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Authorisation Number: 1011663081282

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Ruling

Subject: Assessability of a disability superannuation benefit

Questions:

1. Is the taxable component of a disability superannuation income stream non assessable and non exempt income when you are under 60 years of age?

2. Are the lump sum payments in respect of unused annual leave and unused long service leave paid on termination of employment exempt from tax because your employment was terminated on medical grounds?

Answers:

1. No.

2. No.

This ruling applies for the following period:

01 July 2009 to 30 June 2010

The scheme commences on:

01 July 2009

Relevant facts and circumstances

You are currently under the age of 60.

You commenced employment with the employer a number of years ago.

You terminated this employment over five years later to attend a tertiary course.

A couple of years later you were reemployed by the employer.

You suffered a number of work related injuries that led to your employment being terminated by the employer during the 2009-10 income year.

The next day you commenced a disability income stream benefit (pension) paid by your superannuation fund. The disability income stream benefit consists of a tax-free component and a taxable component which is an element taxed in the fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 83-80(1).

Income Tax Assessment Act 1997 Subsection 83-85(1).

Income Tax Assessment Act 1997 Section 301-10.

Income Tax Assessment Act 1997 Section 301-15.

Income Tax Assessment Act 1997 Section 301-25.

Income Tax Assessment Act 1997 Subsection 301-25(1).

Income Tax Assessment Act 1997 Subsection 301-25(2).

Income Tax Assessment Act 1997 Section 301-30.

Income Tax Assessment Act 1997 Subsection 301-35(1).

Income Tax Assessment Act 1997 Section 301-40.

Income Tax Assessment Act 1997 Subsection 301-40(2).

Income Tax Assessment Act 1997 Section 307-5.

Income Tax Assessment Act 1997 Subsection 307-5(1).

Income Tax Assessment Act 1997 Subsection 307-5(2).

Income Tax Assessment Act 1997 Subsection 307-125(2).

Income Tax Assessment Act 1997 Section 307-215.

Income Tax Assessment Act 1997 Subsection 307-220(1).

Income Tax Assessment Act 1997 Section 307-225.

Income Tax Assessment Act 1997 Subsection 307-225(1).

Income Tax Assessment Act 1997 Subsection 307-225(2).

Income Tax Assessment Act 1997 Section 307-275.

Income Tax Assessment Act 1997 Subsection 307-275(1).

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

Reasons for decision

Summary

The taxable component of a superannuation income stream received by a person under the age of 60 years is correctly included in assessable income. The fact that the superannuation income stream is a superannuation disability benefit does not alter this. It is only when you reach age 60 that the superannuation income stream payments will no longer be included in your assessable income.

A tax-offset equal to 15% of the taxed element of the taxable component of the disability income stream benefit applies to reduce the amount tax payable.

The Commissioner has no power under the legislation he administers to exercise a discretion to change the fact that you received the disability income stream benefits prior to your 60th birthday, nor to change the characteristics of the relevant payments.

Lump sum payments of unused annual leave and unused long service leave on termination of employment are included in a person's assessable income.

Only 5% of the amount of unused long service leave that accrued prior to 16 August 1978 is included in your assessable income and is subject to tax at your marginal rate of tax.

Unused long service leave that accrued between 16 August 1978 and 17 August 1993 inclusive is fully included in your assessable income. A tax offset applies to ensure that the rate tax applicable on this amount does not exceed 30%.

Unused long service leave and unused annual leave that accrued on or after 18 August 1993 is fully included in your assessable income and is ordinarily subject to tax at your marginal rate of tax.

However, where the payment is made in conjunction with a payment that includes the invalidity segment of an employment termination payment or superannuation benefit, then tax offset applies to ensure that the rate tax applicable on the amount of the unused long service leave and unused annual leave that accrued on or after 18 August 1993 does not exceed 30%.

The Commissioner has no discretion to treat payments of unused annual leave and long service paid on termination of employment as being tax-free regardless of the reason for the termination of employment.

Detailed reasoning

Disability superannuation benefit

From 1 July 2007 the taxation treatment of superannuation payments, made in consequence of the termination of any employment by a taxpayer because of ill-health, have changed. Payments, formerly known as invalidity pensions, are now called disability superannuation benefits.

