Edited version of your written advice

Authorisation Number: 1051436300576

Date of advice: 7 January 2019

Ruling

Subject: Invalidity Segment

Question 1

Is the Lump sum payment received by you from the Fund a disability superannuation benefit for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will section 307-145 of the ITAA 1997 be applied to modify the tax free component of the superannuation lump sum made in the 2017-18 income tax year?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Fund is an Australian complying superannuation fund.

The Taxpayer is a member of the Fund.

In 2016, the Taxpayer was diagnosed with an illness

Prior to their diagnoses, the Taxpayer was employed on a full-time basis.

The Taxpayer was advised that they had to stop working based on medical grounds.

The Taxpayers last day of work was in 2016 and was under the retirement age and has not worked since.

The Taxpayer lodged a claim for a total and permanent disablement (TPD) benefit under an Income Protection Policy held by the Taxpayer to help with the financial burden associated with the Taxpayer’s illness.

The Taxpayer had two medical statements from two legally qualified medical practitioners, they certificated that because of the taxpayer’s ill-health you were no longer able to perform your usual occupation

Section of The Fund Member guide provides a clear definition of Total and Permanent Disablement:

“Totally and Permanently Disabled”, “Total and Permanent Disablement”, “Total and Permanent Disability” or “TPD” means:

1. Unlikely to return to work

If you are employed or engaged in a gainful occupation, business, profession or employment within 12 months of the date you cease to be so employed or engaged:

1.1. you have suffered an injury or illness and, as a result of that injury or illness:

1.1.1. are totally unable to be employed or engaged in that occupation, business, profession or employment for a period of six consecutive months, and

1.1.2. are determined by the insurer that at the end of that six month period (or such later time as agreed with the trustee), to be permanently incapacitated to such an extent as to render you unlikely ever to be employed or engaged in any gainful occupation, business, profession or employment for you are reasonably suited by education, training or experience.

The Fund assessed and approved the early release of the benefit

The Taxpayers account with the Fund was closed on the during the 2017-2018 income year

The Taxpayer received a lump sum payment from the Fund. payment comprised of:

i. Taxable component

ii. Tax-free Component

iii. Total Tax Withheld

The Taxpayers last retirement day from their usual occupation would have been in 20XY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 301-1

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Act 1997 section 307-120.

Income Tax Assessment Act 1997 section 307-145.

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Benefits received the Taxpayer from the Fund are disability superannuation benefits as defined in subsection 995-1 (1) of the ITAA 1997. Accordingly, section 307-145 of the ITAA 1997 applies to determine the tax free components of these benefits.

Detailed reasoning

Superannuation benefit

Payments that are superannuation benefits are set out in subsection 307-5 (1) of the ITAA 1997 and include a payment made to person from a superannuation fund because the person is a member of the fund. Consequently, payments to the Taxpayer from the Fund are superannuation benefits.

In accordance with subsection 307-120 (1) of the ITAA 1997, a superannuation benefit may consist of the tax free component and the taxable component.

The tax free component of a superannuation benefit is not assessable income and is not exempt income. The tax treatment of the taxable component varies depending on the age of the member when they receive the benefit (section 301-1 of the ITAA 1997).

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.

A disability superannuation benefit is defined under subsection 995-1(1) of the 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.

In this case, the two medical professionals have provided certificates that, confirm your illnesses, the cause, symptoms and diagnosis was provided to and accepted by the insurer under their definition of ‘Total and Permanent Disablement’.

Therefore, in accordance with the Fund member guide the superannuation benefits received by you from the Fund are disability superannuation benefits for the purposes of section 307 145 of the ITAA 1997. The tax free component of a disability superannuation benefit is increased by an amount worked out 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 it relates to superannuation fund payments, ‘service period’ is defined in subsection 307-400 (1) of the ITAA 1997 as:

(a) if some or all of the *superannuation lump sum accrued while you were, or the deceased was, a member of the *superannuation fund - the period of membership;

(b) if some or all of the superannuation lump sum accrued while you were, or the deceased was, employed (or you or the deceased held office) - each period of employment (or of holding office) to which the lump sum relates.

Based on the above, in the Taxpayers case, the service period is taken to be from the date they joined the Fund to the date of payment.

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