Edited version of private ruling

Authorisation Number: 1011703358553

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Taxation treatment of superannuation income stream payments

Question 1

Are you entitled to a tax offset for a taxable component of a payment from a superannuation fund under subsection 301-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are you entitled to a tax offset under subsection 301-25 of the ITAA 1997 for a taxable component of a pension from a superannuation fund?

Answer

No.

This ruling applies for the following period:

future income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are a member of the Commonwealth Superannuation Scheme (CSS) which is administered by ComSuper.

In the future income year you intend to retire and receive a pension from ComSuper and a lump sum superannuation payment from ComSuper.

You are under 60 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 301-15

Income Tax Assessment Act 1997 Subsection 301-20

Income Tax Assessment Act 1997 Subsection 301-20(2)

Income Tax Assessment Act 1997 Subsection 301-20(4)

Income Tax Assessment Act 1997 Section 301-25

Income Tax Assessment Act 1997 Section 301-25(2)

Income Tax Assessment Act 1997 Section 301-100(2)

Income Tax Assessment Act 1997 Subsection 301-105(2)

Income Tax Assessment Act 1997 Subsection 301-105(4)

Income Tax Assessment Act 1997 Section 301-110

Income Tax Assessment Act 1997 Subsection 307-345(2)

Reasons for decision

Summary

The pension payments from ComSuper are included in your assessable income for the future income year and taxed at your marginal rate of tax.

The taxable component of the lump sum payment from ComSuper is included in your assessable income in the future income year.

In respect of the taxed element you are entitled to a tax offset to ensure that you pay no more than:

· 0% on the amount up to your low rate cap amount; and

· 15% (plus Medicare levy) on the amount (if any) above your low rate cap amount.

In respect of the untaxed element (if any) you are entitled to a tax offset to ensure that you pay no more than:

· 15% (plus Medicare levy) on amounts up to your low rate cap amount; and

· 30% (plus Medicare levy) on amounts (if any) above your low rate cap amount and up to the untaxed plan cap amount; and

· the highest marginal tax rate (plus Medicare levy) for any amount (if any) above the untaxed plan cap amount.

The tax-free component of the lump sum payment is not included in your assessable income.

Detailed reasoning

Benefits payable on age retirement from the CSS

The CSS, which is administered by ComSuper, is what is known as a hybrid superannuation fund. 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 the CSS, the defined benefit part is generally the CPI-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').

The defined benefit part does not accrue in a superannuation fund. Rather, it is paid out of Consolidated Revenue. Because of this, the defined benefit part has not been subject to the 15% tax payable by most superannuation funds and is referred to as the 'untaxed element'.

In an accumulation fund, member benefits are determined by the value of contributions and investment returns. The accumulation part 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 part, the accumulation part does accrue in a superannuation fund. Consequently, the accumulation part has been subject to the 15% tax payable by most superannuation funds and is referred to as the 'taxed element'.

Generally, superannuation benefits cannot be accessed until the member reaches their preservation age and permanently retires from the workforce.

Preservation age is the age at which a person can access their superannuation benefits generally when they retire. If the person were born:

· before 1 July 1960 the person can access their superannuation when they are 55.

· after 30 June 1960, the person's preservation age will be between 55 and 60. This is because the preservation age will gradually increase from 55 to 60 between 2015 and 2025.

On age retirement, a member's benefit options are:

In your case, you state that you will be taking the third option - CPI-indexed pension plus a lump sum.

Taxation of pension or income stream from the CSS

As noted earlier the CPI-indexed pension is a defined benefit and is paid out of Consolidated Revenue. As the defined benefit never accrued in a superannuation fund no part of the benefit has been subject to tax in the fund. Accordingly, it will be an untaxed element.

As you are over preservation age but under 60 years of age each payment of the CPI-indexed pension is fully included in your assessable income and taxed at your marginal rate of tax plus Medicare levy (section 301-110 of the ITAA 1997).

Once you reach age 60 you may be entitled to a tax offset of 10% in respect of pension payments received after your 60th birthday (subsection 301-100(2) of the ITAA 1997).

Taxation of lump sum superannuation benefit from the CSS

From 1 July 2007, a superannuation benefit received from a complying superannuation fund will generally be made up of:

· a tax free component; and

· a taxable component, which in turn may be made up of:

· an element taxed in the fund (the taxed element); and/or

· an element untaxed in the fund (the untaxed element).

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

These components attract different tax treatments.

Tax free component

A tax-free component is the part of a benefit that is not included in your assessable (or taxable) income and is not exempt income (section 301-15 of the ITAA 1997). As the name implies, the tax-free component is tax-free.

Taxable component

The taxable component of a superannuation benefit is the amount remaining after reducing the benefit by the tax free component. As already noted, it may include two parts - a taxed element (tax has been paid in the fund in respect of this part) and an untaxed element (tax has not been paid in the fund in respect of this part).

The taxable component is fully included in your assessable income (subsection 301-20(1) of the ITAA 1997).

The tax treatment of a taxable component depends on the age of the taxpayer.

Tax treatment of taxed element

As you are over preservation age but under 60 years of age a tax offset will apply to ensure:

· that the rate of tax is 0% on the amount up to your low rate cap amount, which is $160,000 for the 2010-11 income year (subsection 301-20(2) of the ITAA 1997); and

· the rate of tax is no more than 15% (plus Medicare levy) on the amount (if any) above your low rate cap amount (subsection 301-20(4)).

Subsection 307-345(2) of the ITAA 1997 provides for the reduction of the low rate cap where other superannuation benefits are received by you in the same income year.

Tax treatment of untaxed element

As you are over preservation age but under 60 years of age a tax offset will apply to ensure:

· that the rate of tax is no more than 15% (plus Medicare levy) on amounts up to your low rate cap amount (subsection 301-105(4) of the ITAA 1997); and

· the rate of tax is no more than 30% (plus Medicare levy) on amounts over your low rate cap amount and up to the untaxed plan cap amount ($1,155,000 for the 2010-11 income year) for each superannuation plan (subsection 301-105 (2)); and

· the highest marginal tax rate (plus Medicare levy) for any amount above the untaxed plan cap amount.

The low rate cap will be reduced by any other taxed or untaxed elements you receive from any superannuation payer after you have reached preservation age.

How the tax offset re the lump sum payment works

As noted above both the taxed element and the untaxed element (if any) of the taxable component of the lump sum payment are included in your assessable income. However, tax offsets apply to ensure that amounts below the low rate cap amount and, in the case of the untaxed element (if any), the untaxed plan cap amount are subject to certain maximum rates of tax.

In applying the tax offset the assumption is made that the income subject to the maximum rate of tax occupies the 'top slice' of your taxable income. Where there is income subject to different maximum rates of tax, a particular hierarchy applies. In so doing, the greatest benefit is applied.

As can be seen, by assuming that the income subject to a maximum rate of 0% tax forms the topmost portion of the taxable income, followed by the income subject to a maximum rate of 15% tax, then the income subject to a maximum rate of 30% tax, and finally the other income, the greatest benefit will be provided.