A 'superannuation benefit' is defined in subsection 307-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as a payment described in the table set out in this subsection. In particular, a 'superannuation member benefit' is defined in subsection 307-5(2) of the ITAA 1997 as being a payment described in Column 2 of the table in subsection 307-5(1).

Under Column 2 of Item 1 of the table contained in subsection 307-5(1) of the ITAA 1997 a superannuation member benefit is described as:

A payment to you from a superannuation fund because you are a fund member.

A 'disability superannuation benefit' is a term that is defined in 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.

A disability superannuation benefit may be paid as either an income stream benefit or a lump sum benefit.

In your case you commenced receiving a disability superannuation benefit in the form of an income stream (pension) from your superannuation fund immediately after your employment was terminated.

What are the components of a disability income stream benefit?

A disability income stream benefit may consist of:

· a tax-free component; and

· a taxable component which includes:

· an element taxed in the fund; and/or

· an element untaxed in the fund.

The superannuation fund will calculate these components for each benefit that is paid. The proportioning rule is generally used to calculate the tax-free and taxable components of a benefit.

What is the proportioning rule?

When any benefit is paid out from a 'superannuation interest', the benefit will be taken to be paid in the same proportion of tax-free and taxable components that these components made up the total value of the superannuation interest just before the benefit is paid (subsection 307-125(2) of the ITAA 1997).

How is the tax-free component of a superannuation interest calculated?

The tax-free component of a superannuation interest is the total value of the following segments:

· the 'contributions segment'; and

· the 'crystallised segment'.

What is the contributions segment?

The contributions segment generally includes all contributions made from 1 July 2007 that have not been included in the assessable income of the fund (subsection 307-220(1) of the ITAA 1997). Typically these would be member contributions where no personal tax deduction has been claimed by the member.

What is the crystallised segment?

The crystallised segment includes the following existing components of an interest that are consolidated into the tax-free component (subsection 307-225(2) of the ITAA 1997):

· the concessional component;

· the post-June 1994 invalidity component;

· undeducted contributions;

· the capital gains tax (CGT) exempt component; and

· the pre-July 83 component.

The crystallised segment is calculated by assuming that an eligible termination payment representing the full value of the superannuation interest is made in respect of the member just before 1 July 2007 (subsection 307-225(1) of the ITAA 1997).

How is the taxable component of a superannuation interest calculated?

The taxable component of a superannuation interest is calculated by subtracting the tax-free component from the total value of the superannuation interest (section 307-215 of the ITAA 1997).

The taxable component of a superannuation benefit may consist of an element taxed in the fund or an element untaxed in the fund (subsection 307-275(1) of the ITAA 1997), depending on whether the benefit is paid from a taxed or untaxed source. The superannuation fund will determine these elements before paying any superannuation benefits.

Applying the proportioning rule to a disability income stream benefit

As previously explained, the proportioning rule is applied to calculate the tax-free and taxable components of a superannuation benefit.

Example

William aged 51, commences a disability benefit income stream on 20 October 2007. The total value of William's superannuation interest is $200,000 when the income stream commences. The superannuation interest includes a tax-free component of $50,000 and a taxable component of $150,000, made up solely of an element taxed in the fund.

William receives a disability income stream benefit of $8,000 on 1 November 2007.

Step 1:

Calculate the tax-free and taxable proportions of the superannuation interest when the income stream commences:

The taxable proportion of the superannuation interest would therefore be 75%

Step 2:

Apply the proportions worked out under Step 1, to calculate the tax-free component of William's disability income stream benefit as follows:

$8,000 × 25% = $2,000

The taxable component of the disability benefit would therefore be $6,000 ($8,000 - $2,000).

Taxation treatment of disability income stream benefits that contain a tax-free component and an element taxed in the fund

Member aged below preservation age

The tax-free component is not assessable income and is not exempt income (section 301-30 of the ITAA 1997).

The taxable component is included in assessable income (subsection 301-40(1) of the ITAA 1997). A tax offset equal to 15% of the taxed element of the taxable component of the disability income stream benefit is allowable (subsection 301-40(2)).

