Edited version of private advice

Authorisation Number: 1052204495090

Date of advice: 22 May 2024

Ruling

Subject: Disability superannuation payments

Question

Is the payment received by the Taxpayer a disability superannuation benefit?

Answer

Yes.

This ruling applies for the following period:

1 July 2021 - 30 June 2022

Relevant facts and circumstances

1.    The Taxpayer has provided their date of birth.

2.    The Taxpayer is a member of a superannuation fund (the Fund).

3.    The Fund is an APRA-regulated superannuation fund.

4.    The Fund is a complying superannuation fund.

5.    The Taxpayer was engaged by a recruitment agency. As part of this engagement, the Taxpayer's services were outsourced to a third party on a contractual basis.

6.    The Taxpayer experienced injuries during their tenure with the third party.

7.    The Taxpayer's employment with the third party was terminated in the 2019-20 income year.

8.    The Taxpayer submitted a total and permanent disability claim (TPD claim) to the Fund.

9.    Two qualified medical practitioners have certified that the Taxpayer will no longer ever to be able to perform a job for which they were reasonably suited by education, training and experience.

10.  The Taxpayer entered into settlement with the Fund in regard to the TPD claim.

11.  The settlement was executed in the 2021-22 income year.

12.  Per the terms of the settlement, the Taxpayer would receive a gross amount from the Fund.

13.  The tax free and taxable components of the gross amount were calculated by the Fund and were reflected on the payment summary provided by the Fund.

14.  The tax-free component of the lump sum was increased by the Fund due to calculations performed by them in relation to the injury suffered by the Taxpayer during their employment.

15.  An amount of this payment was deducted as PAYG tax.

Relevant legislative provisions

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

Question 1

Summary

Based on the information provided, the lump sum that the Taxpayer received is a disability superannuation benefit.

Detailed reasoning

1.    Under section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997), amounts paid to a person from a superannuation fund because they are a fund member are superannuation benefits.

2.    Subsection 995-1(1) of the ITAA 1997 defines a disability superannuation benefit as follows:

disability superannuation benefit means a superannuation benefit if:

(a) the benefit is paid to a person because he or she suffered 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 capacity for which he or she is reasonably qualified because of education, experience or training.

3.    In this case, two qualified medical practitioners have certified that the Taxpayer was suffering from a medical condition which, in their opinion, is likely to preclude the Taxpayer from ever being able to be employed again in a capacity for which they are reasonably qualified by education, training or experience.

4.    Therefore, the payment is a disability superannuation benefit. Accordingly, section 307-145 of the ITAA 1997 applies to modify the tax-free component.

Question 2

Summary

The components and taxation treatment of the disability superannuation benefit were correctly determined by the Fund under the ITAA 1997.

Detailed reasoning

5.    Section 307-145 of the ITAA 1997 modifies the tax-free component where the superannuation benefit is a superannuation lump sum and a disability superannuation benefit.

6.    Section 307-145 of the ITAA 1997 provides for a modification for disability benefits and states:

(1) Work out the tax free component of the superannuation benefit under subsection (2) if the benefit is a superannuation lump sum and a disability superannuation benefit.

(2) The tax free component is the sum of:

(a) the tax free component of the benefit worked out apart from this section; and

(b) the amount worked out under subsection (3).

However, the tax free component cannot exceed the amount of the benefit.

(3) Work out the amount 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.

(4) The balance of the superannuation benefit is the taxable component of the benefit.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).