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Ruling

Subject: Superannuation lump sum payment

Questions

Does your client have to pay tax on the lump sum superannuation payments they received from their superannuation fund in the 2010-11 income year?

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Your client is over their preservation age and under age 60.

Your client received lump sum payments in the 2010-11 income year that consist of taxed elements which in total do not exceed the low rate cap.

Your client has not received any other superannuation payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-15.

Income Tax Assessment Act 1997 Section 301-20.

Income Tax Assessment Act 1997 Section 307-345.

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary of decision

The tax free component of the lump sum payments your client received from their superannuation fund is not assessable income and is not exempt income and will not be included in their income tax return for the 2010-11 income year.

As your client is over their preservation age and under age 60 they will be entitled to a tax offset which ensures that the rate of tax is 0% on the amount that comes within the low rate cap.

In this case your client received lump sum payments that consist of taxed elements which in total do not exceed the low rate cap, therefore, the tax rate applicable is 0%. Please note the taxable component of the lump sum payment is still to be included in their assessable income.

Detailed reasoning

Superannuation benefit components

Lump sum payments made to you from a superannuation fund are called superannuation lump sum benefits, and these benefits will generally comprise:

· a tax free component; and

· a taxable component, which may include both or one of the following:

· an element taxed in the fund; and/or

· an element untaxed in the fund.

Tax free component

The tax free component of a benefit paid to a member of a superannuation fund who is over their preservation age but under age 60 is not assessable income and not exempt income under section 301-15 of the Income Tax Assessment Act 1997 (ITAA 1997).

The total tax free component of the payments that your client received from their superannuation fund in the 2010-11 income year, is not assessable income and is not exempt income under section 301-15 of the ITAA 1997 and will not be included in their income tax return for the relevant income year.

Taxable component

The taxable component of a lump sum superannuation benefit is the amount remaining after reducing the benefit by the tax free component.

Although the taxable component can consist of an element taxed in the fund and/or an element untaxed in the fund, the taxable component of a superannuation interest in a taxed fund normally consists solely of an element taxed in the fund.

The tax treatment of the taxed element depends on the age of the taxpayer and the form of the payment. For taxpayers over their preservation age and under 60 years of age who receive a lump sum payment, the relevant provision is section 301-20 of the ITAA 1997 which states:

If you are under 60 years but have reached your preservation age when you receive a superannuation lump sum, the taxable component of the lump sum is assessable income.

You are entitled to a tax offset that ensures that the rate of income tax on the amount mentioned in subsection (3) does not exceed 0%.

The amount is so much of the total of the taxable components included in your assessable income for the income year under subsection (1) as does not exceed your low rate cap amount (see section 307-345) for the income year.

You are entitled to a tax offset that ensures that the rate of income tax on the amount mentioned in subsection (5) does not exceed 15%.

The amount is so much of the total of the taxable components included in your assessable income for an income year under subsection (1) as exceeds your low rate cap amount for the income year.

Section 995-1 of the ITAA 1997 defines low rate cap amount as having the meaning given by section 307-345 of the ITAA 1997. A taxpayer's low rate cap amount is a lifetime cap which is reduced for all superannuation lump sum payments received by the taxpayer and increased by the indexation amount at the start of each income year. For the 2010-11 income year the low rate cap amount is $160,000.

In your client's case, the taxable component of the lump sum payment is to be included in their assessable income under section 301-20 of the ITAA 1997. As your client is over their preservation age and under age 60 they will be entitled to a tax offset which ensures that the rate of tax is 0% on the amount that comes within the low rate cap and is limited to 15% plus Medicare levy on the amount above the low rate cap.

Your client received lump sum payments that consisted of taxed elements in the 2010-11 income year. As the tax element amount does not exceed the low rate cap the tax rate applicable is 0%. Your client's low rate cap amount will be reduced by the amount received.