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Ruling

Subject: Taxation of superannuation lump sum

Questions

Is any part of the superannuation lump sum received during the 2010-11 income year included as assessable income?

Answers

Yes.

This ruling applies for the following period

2010-11 income year.

The scheme commenced on

1 July 2010.

Relevant facts

In the 2010-11 income year, you were paid a superannuation lump sum from a complying superannuation fund (The Fund). This amount comprised of an element taxed of the taxable component and a tax-free component.

You were over preservation age and under age 60 at the time the payment was made.

Reasons for decision

Summary

Part of the superannuation lump sum payment is included in your assessable income for the 2010-11 income year.

The taxable component - taxed element is fully included in your assessable income for the 2010-11 income year. A tax offset will apply to the taxable component - taxed element to ensure that the rate of tax is no more than 0%.

The tax-free component is tax free and is not included in your assessable income.

Detailed reasoning

Taxation of lump sum payment

From 1 July 2007, a superannuation benefit received from a complying superannuation fund will (under subsection 307-120(1) of the Income Tax Assessment Act 1997 (ITAA 1997)) 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).

These components attract different tax treatments.

The payment made to you by the Fund comprised of a taxable component - taxed element and a tax-free component.

Tax-free component

The tax-free component is the part of a benefit that is not included in your assessable income and is not exempt income (section 301-30 of the ITAA 1997). As the name implies, the tax-free component is tax-free.

Therefore the tax-free component is not included in your assessable income for the 20010-11 income year.

Taxable component

The tax treatment of a taxable component depends on the age of the taxpayer at the time the payment is received.

Generally a person must reach preservation age before he or she can access their superannuation. For persons born before 1 July 1960, their preservation age is 55 years of age.

As you were over preservation age and under 60 years when you received the lump sum payment from the Fund, the taxable component is fully included in your assessable income under subsection 301-20(1) of the ITAA 1997.

However, the low rate cap applies if you have reached your preservation age and are under age 60. The low rate cap amount is the limit set on the amount of the taxable component of a superannuation lump sum benefit that you can receive at a lower rate of tax.

The low rate cap reflects the previous low-rate threshold for eligible termination payments. It has been introduced to keep the existing tax treatment of superannuation lump sum payments between the age of 55 and age 60.

The low rate cap amount for the 2010-11 income year is $160,000.

In your case, the taxed component - taxed element is below the low rate cap amount for the relevant income year. Therefore, a tax offset will apply to ensure that the rate of tax on the taxable component - taxed element is no more than 0% (subsections 301-20(2) and 301-20(3) of the ITAA 1997).