5 of the ITAA 1997.

In the table in subsection 307-5(1), a ‘superannuation benefit ‘is a payment described in the table at column 2 as including a ‘superannuation fund payment’.

Superannuation member benefit

Subsection 307-5(2) defines a ‘superannuation member benefit’ is a payment that is described in column 2 of the table.

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’.

Superannuation lump sum

A ‘superannuation lump sum’ is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given in section 307-65 and means a ‘superannuation benefit’ that is not a ‘superannuation income stream benefit’.

The settlement sum you received is not a superannuation benefit that is paid from a superannuation income stream (as defined in section 307-70). Therefore you are not entitled to a superannuation lump sum tax offset.

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