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Ruling

Subject: lump sum superannuation payment - family court order

Question 1

Is the amount payable to you as an associate member of a superannuation fund subject to tax?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are aged under 45.

Your former spouse, has a superannuation interest in a superannuation fund (the Fund) which was subject to a payment flag made under a family court order (the order) in May 2010.

The order provided notification to the trustee of the Fund to establish a separate account in your name and your entitlement would be calculated using a base amount of $X.

In July 2010, the Fund notified you that under the order made with regard to your former spouse's superannuation interest in the Fund, a separate interest had been created for you in the Fund with effect from a date in June 2010.

The Fund also advised:

· they were required to convert the base amount of $X to a Transfer amount calculated as $Y. This amount was advised to you as the starting value of your associate benefit in the Fund.

· your associate benefit is entirely unfunded and as such it will be indexed annually at the long term bond rate.

· the circumstances in which benefits can become payable include:

o on retirement (having attained your preservation age)

o by reason of severe financial hardship.

The copy of your 2011 Associate Member Statement from the Fund in August 2011 stated your associate benefit as at 30 June 2011 was a Total Preserved Associate Benefit amount of $Z.

You provided a draft copy of the application you are preparing to lodge for early release of benefits on the grounds of severe financial hardship.

You stated that the Fund had advised you that any payout made will incur a tax withholding of 31.5% of the total lump sum payment made.

Relevant legislative provisions

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(7)

Income tax Assessment Act 1997 Section 301-115

Income tax Assessment Act 1997 Subsection 301-115(2)

Superannuation Industry (Supervision) Regulations 1994 Part 7A

Superannuation Industry (Supervision) Regulations 1994 Regulation 7A.01

Superannuation Industry (Supervision) Regulations 1994 Regulation 7A.01A

Superannuation Industry (Supervision) Regulations 1994 Schedule 1

Reasons for decision

Summary

The amount payable to you as an associate member of the Fund will be a superannuation lump sum payment and is assessable income as a superannuation member benefit.

The lump sum payment is taxable at the rate of 30% plus Medicare levy.

Detailed reasoning

Family law superannuation payment

Part 7A of the Superannuation Industry (Supervision) Regulations 1994 (SISR) facilitates the payment splitting arrangements established under Part VIIIB of the Family Law Act 1975.

Pursuant to an order made by the Family Court, a superannuation interest may be created for a non-member spouse and the interest split is treated as a separate superannuation benefit for the non-member spouse.

Regulation 7A.01 and Schedule 1 of SISR refers to how a person may request an early release of benefits from their fund subject to meeting the relevant condition of release and the amounts of the benefits permitted to be released by the fund at the time.

For the purposes of the meaning of 'superannuation benefit', if a family law superannuation payment' is made to a non-member spouse, the non-member spouse is treated as a member of the fund that is making the payment.

Under the Income Tax Assessment Act 1997 (ITAA 1997), a 'family law superannuation payment' is defined has having the meaning given in section 307-5 of the ITAA 1997.

Subsection 307-5(7) defines a 'family law superannuation payment' is a payment that is a payment made in accordance with Part 7A of the SISR. Subsection 307-5(1) contains the table describing the types of payments which are superannuation benefits. Item 1 in Column 1 and Column 2 of the table provides that a payment made to you from a superannuation fund because you are a fund member is a 'superannuation benefit' and a 'superannuation member benefit'.

The Fund advised you that pursuant to the family court order of May 2010, you became an associate member as a result of the separate interest created for you with regard to your former spouse's superannuation interest in the Fund with effect from a date in June 2010.

The Fund also advised:

· they were required to convert the base amount of $X to a Transfer amount calculated as $Y. This amount being the starting value of your associate benefit in the Fund.

· your associate benefit is entirely unfunded

· the circumstances in which benefits can become payable include:

o on retirement (having attained your preservation age)

o by reason of severe financial hardship.

Based on your associate member statement from the Fund for August 2011, your associate benefit as at 30 June 2011 was a preserved associate benefit amount of $Z.

If the Fund pays you an amount pursuant to accepting your application for early release of benefits on the grounds of severe financial hardship, the amount will be treated as a 'superannuation lump sum' and a 'superannuation member benefit' as you are an associate member of the fund.

Taxation of a superannuation member benefit

The taxation of a superannuation lump sum - element untaxed in the fund is contained in section 301-115 of the ITAA 1997 for recipients of member benefits where the recipient is under preservation age.

Based on the information provided, if you are under your preservation age when you receive a superannuation lump sum that is a superannuation member benefit from the Fund, the component of the lump sum that is the element untaxed in the fund is assessable income and subject to a tax rate of 30% plus the applicable Medicare levy.