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Ruling:

Subject: Low income tax offset

Question:

When calculating the low income tax offset does the taxable component of a lump sum superannuation payment form part of your taxable income?

Answer:

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

Relevant facts

Your 2011 taxable income included a taxable component lump sum superannuation payment.

You received a part low income tax offset (LITO) as part of your 2011 notice of assessment.

Relevant legislative provisions

Subsection 6-5(2) of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Section 10-5 of the Income Tax Assessment Act 1997

Superannuation Industry (Supervision) Act 1993

Section 301-15 of the Income Tax Assessment Act 1997

Section 301-20 of the Income Tax Assessment Act 1997

Reasons for decision

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

Ordinary income is income according to ordinary concepts and is generally considered to include amounts received:

· in return for personal services, whether received in the capacity of an employee or otherwise, and

· periodically or regularly and that the recipient relies on for the maintenance of themselves and /or their dependants (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 541).

Section 6-10 of the ITAA 1997 further provides that assessable income also includes some amounts that are not ordinary income. This income is referred to as statutory income. Statutory income from all sources in or out of Australia is also included in the assessable income of an Australian resident. Statutory income includes net capital gains.

Section 10-5 of the ITAA 1997 lists income that may be assessable income for income tax purposes. This list includes superannuation benefits. A superannuation benefit can include a payment made by a superannuation fund. A superannuation benefit may be paid either as a superannuation lump sum or an income stream.

Assessable income is gross income before any deductions are allowed.

Taxation of a lump sum superannuation benefit

From 1 July 2007, a superannuation benefit received from a superannuation fund, subject to meeting the preservation rules and conditions of release under the Superannuation Industry (Supervision) Act 1993, will have two components: a tax-free component and a taxable component. These two components attract different tax treatments.

Tax-free component

The tax-free component of a lump sum superannuation benefit typically includes:

· contributions from a person's post-tax income and,

· amounts that represent the portion of a superannuation benefit that accrued before 1 July 1983.

Under section 301-15 of the ITAA 1997, the tax-free component of a benefit paid to a member of a superannuation fund who is over the preservation age but under 60 is not assessable income and not exempt income.

Taxable component

The taxable component of a lump sum superannuation benefit typically includes:

· contributions made by the employer on the person's behalf

· tax-deductible contributions made by the person, and

· earnings on these contributions.

For most superannuation funds, the taxable component will consist entirely of an element taxed in the fund. In certain limited circumstances, the taxable component may also contain an element untaxed in the fund.

The tax treatment of the taxed element of a taxable component depends on the age of the person.

Under section 301-20 of the ITAA 1997, for people who are over the preservation age but under 60, the taxed element is:

· included in their assessable income, and

· subject to tax at their marginal rates (plus Medicare levy).

They receive tax offsets to ensure that:

· the rate of tax is 0% on any amount that comes within the low rate cap ($160,000 for the 2011 income year), and

· they pay no more than 15% tax (plus Medicare levy) on any amount above the low rate cap in an income year.

In your case, you received a superannuation lump sum payment from a taxed superannuation fund that contained a taxable component. You were over 55 years of age but less than 60 years at the date you received this payment.

In accordance with subsection 301-20 of the ITAA 1937, the taxed element does form part of assessable income. However, as you are over 55 years of age but less than 60 years, and have not exceeded the low rate cap, the taxed element has been subjected to a 0% tax rate.

In accordance with subsection 301-20 of the ITAA 1997, 100% of the taxed element of the lump sum payment you received was correctly included in your assessable income in your notice of assessment issued by the Commissioner.

Low income tax offset (LITO)

The maximum LITO for the 2011 year is $1,500 and it is reduced by 4 cents in the dollar for every dollar of taxable income over $30,000.

Therefore you are entitled to a part LITO.