The superannuation fund must provide an annual payment summary in respect of the disability income stream benefit. The amount of the tax-free component, the amount of the taxed element of the taxable component, the amount of the tax offset and the amount of tax withheld are included on the payment summary at the relevant labels.

Member aged over preservation age and under 60

The tax-free component is not assessable income and is not exempt income (section 301-15 of the ITAA 1997).

The taxable component is included in assessable income (subsection 301-25(1) of the ITAA 1997). A tax offset equal to 15% of the taxed element of the taxable component of the disability income stream benefit is allowable (subsection 301-25(2) of the ITAA 1997).

The superannuation fund must provide an annual payment summary in respect of the disability income stream benefit. The amount of the tax-free component, the amount of the taxed element of the taxable component, the amount of the tax offset and the amount of tax withheld are included on the payment summary at the relevant labels.

Member turns 60 during the year

The tax-free component is not assessable income and is not exempt income (sections 301-10 and 301-15 of the ITAA 1997).

The taxable component in respect of amounts paid prior to the member turning 60 years is included in assessable income (subsection 301-25(1) of the ITAA 1997). A tax offset equal to 15% of the taxed element of the taxable component of the disability income stream benefit paid prior to the member turning 60 years is allowable (subsection 301-25(2) of the ITAA 1997).

The taxable component in respect of amounts paid after the member has turned 60 years is not assessable income and is not exempt income (section 301-10 of the ITAA 1997).

The superannuation fund must provide an annual payment summary in respect of the disability income stream benefit. The amount of the tax-free component, the amount of the taxed element of the taxable component, the amount of the tax offset and the amount of tax withheld (of only those payments made prior to the member turning 60) are included on the payment summary at the relevant labels.

Member aged 60 or over

The whole of the disability income stream benefits paid to the member are not assessable income and are not exempt income (section 301-10 of the ITAA 1997).

There is no requirement for the superannuation fund to issue a payment summary for any payments made after the member turns 60.

Preservation age

The preservation age is the age you can normally access your benefits and it depends on your date of birth as follows:

Unused annual leave and long service leave payments on termination of employment

When a person's employment is terminated, that person may receive lump sum payments for:

· unused annual leave (including leave loading); and/or

· unused long service leave.

How these payments are taxed will generally depend on when the relevant leave was accrued and the reason for the termination of employment.

Unused long service leave that accrued prior to 16 August 1978

Only 5% of the identified amount is included in your assessable income (subsection 83-80(1) of the ITAA 1997) and is subject to tax at your marginal rate of tax. This amount is shown at Label B on the PAYG payment summary.

Unused long service leave that accrued between 16 August 1978 and 17 August 1993 inclusive

This amount is fully included in your assessable income (subsection 83-80(1) of the ITAA 1997) and a tax offset applies to ensure that the rate tax applicable on this amount does not exceed 30% (subsection 83-85(1) of the ITAA 1997). This amount is shown at Label A on the PAYG payment summary.

Unused long service leave and unused annul leave that accrued on or after 18 August 1993

Unused long service leave and unused annual leave that accrued on or after 18 August 1993 is fully included in your assessable income (subsection 83-80(1) of the ITAA 1997) and is subject to tax at your marginal rate of tax. This amount is shown as part of your salary and wages on the PAYG payment summary.

However, where the payment is made in conjunction with a payment that includes the invalidity segment of an employment termination payment or superannuation benefit, then a tax offset applies to ensure that the rate tax applicable on this amount does not exceed 30% (subsection 83-85(1) of the ITAA 1997). This amount is shown at Label A on the PAYG payment summary.

Discretion to disregard the nature of the payments

The Commissioner of Taxation can only exercise, or refuse to exercise, a discretion where a provision of the ITAA 1997 or the Taxation Administration Act 1953 allows him the power to do so.

In the present case, the Commissioner has no discretion under the legislation that he administers to change the fact that you received the disability income stream benefits prior to your 60th birthday, nor to change the characteristics of the relevant payments.

Similarly, the Commissioner has no discretion to treat payments of unused annual leave and long service paid on termination of employment as being tax-free regardless of the reason for the termination of employment.