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Ruling

Subject: Tax on superannuation lump sum benefit

Question

Is a superannuation lump sum withdrawn early, in accordance with the Australian Prudential Regulation Authority (APRA) guidelines, included in the taxpayer's assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You applied to APRA on two separate occasions for early access to your superannuation on compassionate grounds.

Your first application to APRA was received in late 2010.

In late 2010 you received an amount from a public sector superannuation scheme as disclosed on the relevant PAYG payment summary. This amount was comprised entirely of a taxable component - taxed element. Tax was withheld.

Your second application to APRA was received in early 2011.

In early 2011 you received an amount from the same public sector superannuation scheme as indicated on the relevant PAYG payment summary. This amount was comprised entirely of a taxable component - taxed element. Tax was withheld.

Subsequent to this, two further amounts were authorised to be released by APRA.

The first payment was in early 2011 when you received an amount from a industry superannuation fund as disclosed on the relevant PAYG payment summary. This amount was comprised of a taxable component - taxed element, and a tax-free component. Tax was withheld.

The second payment was in early 2011 when you received an amount from a public sector superannuation scheme as indicated on the relevant PAYG payment summary. This amount was comprised entirely of a taxable component - taxed element. Tax was withheld.

You are currently under 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-30

Income Tax Assessment Act 1997 Section 301-35

Income Tax Assessment Act 1997 Subsection 301-35(2)

Income Tax Assessment Act 1997 Section 301-115

Reasons for decision

Summary

Whilst under APRA guidelines the superannuation lump sum payments have been allowed to be withdrawn early, they are still subject to income tax and included in your assessable income.

The taxable component - taxed element paid by the public sector superannuation scheme are to be included, in full, in your assessable income for the 2010-11 income year. A tax offset is available to ensure that this amount is taxed at no more than 20% plus the Medicare levy.

The taxable component - taxed element paid by the industry superannuation fund is to be included, in full, in your assessable income for the 2010-11 income year. A tax offset is available to ensure that this amount is taxed at no more than 20% plus the Medicare levy.

The tax-free component is not assessable income and will not be included in your assessable income.

Detailed reasoning

Components of a superannuation lump sum benefit

Under subsection 307-120(1) of the Income Tax Assessment Act 1997 (ITAA 1997) a superannuation lump sum benefit can include a:

· taxable component, and

· tax-free component.

The taxable component may include two parts. These are called taxed and untaxed elements of the taxable component:

· A taxed element is the amount of your 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. Typically, this component comprises employer contributions and earnings within the fund.

· An untaxed element is the part of your 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. This element typically arises due to a person's membership of an untaxed government fund.

The tax-free component is the part of a benefit that is not included in your tax return. Typically, for a person who joined a superannuation fund after 1 July 1983, this will comprise a person's personal superannuation contributions for which no tax deduction has been claimed.

Most commonly, a person's superannuation interest will comprise a taxed element of a taxable component, and possibly a smaller tax-free component.

Early release of benefits

Most superannuation benefits are subject to age preservation under the Superannuation Industry (Supervision) Act 1993. Usually this means that the benefits cannot be accessed until you reach your preservation age. For persons born on or after 1 July 1964 their preservation age is 60 years.

In addition, in order to access most superannuation benefits, a person also needs to satisfy a condition of release. Conditions of release include (but are not limited to):

· Retirement;

· Death;

· Terminal medical condition;

· Permanent incapacity;

· Attaining age 65;

· Compassionate grounds;

· Severe financial hardship;

· Temporary incapacity.

In your case you are under your preservation age and ordinarily you would not be able to access your superannuation benefits until you reached age 60 and, where appropriate, satisfied a condition of release. However, you applied to APRA to obtain early access to your superannuation benefits on compassionate grounds.

APRA has given permission for you to, on four separate occasions, access your superannuation benefits on compassionate grounds notwithstanding that you have not yet reached your preservation age.

However, early release of superannuation benefits on compassionate grounds does not release you from your obligation to pay the correct amount of tax on the income that you derive in a particular income year.

As you have received the monies when you are under your preservation age you will pay tax on any taxed element at a maximum rate of 20% plus the Medicare levy (section 301-35 of the ITAA 1997. If you receive any untaxed element, a maximum rate of 30% plus the Medicare levy will apply in accordance with section 301-115.

While certain superannuation payments are often tax-free, such as a payment made to a dependant of a deceased person, receiving a superannuation benefit as a result of compassionate grounds does not make the payment a tax-free.

Further, the Commissioner can only treat a payment as tax-free when the law he administers states that it is tax-free.