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Ruling

Subject: Superannuation income stream offset

Question

Is your client entitled to a tax offset for their superannuation income stream from their superannuation fund?

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

Your client is under their preservation age in the 2009-10 and 2010-11 income years

Your client is in receipt of a superannuation income stream from their superannuation fund comprising a taxable component, which includes both an element taxed in the fund and an element untaxed in the fund.

Two legally qualified medical practitioners have not certified that, because of the ill-health, it is unlikely that your client can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 301

Income Tax Assessment Act 1997 Section 301-10

Income Tax Assessment Act 1997 Section 301-100

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Subsection 307-5(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary of decision

As your client is under their preservation age in the 2009-10 and 2010-11 income years, and the benefit is not a disability superannuation benefit, the taxable component - taxed element and taxable component - untaxed element of your client's superannuation income stream are included in their assessable income. Your client is not entitled to a tax offset.

Detailed reasoning

Section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out amounts which are superannuation benefits. Generally, an amount which is paid to a person from a superannuation fund because they are a fund member is a superannuation benefit by virtue of subsection 307-5(1) of the ITAA 1997.

Payments made to a person from a superannuation fund will generally comprise:

§ a tax-free component; and

§ a taxable component which may include:

a. an element taxed in the fund; and/or

b. an element untaxed in the fund.

Superannuation funds will calculate these components for each benefit that is paid. The taxation of superannuation member benefits paid from complying superannuation funds are set out in Division 301 of the ITAA 1997.

In this case, your client is in receipt of a superannuation income stream from their superannuation fund comprising a taxable component, which includes both an element taxed in the fund and an element untaxed in the fund.

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 under their preservation age who receive a superannuation income stream, section 301-40 of the ITAA 1997 states:

1) If you are under your preservation age when you receive a superannuation income stream benefit, the taxable component of the benefit is assessable income.

Offset for disability benefit

2) If the benefit is a superannuation income stream benefit and a disability superannuation benefit, you are entitled to a tax offset equal to 15% of the taxable component of the benefit.

Subsection 995-1(1) of the ITAA 1997 states:

disability superannuation benefit means a superannuation benefit if:

(a) the benefit is paid to an individual because he or she suffers from ill-health (whether physical or mental); and

(b) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the individual can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

However, any element untaxed in the fund is taxed in accordance with subdivision 301-C of the ITAA 1997.

For taxpayers under their preservation age in receipt of a superannuation income stream comprising of an element untaxed in the fund, section 301-120 of the ITAA 1997 states:

If you are under your preservation age when you receive a superannuation income stream benefit, the element untaxed in the fund of the benefit is assessable income.

The preservation age of a person born after 30 June 1964, is age 60.

Your client is under their preservation age at all times during both the 2009-10 and 2010-11 income years.

Consequently, the taxable component of your client's superannuation income stream is included in their assessable income.

Disability superannuation benefit

However, where an income stream is a disability superannuation benefit, a taxpayer under their preservation age will be entitled to a 15% tax offset on the taxed element only.

Paragraph (b) of the definition of a 'disability superannuation benefit' in section 995-1 of the ITAA 1997 requires specific certification by two medical practitioners.

In this case, the superannuation benefit is not a disability superannuation benefit as two legally qualified medical practitioners have not certified that, because of the ill-health, it is unlikely that your client can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training.

Conclusion

As your client is under their preservation age in the 2009-10 and 2010-11 income years, and the benefit is not a disability superannuation benefit, the taxable component - taxed element and taxable component - untaxed element of your client's superannuation income stream are included in their assessable income. Your client is not entitled to a tax offset.