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Ruling

Subject: Superannuation lump sum - disability superannuation benefit

Question 1

Can the tax free component of the superannuation lump sum be increased by applying the modification for disability benefits?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are under 55 years of age.

You commenced your employer superannuation fund membership a number of years ago.

You had a period of contributory service until you left that employment.

You retained a preserved employer benefit which, according to the fund balance summary statement as at 30 June 2011 and your member benefit balance /account balance was $0.

You were diagnosed with an illness.

Subsequently, you were certified by two medical practitioners, that you had ceased to be gainfully employed because you suffered a permanent incapacity and was unlikely to ever again be able to engage in gainful employment for which you are reasonably qualified by education, training or experience.

You commenced to receive a Government disability support pension.

You applied to your superannuation fund for the early release of your preserved employer benefits by way of an application for "Early release of preserved employer benefits on the grounds of invalidity before age 55".

The Board of Trustees of your superannuation fund were required to decide, together with the supporting medical certification provided, that by reason of your physical or mental incapacity, you had become unlikely ever to be able to work again in employment for which you were reasonably qualified by education, training or experience or for which you could be reasonably be qualified after retraining.

You received approval of the early release of your preserved employer benefits on the grounds of invalidity and received a lump sum payment from your superannuation fund.

You also received a PAYG payment summary - superannuation lump sum ($X) from your superannuation fund with the following components:

· Tax free-component $A

· Taxable component

· untaxed element $B

· Total Tax withheld $C

You questioned the superannuation fund in relation to the total amount of tax withheld from the superannuation lump sum by and they advised you to obtain a ruling from the Australian Taxation Office (ATO).

You contacted the fund administrator to seek confirmation as to whether or not they applied the modification for disability superannuation benefits under subsection 307-145(3) of the ITAA 1997 when they calculated the tax-free component of the lump sum received.

You advised us that the fund administrator had verbally confirmed that they did not apply the modification when calculating the tax-free component of the superannuation lump sum payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 307-120(3).

Income Tax Assessment Act 1997 Subsection 307-145(3).

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

Reasons for decision

Summary

The tax-free component of the superannuation lump sum received should be increased by applying the modification for disability benefits when calculating the components of the superannuation lump sum.

The tax-free component is therefore increased from $A to $D and the taxable component is reduced from $B to $E.

Accordingly the details of the PAYG payment summary -superannuation lump sum should be as follows:

· Tax free-component $D

· Taxable component

· untaxed element $E

Detailed reasoning

Disability superannuation benefit

A disability superannuation benefit is defined under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

disability superannuation benefit means a superannuation benefit if:

· the benefit is paid to a person because he or she suffers from ill-health (whether physical or mental); 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 a capacity for which he or she is reasonably qualified because of education, experience or training.

If a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed (that is, their future employment service period).

The above is referred to as the modification for disability superannuation benefits if the benefit is a superannuation lump sum and a disability superannuation benefit.

Medical certification for disability superannuation benefits

On the basis of the information provided, it can be established you have received medical reports from two legally qualified medical practitioners which meet the requirements of a disability superannuation benefit as defined in subsection 995-1(1) of the ITAA 1997.

Superannuation benefit

A superannuation benefit includes a superannuation fund payment made to you from a superannuation fund because you are a fund member. When it is paid to you as a lump sum, this is referred to as a superannuation lump sum payment.

The components of a superannuation benefit are worked out under section 307-120 of the ITAA 1997 and will consist of the tax free component and the taxable component.

Modification for disability superannuation benefits

Under section 307-145 of the ITAA 1997, where a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed.

As the payment of the superannuation lump sum from your superannuation fund is also a disability superannuation benefit, therefore, modification for disability benefits under section 307-145 will apply to increase the original tax-free component ($A) by using the following details to calculate the amount of tax free disability modification:

Amount of the superannuation lump sum

Tax free component

Date service period commenced:

Date service period ended

Date you stopped being capable of being

gainfully employed

Your date of birth

Last retirement day (age 65) Calculation

Amount of superannuation lump sum x days to retirement/service days + days to retirement

=Tax free disability modification

Tax free component is increased to $D

Taxable component (untaxed element) reduced to $E