Edited version of private advice

Authorisation Number: 1051964125210

Date of advice: 5 April 2022

Ruling

Subject:Disability superannuation benefit payment

Question

Is any part of the disability superannuation benefit taxable in accordance with section 301-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This private ruling applies for the following period:

Year ending 30 June 20XX

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.            You are under 60 years of age.

2.            You are a member of a complying superannuation fund (the Fund).

3.            During the 20XX income year you lodged an application for Total and Permanent Disablement Benefit (TPD) with the Fund.

4.            The Fund approved your TPD application and advised that you were entitled to receive a payment due to meeting a condition of release for permanent disability.

5.            Your superannuation total account balance became unrestricted non-preserved benefits and comprised a tax-free and 'taxable component - taxed element'.

6.            The lump sum superannuation benefit was paid to you during the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 301-30.

Income Tax Assessment Act 1997 section 301-35

Income Tax Assessment Act 1997 section 307-145

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

Superannuation Industry (Supervision) Regulations 1994 regulation 1.03C

Superannuation Industry (Supervision) Regulations subregulation 6.01(2)

Superannuation Industry (Supervision) Regulations Schedule 1

Reasons for Decision

A lump sum superannuation payment was made to you by the Fund during the 20XX income year due to total and permanent disablement.

Condition of release - permanent incapacity

Proceeds from a TPD insurance policy are payable to the policy owner, subsequently, proceeds paid via a policy held inside a superannuation fund on behalf of a member will be paid to the trustee of the fund as the owner of the policy. They are then allocated to the member's relevant account.

A member will need to meet a condition of release to access their benefits - which in relation to TPD proceeds will generally be for permanent incapacity.

A member has a permanent incapacity if the trustee is reasonably satisfied they have a physical or mental medical condition that makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience - regulation 1.03C of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

Based on the information provided, the Fund trustee was reasonably satisfied that you met a condition of release for permanent incapacity.

Disability superannuation benefit

A superannuation benefit may be taxed less if it is a 'disability superannuation benefit' as defined in subsection 995-1(1) of the ITAA 1997. A disability superannuation benefit is one that is paid to an individual because he or she suffers from ill-health (whether physical or mental) and 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the individual can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

A disability superannuation benefit may be paid as a lump sum or an income stream. As stated above, a fund member must meet the permanent incapacity condition of release under Schedule 1 of SISR to receive a disability superannuation benefit.

For a member who has not reached their preservation age, tax is payable on the lump sum depending on its tax-free and taxable components. Subregulation 6.01(2) of the SISR provides that the preservation age for a person born after 30 June 1964 is 60 years. Your preservation age is 60.

The 'taxable component-taxed element' is included in the member's assessable income with an entitlement to a tax offset that ensures the rate of income tax payable on taxable component - taxed element does not exceed 20% (plus Medicare levy of 2%) - section 301-35 of the ITAA 1997.

The tax-free component of the disability superannuation benefit is increased for potential service benefits that are lost because of the disability - section 307-145 of the ITAA 1997. This reflects the period when the member could have expected to be gainfully employed if the disability had not occurred.

The increased tax-free lump sum amount is calculated using the following formula:

Days to retirement is the number of days from the day the person stopped being capable of working to their last day of work (which for most people will be their 65th birthday).

Service days are the number of days in the service period for the lump sum (usually the period from when the person began contributing to super).

Your lump sum includes a taxable component - taxed element. The formula in section 307-145 of the ITAA 1997 can be applied to this amount to increase the tax-free component.

As per section 301-35 of the ITAA 1997 the reduced taxable component - taxed element is included in your assessable income with an entitlement to a tax offset that ensures the rate of income tax payable on this component does not exceed 20% (plus Medicare levy of 2%). The tax-free component is not included in your assessable income - section 301-30 of the ITAA 1997.

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