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Ruling

Subject: Lump sum superannuation benefit - invalidity benefit

Questions

1. Is any portion of the lump sum superannuation benefit received by you exempt from tax as an invalidity segment in accordance with section 82-150 of the Income Tax Assessment Act 1997?

2. Is any portion of the payments under the temporary salary continuance cover received by you exempt from tax as an invalidity segment in accordance with section 82-150 of the Income Tax Assessment Act 1997?

3. Are the payments under the temporary salary continuance cover included as assessable income?

Advice/Answers

1. No.

2. No.

3. Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are under your preservation age.

You sustained an injury in the 2009-10 income year.

You have provided one medical certificate signed by one medical practitioner. The medical certificate does not certify that you are suffering from a medical condition which is likely to preclude you from ever being able to be employed again in a capacity for which you are reasonably qualified by education, training or experience.

Your client is a member of a superannuation fund (the Fund).

In the 2010-11 income year you received a lump sum superannuation benefit and payments under a temporary salary continuance cover from the Fund.

A PAYG payment summary - superannuation lump sum from the Fund shows that a payment was made to you in the 2010-11 income year comprising a taxable component - taxed element, tax free component and tax withheld.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27G

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1997 Subsection 82-150(1)

Income Tax Assessment Act 1997 Paragraph 82-150(1)(d)

Income Tax Assessment Act 1997 Section 301-30

Income Tax Assessment Act 1997 Section 301-35

Reasons for decision

Summary

You have not provided certificates from two medical practitioners that attest to you being unable to ever be employed in a capacity for which you are reasonably qualified because of education, training or experience. Therefore, no part of the lump sum superannuation benefit or any portion of the payments under the temporary salary continuance cover received by you from your superannuation fund (the Fund) is exempt from tax as an invalidity segment.

As you are under your preservation age the total tax free component of the lump sum superannuation benefit that you received from the Fund is not assessable income and is not exempt income and will not be included in your income tax return for the relevant income year.

The taxable component of the lump sum superannuation benefit from the Fund is to be included in your assessable income. You will be entitled to a tax offset which ensures that the rate of tax on the taxable component of the lump sum does not exceed 20%.

The payments you receive under a temporary salary continuance cover from the Fund provide you with income as you are unable to work due to illness. The purpose of the payments are to replace the salary and wages normally earned, expected and relied upon by you during the period specified under a temporary salary continuance cover policy. These payments are considered to be ordinary income and assessable as they acquire the character of the salary and wages for which they are substituted.

Detailed reasoning

Invalidity segment

Where a person's employment is terminated because of ill-health and the person receives an employment termination payment, part of the payment may be tax free. This component is called an invalidity segment.

Invalidity segment

Subsection 82-150(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

An employment termination payment includes an invalidity segment if:

· the payment was made to a person because he or she stops being gainfully employed; and

· the person stopped being gainfully employed because he or she suffered from ill-health (whether physical or mental); and

· the gainful employment stopped before the person's last retirement day; and

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

Certification from two legally qualified medical practitioners that the disability is likely to result in the taxpayer being unable ever to be employed.

In respect of this requirement, it must be demonstrated that the disability was such that it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

Therefore, paragraph 82-150(1)(d) of the ITAA 1997 requires that there must be the likelihood that the disability of the taxpayer will preclude the taxpayer from ever being employed in a role, for which the taxpayer is reasonably qualified.

A person, who is unable to continue to perform the duties of his or her current employment, but is able to undertake other appropriate employment for which they are reasonably qualified, would not satisfy the condition in paragraph 82-150(1)(d) of the ITAA 1997.

Even if a taxpayer's employment is terminated by disability, this does not mean that the second part of the test for invalidity is satisfied. The two parts are independent. The fact that the medical practitioners have to determine invalidity does not mean that the medical practitioners have to determine the reason for termination.

A person's employment can be terminated because of disability, irrespective of whether two medical practitioners form an opinion as to whether the disability will prevent the taxpayer from ever being able to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience.

Further, the requirement that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity for which he or she is reasonably qualified extends to full-time employment, part-time or casual employment. A person who is not able to work full-time but can work part-time or casual in any employment for which the taxpayer is reasonably qualified will not receive the concessional component.

In this case you have only provided one medical certificate signed by one medical practitioner. Further, after examining the contents of the medical certificate provided it is considered it does not explicitly certify that you are suffering from a medical condition which, in their opinion, is likely to preclude you from ever being able to be employed again in a capacity for which you are reasonably qualified by education, training or experience.

As you have not provided certificates from two medical practitioners that attest to you being unable to ever be employed in a capacity for which you are reasonably qualified because of education, training or experience, the condition under paragraph 82-150(1)(d) of the ITAA 1997 has not been satisfied.

As all conditions need to be satisfied no part of the lump sum superannuation benefit or any portion of the payments under the temporary salary continuance cover received by you from AMP is exempt from tax as an invalidity segment in accordance with subsection 82-150(1) of the ITAA 1997.

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 under their preservation age is not assessable income and not exempt income under section 301-30 of the ITAA 1997.

You are under your preservation age.

The total tax free component of the lump sum superannuation benefit that you received from your superannuation fund (the Fund) in the 2010-11 income year, is not assessable income and is not exempt income under section 301-30 of the ITAA 1997 and will not be included in your 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 under their preservation age who receive a lump sum payment, the relevant provision is section 301-35 of the ITAA 1997 which states:

If you are under 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 taxable component of the lump sum does not exceed 20%.

In your case, the taxable component of the lump sum superannuation benefit from the Fund is to be included in your assessable income under section 301-35 of the ITAA 1997. As you are under your preservation age you will be entitled to a tax offset which ensures that the rate of tax on the taxable component of the lump sum does not exceed 20%.

Ordinary Income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned;

· are expected;

· are relied upon; and

· have an element of periodicity, recurrence or regularity.

Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 26 ALJ 505; (1952) 10 ATD 82; [1953] ALR 17; [1952] HCA 65). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 89 ALR 137; (1989) 20 ATR 1516; (1989) 89 ATC 5142; Tinkler v. Commissioner of Taxation (Cth) (1979) 40 FLR 116; (1979) 29 ALR 663; (1979) 10 ATR 411; (1979) 79 ATC 4641; AAT Case 7328 (1991) 22 ATR 3422; (1991) 91 ATC 433).

The payments you receive under a temporary salary continuance cover from the Fund provide you with income as you are unable to work due to illness. The purpose of the payments made under the temporary salary continuance cover are to replace, up to a specified percentage and subject to specified dollar limit, the salary and wages normally earned, expected and relied upon by you during the period specified under a temporary salary continuance cover policy.

These payments are considered to be ordinary income as they acquire the character of the salary and wages for which they are substituted. The payments are assessable under subsection 6-5(2) of the ITAA 1997.