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Ruling

Subject: Taxation of a family law superannuation benefit

Issue 1

Questions

1. Is any part of the payment made to you by a complying superannuation fund, a family law superannuation payment in accordance with subsection 307-5(7) of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. If the payment is taken as a lump sum between preservation age and age 60, is any part of the payment included in your assessable income?

Answers

1. Yes.

2. Yes.

This ruling applies for the following periods:

Year ended 30 June 2011.

Year ending 30 June 2012.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You are over preservation age and under age 60.

Your spouse is a member of a superannuation scheme (the scheme) which provides both a defined benefit and an accumulation benefit. The accumulation benefit accrues in a superannuation fund (the fund). The defined benefit is paid out of an untaxed source.

During the 2010-11 income year you entered into a Family Law property settlement with your spouse in accordance with paragraph 90MT(1)(b) of Part VIIIB of the Family Law Act 1975. The consent order for the property settlement was made in the 2010-11 income year.

As a result, under the rules of the scheme, you are classed as a non-member spouse in relation to your spouse's benefit in the scheme. You are entitled to a preserved non-member spouse benefit from the scheme as the main part of the property settlement.

A benefits estimate from the trustees of the scheme shows that your preserved non-member spouse benefit is comprised of:

· a non-member spouse A benefit from a taxed source; and

· a non-member spouse B benefit from an untaxed source.

You state that your non-member spouse A and non-member spouse B benefits are separate benefits, each of which is treated independently.

You have the following two options available regarding your preserved non-member spouse benefit.

Under the first benefit option you may choose to receive your non-member spouse A and/or non-member spouse B benefits as a lump sum. If you choose this option, the superannuation lump sum payment will be made up of the following components:

· a tax-free component;

· a taxable component - taxed element; and

· a taxable component - untaxed element.

Tax would be withheld from the superannuation lump sum, and the net payment would be credited to your nominated bank account.

Under the second benefit option you may choose to roll-over your non-member spouse A and/or non-member spouse B benefits to another complying superannuation fund, a retirement savings account (RSA) or an approved deposit fund. If you choose this option, the roll-over payment will be made up of the same components as the superannuation lump sum described above, and no tax would be withheld from the roll-over payment.

You have calculated the amount of the taxable component - untaxed element of your non-member spouse A benefit. You have also advised that your non-member spouse B benefit is made up entirely of a taxable component - untaxed element.

You have a benefit in another superannuation fund, and you state that this benefit is mostly tax-free. You are contemplating taking your preserved non-member spouse A benefit as a lump sum payment in the 2010-11 income year, together with your other benefit.

You are also contemplating rolling-over your preserved non-member spouse B benefit into your other superannuation fund in the 2011-12 income year.

You have not engaged in any paid employment for several years. You have been receiving an allowance from Centrelink since partway through the 2009-10 income year. You are currently assessed as having a temporary reduced work capacity of less than a certain number of hours per week.

As you will declare that you are retired from the workforce in order to receive both your preserved non-member spouse benefit from the scheme and your other superannuation benefit, you anticipate that your entitlement to the allowance from Centrelink will cease.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 251S(1A),

Income Tax Assessment Act 1997 Subsection 295-190(1),

Income Tax Assessment Act 1997 Section 301-15,

Income Tax Assessment Act 1997 Subsection 301-20(1),

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

Income Tax Assessment Act 1997 Subsection 301-20(3),

Income Tax Assessment Act 1997 Subsection 301-105(1),

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

Income Tax Assessment Act 1997 Subsection 301-105(3),

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

Income Tax Assessment Act 1997 Subsection 301-105(5),

Income Tax Assessment Act 1997 Subsection 301-105(6),

Income Tax Assessment Act 1997 Subsection 306-15(1),

Income Tax Assessment Act 1997 Subsection 306-15(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(6),

Income Tax Assessment Act 1997 Subsection 307-5(7),

Income Tax Assessment Act 1997 Section 307-15,

Income Tax Assessment Act 1997 Subsection 307-15(1),

Income Tax Assessment Act 1997 Subsection 307-15(2),

Income Tax Assessment Act 1997 Section 307-65,

Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007 Section 5,

Taxation Administration Act 1953 Division 359 of Schedule 1,

Family Law Act 1975 Section 90MT and

Family Law Act 1975 Paragraph 90MT(1)(b).

Reasons for decision

Issue 1

Summary

The payment will be made to you by the superannuation fund as a result of a family law splitting order. Therefore, the payment is a family law superannuation payment.

If you take your non-member spouse A benefit as a superannuation lump sum:

· the tax-free component is not subject to tax and is not included in your assessable income;

· the taxable component - taxed element is included in your assessable income. However, a tax offset will apply to ensure that the rate of tax payable on this amount is not greater than 0%; and

· the taxable component - untaxed element is also included in your assessable income. However, a tax offset will apply to ensure that the rate of tax payable on this amount is no more than 15% plus Medicare levy.

Detailed Reasoning

The taxation treatment of superannuation lump sums is set out in Divisions 301, 306 and 307 of the Income Tax Assessment Act 1997 (ITAA 1997).

Family law superannuation payment

A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream.

Section 307-5 of the ITAA 1997 defines what is a 'superannuation benefit'. A superannuation benefit is a payment described in the table contained in subsection 307-5(1) and will either be a superannuation member benefit or a superannuation death benefit.

Item 1, column 2 of the table contained in subsection 307-5(1) of the ITAA 1997 defines a 'superannuation member benefit' as being:

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

Where a 'family law superannuation payment' is made to you because another person is a member of the superannuation fund, subsection 307-5(6) of the ITAA 1997 applies to treat you as a member of the fund for the purposes of section 307-5. The effect of subsection 307-5(6) is that a family law superannuation payment will not be a superannuation benefit to the spouse originally entitled to the superannuation but rather will be a superannuation benefit for the receiving spouse.

Therefore the benefit is a superannuation benefit for you but not for the other person.

A 'family law superannuation payment' is defined in subsection 307-5(7) of the ITAA 1997 as a payment that:

(a) is a payment of any of the following kinds:

(i) a payment in accordance with Part VIIIB of the Family Law Act 1975;

(ii) a payment in accordance with the Family Law (Superannuation) Regulations 2001;

(iii) a payment in accordance with Part 7A of the Superannuation Industry (Supervision) Regulations 1994;

(iv) a payment in accordance with Part 4A of the Retirement Savings Accounts Regulations 1997;

(v) a payment specified in the regulations; and

(b) satisfies the requirements (if any) specified in the regulations.

The Family Law Act 1975 (FLA) was amended on 28 December 2002 to allow superannuation to be treated in the same way as property and other assets, allowing it to be divided (or 'split') between separating parties (Part VIIIB of the FLA).

The amendments are prospective which means they only apply to court orders and superannuation agreements entered into after 28 December 2002.

In your case you entered into a Family Law property settlement with your spouse in accordance with paragraph 90MT(1)(b) of Part VIIIB of the FLA. The consent order for the property settlement was made during the 2010-11 income year.

As noted in the facts, your spouse is a member of a member of the scheme. As a result of the splitting order made under Part VIIIB of the FLA, you became a non-member spouse in relation to your spouse's preserved benefit.

Under the rules of the scheme, you were allocated a preserved non-member spouse benefit by the trustees of the scheme. Your preserved benefit is a non-member spouse benefit held on your behalf in the scheme subject to the satisfaction of a condition of release of benefits specified in the Superannuation Industry (Supervision) Regulations 1994.

As your preserved non-member spouse benefit in the scheme arose as a result of a family law splitting order, the benefit is a 'family law superannuation payment' as defined under subsection 307-5(7) of the ITAA 1997. Therefore the benefit is a superannuation benefit as defined under subsection 307-5(1).

Components of a superannuation lump sum benefit

· A superannuation lump sum benefit can include a:

· taxable component; and

· tax-free component.

The taxable component is the part of the benefit that is taxable. Though tax must be paid on the entire taxable component, it may include two parts - one where tax has already been paid and one where tax has not yet been paid. These are called taxed and untaxed elements of the taxable component:

· A taxed element is the amount of the benefit that has already had tax paid within the fund. You may need to pay additional tax on it when it is paid out, depending on your age when you take the lump sum. You may need to include the taxed element in your tax return.

· An untaxed element is the part of the benefit that hasn't had any tax paid on it in the fund, but is still taxable. You must include it in your tax return.

The tax-free component is the part of a benefit that is tax-free and is not included in your tax return (section 301-15 of the ITAA 1997).

Taxation treatment of the taxable component of a superannuation lump sum benefit

The tax treatment of a taxable component depends on the age of the person at the time the payment is received and whether or not the person has reached their preservation age.

Preservation age is the age at which retirees can access their superannuation benefits generally when they retire. For a person born before 1 July 1960 their preservation age is 55.

For persons who receive a superannuation lump sum at or above preservation age and under 60, the taxable component of the benefit is taxed as follows:

Low rate cap on superannuation lump sum benefits

The low rate cap is the limit set on the amount of the taxable component of a superannuation lump sum benefit that a person can receive at a lower (or nil) rate of tax.

The low rate cap applies if the person has reached their preservation age but has not turned 60.

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.

For the 2010-11 income year the low rate cap is $160,000. For the 2011-12 income year the low rate cap is $165,000.

Untaxed plan cap amount

The untaxed plan cap amount limits the concessional tax treatment of benefits that have not been subject to contributions tax in a superannuation fund. The untaxed plan cap amount applies to each superannuation plan (superannuation fund, approved deposit fund or RSA) from which a person receives superannuation lump sum member benefits.

For the 2010-11 income year the untaxed plan cap amount is $1,155,000. For the 2011-12 income year the untaxed plan cap amount is $1,205,000.

Taxation of your proposed superannuation lump sum

You are contemplating taking your preserved non-member spouse A benefit as a lump sum payment in the 2010-11 income year, together with a mostly tax-free benefit from another superannuation fund. As noted in the facts, the preserved non-member spouse A benefit is made up of:

· a tax-free component;

· a taxable component - taxed element; and

· a taxable component - untaxed element.

The tax-free component is not included in your assessable income (section 301-5 of the ITAA 1997).

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

Provided this amount together with the taxable component - taxed element payable from the other superannuation fund are below the low rate cap of $160,000, 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).

No Medicare levy or Medicare levy surcharge will apply to the taxable component - taxed element (subsection 251S(1A) of the Income Tax Assessment Act 1936).

The taxable component - untaxed element is fully included in your assessable income (subsection 301-105(1) of the ITAA 1997).

Provided the taxable component - untaxed element is below the low rate cap then a tax offset will apply to ensure that the rate of tax is no more than 15% plus Medicare levy (subsections 301-105(2), 301-105(3), 301-105(4) and 301-05(5) of the ITAA 1997). The low rate cap, for this purpose, will be reduced by the amount of the taxable component - taxed elements (subsection 301-105(6)) received during the income year and, where relevant, in previous income years.

If there is any taxable component - untaxed element in excess of the reduced low rate cap and below the untaxed plan cap amount, then a tax offset will apply to ensure that the rate of tax is no more than 30% plus Medicare levy (subsections 301-105(2) and 301-105(3) of the ITAA 1997).