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Ruling

Subject: Superannuation lump sum payment - early release of benefits

Question

Will the Commissioner exercise discretion to reduce the rate of tax payable on a superannuation lump sum arising from an early release of benefits of the non-member spouse?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances
You are under 55 years of age.

Following a court ordered post separation property settlement you became entitled to a superannuation split under Section 90MT (1)(a) of the Family Law Act 1974 . The entitlement was calculated in accordance with part 6 of the Family Law (Superannuation) Regulations 2001 using a base amount at the date of the court order of A.

In these Orders you were also instructed to apply to the superannuation fund for early release of the abovementioned preserved benefits.

During the 2010-11 income year, your application for early release was approved and you were entitled to a gross payment of B.

As you were under your preservation age this payment was subject to tax at 30% which amounted to C. As such, you received a net payment of D.

This amount was entirely an untaxed element of a taxable component.

You have stated that your main concern was not having the opportunity to have any input regarding the timing of the payment being made before the early release was processed. You have advised that had you known the application for early release was being processed, you would have delayed the payment for a short period in order to attract the 15% tax rate plus Medicare instead of the 30% tax rate plus Medicare as you would have reached preservation age.

You have stated that you were expecting a minimum payment of A as per the court orders.

You have requested that due to the number of personal circumstances including housing affordability, the health of your child and of yourself, and that you were not far from preservation age, it is warranted that special consideration be given and the tax rate on your payment be reduced from 30% to 15%.

You have stated this reduction would ensure the net payment was more in line with the minimum base payment of A you were entitled to in accordance with part 6 of the Family Law (Superannuation) Regulations 2001.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 301-20(1)
Income Tax Assessment Act 1997 Subsection 301-20(2)

Income Tax Assessment Act 1997 Subsection 301-115
Income Tax Assessment Act 1997 Section 307-215

Income Tax Assessment Act 1997 Section 307-345

Reasons for decision

Summary

The superannuation lump sum benefit you received comprised wholly of a taxable component. As this taxable component was entirely an element untaxed in the fund and you were under preservation age when it was paid, the payment is subject to tax at 30% plus Medicare levy.

The Commissioner does not have any discretionary powers to waive the impositions of tax in respect of an item of income.

Detailed reasoning

Superannuation lump sum payments

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:

· an element taxed in the fund; and/or
an element untaxed in the fund.

Taxable component

The taxable component of a superannuation lump sum can consist of an element taxed in the fund and /or an element untaxed in the fund. In your case, the taxable component of the superannuation benefit was wholly comprised of an element untaxed in the fund.

The tax treatment of the untaxed element of a taxable component depends on the age of the taxpayer.

As you were below your preservation age, the untaxed element of the lump sum is assessable income pursuant to subsection 301-115 of the Income Tax Assessment Act 1997 (ITAA 1997). The tax rate that applies to this payment is 30 % plus Medicare levy.

You have raised concerns that you were not far from reaching preservation age. It is therefore important to note that had you received the payment at preservation age, yet were below 60 years of age, the lower tax rate of 15% plus Medicare would only have applied to the amount up to the low rate cap amount; being $160,000 for the 2010-11 income year. As such, the amounts exceeding $160,000 would attract the 30% tax rate plus Medicare regardless of whether you received the payment before or after you reached preservation age.

Further, it should be noted that the Commissioner does not have any discretionary powers to waive the impositions of tax in respect of an item of income. As such, the correct amount of tax has been withheld from your superannuation lump sum payment.