Edited version of your private ruling

Authorisation Number: 1012474063917

Ruling

Subject: Service period in relation to superannuation lump sum

Question

Will the service period in relation to a superannuation lump sum benefit which accrued during the taxpayer's period of most recent current employment also include an earlier period of employment with another unrelated employer?

Advice

No.

This ruling applies for the following periods:

2012-13 income year

The scheme commences on:

N/A

Relevant facts and circumstances

You joined a government service in the late 19XXs and became a member of a public-sector superannuation scheme (the Scheme).

You received approval from the government department concerned in the late 19XXs for the recognition of your prior service with an unrelated employer. for long service leave purposes. That prior service was for the period from a day in the early 19XXs to a date several days prior to joining the Scheme. No transfer value was paid into the Scheme in respect of your period of service with the unrelated employer.

You resigned from the government service during the 20XX-YY income year.

On resignation, you received from the Scheme two superannuation lump sums that represented, respectively, the value of the commuted portion of your future retirement benefit and your productivity benefit. You rolled over the lump sums to a public-offer superannuation fund shortly afterwards.

On both of the roll-over benefit statements issued by the Scheme, the 'service period start date' was stated as a day in the late 1970s, the date of your joining the government service. You queried if it should be the date on which you started working for the unrelated employer in the early 1970s.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 27A(1)

Income Tax Assessment Act 1997 Section 306-10

Income Tax Assessment Act 1997 Section 307-210

Income Tax Assessment Act 1997 Section 307-225

Income Tax Assessment Act 1997 Subsection 307-225(2)

Income Tax Assessment Act 1997 Subsection 307-225(4)

Income Tax Assessment Act 1997 Section 307-400

Reasons for decision

Summary of decision

The 'service period start date' stated on both of the rollover benefits statements is correct.

Detailed reasoning

Service period

Subsection 307-400(1) of the Income Tax Assessment Act 1997 (the ITAA 1997) states that:

The service period for a superannuation lump sum consists of each day that is in the period worked out under the table or a period covered by subsection (2).

Item 1 of the table in subsection 307-400(1) of the ITAA 1997, which applies to a lump sum that is paid by a superannuation fund, states that the service period includes:

The following:

(a) if some or all of the superannuation lump sum accrued while you were, or the deceased was, a member of the superannuation fund - the period of membership;

(b) if some or all of the superannuation lump sum accrued while you were, or the deceased was, employed (or you or the deceased held office) - each period of employment (or of holding office) to which the lump sum relates. (bold emphasis added)

Subsection 307-400(2) of the ITAA 1997 goes further to explain that:

The service period for the superannuation lump sum (the later lump sum) also includes each day that is in the service period for an earlier superannuation lump sum if some or all of the later lump sum is attributable, directly or indirectly, to some or all of the earlier lump sum through the payment of one or more roll-over superannuation benefits.

Paragraph 2.119 of the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 states, in relation to the re-written provision that replaces 'eligible service period' formerly used in the Income Tax Assessment Act 1936 (the ITAA 1936), that:

Service periods are used to calculate the pre-July 1983 amounts and adjust the tax free component of lump sum disability superannuation benefit payments and the element untaxed in the fund of superannuation death benefit payments. The definition of a 'service period' reflects the existing arrangements.

The term 'eligible service period' was defined in former subsection 27A(1) of the ITAA 1936. In particular, paragraph b of that former definition stated:

where the relevant eligible termination payment is an eligible termination payment by virtue of paragraph (b)¹, (ba), (c), (ca), (da), (db), (ga) or (gb) of the definition of eligible termination payment - the period that is the relevant service period, or the aggregate of the periods that are relevant service periods, in relation to the relevant eligible termination payment; …

The term 'relevant service period' was, in turn, defined in former subsection 27A(1) of the ITAA 1936. In particular, paragraph (d) of that former definition stated, that 'relevant service period', in relation to an eligible termination payment, in relation to a taxpayer, means:

where the eligible termination payment is attributable in whole or in part to an earlier eligible termination payment or earlier eligible termination payments - the period that is the eligible service period in relation to that earlier eligible termination payment, or the aggregate of the periods that are the eligible service periods in relation to the earlier eligible termination payments, as the case maybe.

