Edited version of private ruling

Authorisation Number: 1011858813156

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: sickness benefits and salary sacrifice

Question

Can superannuation contributions from your sickness and accident benefits form part of an effective salary sacrifice arrangement?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2011

Relevant facts

You were an employee who previously salary sacrificed amounts into your superannuation scheme.

You retired on medical grounds in 2011.

You now receive a fortnightly indexed pension from your superannuation scheme. The amounts received are substantially less than you had anticipated.

You did not intend to retire until another few years. During those years you were expecting numerous pay rises and probably one or two promotions.

You also receive payments from your sickness and accident policies. These policies are not part of your superannuation scheme. The policies have a five year limit for sickness.

You wish to contribute an amount each year from your sickness and accident policy payments into your superannuation and have those contributions treated as concessional (pre-tax) contributions to your superannuation, similar to your previous salary sacrifice arrangements.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Summary

Contributions into superannuation from your sickness and accident benefits do not form part of an effective salary sacrifice arrangement. Therefore any amounts paid from your sickness benefits into superannuation are regarded as assessable income.

Reasons

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

Salary and wages and sickness benefits are regarded as assessable income under subsection 6-5(2) of the ITAA 1997.

A salary sacrifice arrangement is an arrangement between an employer and an employee whereby the employee agrees to forgo part of their future salary entitlement in return for a benefit of a similar value.

The consequence of such an arrangement is that the employee is assessed on the reduced amount of the salary actually received and the employer is liable for any fringe benefits tax payable on the benefit provided.

The Commissioner's view on the taxation implications of salary sacrifice arrangements is discussed in Taxation Ruling TR 2001/10.

TR 2001/10 states that an effective salary sacrifice arrangement is an arrangement between the employer and the employee detailing the amount of income to be sacrificed, and must be entered into before the employee becomes entitled to be paid.

Where a person resigns or retires from their employment and is no longer working, there is generally no employer. Furthermore where a person is no longer employed they are not considered to be an employee and therefore not earning a salary. Any previous employer/employee relationship and/or entitlements generally cease upon resignation or retirement.

Where a person has retired and is receiving sickness insurance payments from an insurer, there is no employer/employee relationship. The amounts are paid due to an obligation under an insurance policy rather than as remuneration from an employer for services provided by an employee. As there is no employer/employee relationship, a salary sacrifice arrangement can not be entered into. That is, the sickness payments can not be salary sacrificed.

We acknowledge that your sickness benefits are replacing your previous employment income and form part of your assessable income. However, the legislation does not allow for sickness benefits to be salary sacrificed. Therefore if some of your sickness benefits are put into a superannuation fund, the full amount of your sickness benefits is assessable income.