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Ruling

Subject: Government superannuation scheme

Questions:

Are the superannuation benefits received by the taxpayer from a Government superannuation scheme tax-free?

Advice/Answers:

No. However, as you have now reached age 60 they are subject to a 10% tax offset.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts:

You are over 60 years of age and are in receipt of a pension from a Government superannuation scheme.

In the 2010-11 income year you received a lump sum payment of arrears of your pension.

Assumptions:

None.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 301-10.

Income Tax Assessment Act 1997 paragraph 301-90(a)

Income Tax Assessment Act 1997 paragraph 301-90(c)

Income Tax Assessment Act 1997 Subsection 301-100(1).

Income Tax Assessment Act 1997 Subsection 301-100(2).

Income Tax Assessment Act 1997 Subsection 307-295 (2)

Reasons for decision

Summary

The Government superannuation scheme is an untaxed source for income tax purposes as all contributions to the scheme are paid into the Consolidated Revenue and all benefits paid under the scheme are paid out of Consolidated Revenue.

As the pension payments are being made from an untaxed source they are included in your assessable income, notwithstanding that you are now over age 60.

However, the pension payments will subject to the 10% tax offset which will reduce your tax liability.

Detailed reasoning

Taxation treatment of superannuation lump sums and income streams

The taxation treatment of a superannuation benefits paid from a complying superannuation fund is based on:

· the age of the benefit recipient;

· whether the benefit is a lump sum or an income stream;

· whether the benefit comprises a tax free component and/or a taxable component; and

· whether the taxable component of the benefit includes

o an element taxed in the fund; and/or

o an element untaxed in the fund.

Components of a superannuation income stream

As the Government superannuation scheme is a public sector superannuation scheme, section 307-295 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to benefits paid from it.

Under subsection 307-295(2) of the ITAA 1997, if a superannuation benefit is not sourced to any extent from contributions made into a superannuation fund or earnings on such contributions, the benefit will consist wholly of an element untaxed in the fund.

The Government superannuation scheme, unlike the civilian schemes, is a completely untaxed scheme. It does not have a separate and distinct fund for the accrual of benefits. All contributions are paid into, and all benefits are paid from, the government's Consolidated Revenue.

The 'Consolidated Revenue Fund', or simply 'Consolidated Revenue', is the term used for the main bank account of the government which is drawn upon whenever an appropriation is approved by Parliament and replenished through the collection of taxes, tariffs and excises.

A superannuation fund has employer and member contributions paid into it. The superannuation fund pays 15% tax on its income and is therefore a taxed fund.

On the other hand, Consolidated Revenue pays no income tax and is therefore referred to as an untaxed fund. Consequently, pension payments made from Consolidated Revenue are from an untaxed source.

Therefore the pension payments under the Government superannuation scheme consist wholly of an element untaxed in the fund.

Pensions paid under the Government superannuation scheme

Pensions paid under the Government superannuation scheme are 'defined benefit' pensions. That is to say, a pension payable to a person that is defined by reference to a number of factors that may include (but not limited to):

o the person's (or another person's) salary;

o the person's age at retirement;

o length of service;

o specified conversion factors.

Therefore, the actual amount of contributions a person makes to a defined benefit scheme will not usually determine the amount of the pension that is ultimately paid from the defined benefit scheme. However, in order to secure an entitlement to benefits under the defined benefit scheme the member is required to make personal contributions.

In the case of the Government superannuation scheme, members are required to make fortnightly contributions from their after tax salary. As noted earlier, these contributions are paid into Consolidated Revenue.

Consequently, pensions paid under the Government superannuation scheme will be comprised as follows:

· the tax free component which represents the member's compulsory contributions from their after tax salary; and

· the taxable component - untaxed element which is the balance of the pension payment.

Payment summary

You should receive a payment summary at the end of each financial year from the Government superannuation scheme in relation to the pension payments. The payment summary will show the different components of the pension which are taxed as discussed below.

Taxation treatment of a superannuation income stream from an untaxed fund where the recipient has reached age 60

The tax free component is not assessable income and not exempt income (section 301-10 of and paragraph 301-90(a) the ITAA 1997). It is not included as assessable income in your tax return.

The taxable component - untaxed element of the pension is included in assessable income and taxed at marginal rates plus Medicare levy (subsection 301-100(1) of the ITAA 1997).

However, a tax offset of 10% will apply to the taxable component (untaxed element) to reduce you tax liability (subsection 301-100(2) of the ITAA 1997).

You have received a lump sum payment of your pension in arrears in the 2010-11 income year. Please note that the 10% tax offset only applies after you turned 60 years of age.