It is further noted that the relevant sections of the Act which governs the operation of the Scheme respectively deal with transfer values payable in respect of previous employment and members who pay transfer values to the government concerned. The effect of these provisions is that where such a transfer value is paid to the trustee of the Scheme in respect of a member, the member's entitlements under the Scheme are increased.

No transfer value in respect of your service with the unrelated employment was paid by you, or on your behalf, to the Scheme. It is also noted that the calculation of your future retirement benefits was based on the number of your completed years of effective service and your rate of pay at retirement. The calculation of these benefits did not take into account any prior service with the unrelated employer.

Therefore, it is evidently clear that the superannuation lump sum you received accrued solely during the period when you were a member of the Scheme.

Accordingly, under either:

(a) paragraph (a) or (b) of the description given to 'service period' under item 1 of subsection 307-400(a) of the ITAA 1997; or

(b) paragraph (d) of the definition of 'relevant service period' under former subsection 27A(1) of the ITAA 1936;

your completed years of effective service were, in the Commissioner's opinion, confined to those years in which you were in the government service and could not include the period of your service with the unrelated employer.

However, it is noted that when calculating the crystallised segment of your benefit entitlement that was rolled over to the public-offer fund, the earlier start date of your service with the unrelated employer was used. This is confirmed in the relevant correspondence you provided.

Section 307-210 of the ITAA 1997 states:

The tax-free component of a *superannuation interest is so much of the *value of the interest as consists of;

(a) the *contributions segment of the interest; and

(b) the *crystallised segment of the interest.

Subsection 307-220(1) of the ITAA 1997 defines the term 'contributions segment' as follows:

The contributions segment of a *superannuation interest is so much of the *value of the interest as consists of contributions made after 1 July 2007 to the extent that they have not been and will not be included in the assessable income of the superannuation provider in relation to the superannuation plan in which the interest is held.

Section 307-225 of the ITAA 1997 states, in part:

(1) To work out the crystallised segment of a *superannuation interest, first assume that:

(a) an eligible termination payment had been made in respect of the holder of the interest just before 1 July 2007; and

(b) the amount of the eligible termination payment had been equal to the *value of the interest at that time

(2) The crystallised segment of the *superannuation interest is so much of the *value of the interest as consists of the total of the following components of the eligible termination payment:

(a) the concessional component;

(b) the post-June 1994 invalidity component;

(c) the undeducted contributions;

(d) the CGT exempt component;

(e) the pre-July 83 component.

In the present case it would appear that the crystallised segment of your superannuation interest in the Scheme was determined on the basis of a notional eligible termination payment on the day of your resignation rather than a notional eligible termination payment on 30 June 2007, as is required under the legislation. Consequently, as the amount of the 30 June 2007 notional eligible termination payment would probably have been less than the resignation-day notional eligible termination payment, the crystallised segment as at 1 July 2007 would also have been a lesser amount.

It is also not clear whether the undeducted contributions you made to the Scheme pre 1 July 2007 were included in the crystallised segment as at 1 July 2007 so that what was included in the contributions segment of the tax free component of your benefit was entirely those contributions you made to the Scheme after 30 June 2007.

Without any information about the value of your superannuation interest, and its components, as at 30 June 2007, the Commissioner is unable to ascertain the actual amount of the 30 June 2007 notional eligible termination payment and the actual amount of the crystallised segment as at 1 July 2007.

Accordingly, you will need to approach the administrator of the Scheme, to ascertain if the amount in respect of the crystallised segment as at 1 July 2007 was correct.

Further, the number of days in a relevant service period for a superannuation benefit is a question of fact. If a benefit did not accrue during a particular relevant service period then the eligible service period for the superannuation benefit will not include that earlier service period.

It should be noted that the Commissioner does not have any discretionary powers in relation to the determination of relevant service periods.

¹ Former paragraph (b) of the definition of 'eligible termination payment' in former subsection 27A(1) of the ITAA 1936 referred essentially to "any payment made from superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund".