Edited version of your private ruling

Authorisation Number: 1012477182299

Ruling

Subject: Superannuation lump sum benefit

Question

1. Are the series of payments received from a superannuation fund (the Fund) lump sum payments?

2. Will the payments be subject to tax?

Advice/Answer

1. Yes.

2. Yes.

This ruling applies for the following period

For the year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

In the 2010-11 income year, permanent disability benefits were made to you from the Fund on a monthly basis. These payments were treated as a superannuation income stream.

In early 2013, the Fund advised that:

· the Australian Taxation Office had determined that the disablement benefits such as the benefits you are receiving from the Fund, are not superannuation income streams under the law;

· the disablement benefit payment that you receive is required to be taxed as a superannuation lump sum rather than as a superannuation income stream payment;

· they are required to issue monthly rather than annual PAYG payment summaries which you will receive approximately 14 days after each payment; and

· the PAYG payment summaries differ from previous summaries, in that the taxable and tax free components are to be calculated on the basis that your disablement benefit payments are now superannuation lump sums.

The Fund advised that tax would be withheld from your new monthly income effective from early 2013.

The PAYG payment summary - superannuation lump sum for the year ending 30 June 2013 shows a taxable component - taxed element and a tax free component with no tax withheld.

The Fund is comprised of four divisions - two of which deal with defined benefits and two which deal with accumulation benefits.

The term 'Disablement' is defined in the Trust Deed of the Fund as a state of health which in the opinion of the Trustee renders a Member permanently incapable of performing duties or engaging in employment for which they are reasonably qualified by training and experience. It further requires that:

· the member has been absent from employment through injury or illness for a specified number of months within a specified number of consecutive months immediately prior to ceasing to be in the employment; and

· the Trustee is satisfied that the state of health is not due to or induced by any wilful action on the part of the member to obtain a benefit.

The Trust Deed provides for when disablement benefits are to be paid to a member in accordance with the first three Divisions (that is, the two defined benefits Divisions and one of the accumulation benefits Divisions).

You were advised by the Fund that the disablement benefits are being made to you under one of the defined benefits Divisions of the Trust Deed and that your benefits will cease when you reach age 65.

Disablement benefits being made under that defined benefits Division are referred to in a particular clause of the Trust Deed. Benefits are payable upon the disablement of a member prior to their normal retirement date. At a particular subclause it states that if a Member is entitled to a Disablement benefit under this clause, the Disablement benefit prior to age 65 will be an immediate pension payable until the Member's 65th birthday or earlier death at an annual rate. It then provides a formula to calculate the annual rate.

The following subclause of the Trust Deed deals with those members receiving disablement benefits who reach age 65. This subclause provides that if a Member is entitled to a Disablement Benefit under this clause, the Member may elect to receive one of a number of types of benefit upon reaching age 65. These include a single lump sum payment calculated under another clause or an immediate pension payable for the life of the Member at an annual rate calculated using a different formula than that used in respect of the benefits payable up to age 65.

The next subclause of the Trust Deed deals with those members receiving disablement benefits who cease to be disabled. This subclause provides that:

If a member ceases to be Disabled and does not return to active employment or elects to be treated as if they have ceased to be Disabled, the Member will be treated as if they had returned to active employment and immediately ceased to be in the Service of the Employer.

Under the terms of the Trust Deed, disablement benefits may be reduced if:

· the member receives or has received actual earnings from personal exertion;

· the Trustee is satisfied that the member is capable of earning some income from personal exertion in a suitable capacity having regard to their training and experience, and a suitable opportunity exists for earning such income;

· the member receives an amount under legislation, for example workers' compensation or similar payments; or

· the member receives an amount under any award or agreement relating to their employment with their employer.

The member's disablement benefit will cease if the member:

· fails to provide the Trustee with satisfactory proof of their continued disablement;

· no longer meets the definition of disablement as set out in the Trust Deed;

· reaches age 65 and qualifies for a retirement benefit;

· is approved for a terminal medical condition benefit; or

· dies.

You have advised that on reaching age 65 the disablement benefits will cease and you will then receive your retirement benefits.

Your entitlement to the disablement benefits commenced after 20 September 2007.

You are under preservation age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-15.

Income Tax Assessment Act 1997 Subsection 301-35(1).

Income Tax Assessment Act 1997 Subsection 307-5(1).

Income Tax Assessment Act 1997 Subsection 307-70(2).

Superannuation Industry (Supervision) Act 1993 Section 10.

Income Tax Assessment Regulations 1997 Regulation 995-1.01.

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(1).

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(9A).

Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(9A)(a).

Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(9A)(b).

Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(9A)(c).

Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(2)(a).

Reasons for decision

Summary

The disablement benefits you are receiving does not meet the standards under the Superannuation Industry (Supervision) legislation to be a pension for the purposes of that legislation. Therefore the benefits are not a superannuation pension or income stream for the purposes of the Income Tax legislation.

The disablement benefits form a series of superannuation lump sums. As a result, the taxable component - taxed element of the payments are included in your assessable income in the year they are received.

As you are under preservation age in the 2012-13 income year the whole amount of the taxable component is taxed at a maximum rate of 20% plus the Medicare levy.

Detailed reasoning

Superannuation income stream

A 'superannuation income stream benefit' is defined in subsection 307-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to have the meaning given by the regulations.

Regulation 995-1.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) provides, relevantly, that a 'superannuation income stream' means:

(a) an income stream that is taken to be:

(i) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or

…

(b) an income stream that:

(i) is an annuity or pension within the meaning of the SIS Act; and

(ii) commenced before 20 September 2007.

A 'pension' is defined in section 10 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) as follows:

pension, except in the expression old-age pension, includes a benefit provided by a fund if the benefit is taken, under the regulations, to be a pension for the purposes of this Act.

The SIS Act and the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations) regulate the various types of benefits that may be paid by a regulated superannuation fund (as defined in the SIS Act). In this context, the SIS Act defined the term 'pension' so as to include benefits that are taken to be a provision under the SIS Regulations.

Therefore, a benefit that commenced on or after 20 September 2007 must be a pension in accordance with subregulation 1.06(1) of the SIS Regulations in order to be a superannuation income stream under paragraph (a) of that definition in regulation 995-1.01 of the ITAR 1997.

Subregulation 1.06(1) of the SIS Regulations provides (amongst other things) that a benefit is taken to be a pension for the purposes of the SIS Act if it is provided under the rules of a superannuation fund that meet the standards of subregulation 1.06(9A) of the SIS Regulations.

There are generally four types of pensions that could meet the standards set out in subregulation 1.06(9A) of the SIS Regulations:

(a) a pension that has an account balance attributable to the beneficiary;

(b) two variations of pensions that do not have an account balance but meet the requirements of subparagraphs 1.06(9A)(b)(i) or 1.06(9A)(b)(ii); or

(c) a pension that meets the standards of subregulation 1.06(2) (including a variation with some exclusions relating to the circumstances in which the pension can be commuted or the cessation of pension payments made in respect of children).

Draft Taxation Ruling TR 2011/D3 sets out the Commissioner's preliminary view on a range of superannuation income stream issues. While TR 2011/D3 primarily considers account based pensions, paragraph 3 notes that the principles discussed will typically apply to other pension types payable under the SIS Regulations.

Paragraphs 85 through 87 of TR 2011/D3 provide that the rules of the superannuation fund must ensure that all of the requirements of subregulation 1.06(9A) of the SIS Regulations are met at all times in practice if a pension commenced on or after 20 September 2007 is to be a superannuation income stream. It is not sufficient for the rules to simply include a reference to, or reproduce possibly only in part, the terms of the standards. If the requirements are not met in full then, in substance, there is no superannuation income stream.

Disablement Pensions

As noted in the facts at a particular clause of the Trust Deed it provides for a Disablement benefit in the form of an immediate pension that is payable until the Member's 65th birthday (or earlier death). It then provides a formula to calculate the annual rate.

Upon reaching age 65 the Member may elect to receive an immediate pension payable for the life of the Member. This benefit is determined on a different basis from the disablement pension payable prior to age 65 and cannot be considered to be a continuation of the pension payable prior to this age.

Accordingly, it is considered the disablement pension payable prior to age 65 ceases at that age.

Disablement Pensions commencing on or after 20 September 2007 and payable before a member's 65th birthday

As the Fund's members do not pay any identifiable consideration to be entitled to receive benefits under one of the defined benefits disablement pensions, it is considered that the disablement pensions do not have an account balance or a purchase price. Hence, the pension does not meet the requirements of paragraph 1.06(9A)(a) or subparagraphs 1.06(9A)(b)(i) and 1.06(9A)(b)(ii) of the SIS Regulations.

The defined benefit disablement pension payable before a member's 65th birthday, ceases at that age and a new pension or lump sum becomes payable at that time. Further, the pension payable before age 65 may, under specific provisions of the Trust Deed, also cease at any time. Hence, the pension cannot satisfy paragraph 1.06(2)(a) of the SIS Regulations which requires that the pension is payable for the life of the primary beneficiary.

The disablement pension may also be subject to a reduction in the annual pension payment amount well in excess of any likely reduction in the Consumer Price Index. Hence, the pension also does not meet the requirement of paragraph 1.06(2)(c) of the SIS Regulations.

As the standards of subregulation 1.06(2) of the SIS Regulations are not met, the pension does not meet the requirements of subparagraphs 1.06(9A)(b)(iii) or 1.06(9A)(iv).

Therefore, the specified defined benefit disablement pension that commenced on or after 20 September 2007 and is payable before a member's 65th birthday does not meet the standards of subregulations 1.06(2) or 1.06(9A) of the SIS Regulations. Accordingly, is not a superannuation income stream for the purposes of subsection 307-70(2) of the ITAA 1997.

Superannuation Lump Sum Payments

Lump sum payments made to a member from a superannuation fund are called superannuation lump sum benefits.

A superannuation lump sum is defined in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream. As noted earlier, the term 'superannuation income stream' is defined in regulation 995-1.01 of the ITAR 1997.

A superannuation benefit is defined in subsection 307-5(1) of the ITAA 1997. It includes a superannuation member benefit, which is defined in Column 2 of Item 1 of the table set out in that section as:

A payment to you from a superannuation fund because you are a fund member.

In this case, you are receiving disablement benefits made to you by the Fund. As previously discussed, these benefits are not a superannuation income stream but rather, superannuation lump sum payments.

The disablement benefits are made to you by the Fund because you are a fund member. Hence these payments are superannuation benefits within the meaning of Column 2 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997.

Therefore, the disablement benefits are superannuation lump sum payments within the meaning of section 307-65 of the ITAA 1997. Certain payments are specifically excluded from the definition of a superannuation benefit. These are set out in section 307-10. However, none of these apply to your payments.

Consequently, the disablement benefits are subject to taxation as superannuation lump sum benefits under the provisions of the ITAA 1997.

Superannuation lump sum 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.

Superannuation funds will calculate these components for each benefit that is paid.

Section 301-15 of the ITAA 1997 states:

If you are under 60 years but have reached your preservation age when you receive a superannuation benefit, the tax free component of the benefit is not assessable income and is not exempt income.

For a person born before 1 July 1960, their preservation age is age 55.

Subsection 301-35(1) of the ITAA 1997 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.

In this case you are under preservation age in the 2012-13 income year when the payments are being made. Therefore, the payments made to you in the 2012-13 income year are included in your assessable income. However, 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 addition the Medicare levy may also apply. For the 2012-13 income year the Medicare levy is 1.5%.

The tax-free component of the payments do not count towards your assessable income, that is, they are tax-free.

On reaching preservation age and while you are under age 60 your superannuation lump sum benefits up to the low rate cap amount is taxed at 0%. Amounts above the low rate cap amount is taxed at 16.5% (including the Medicare levy).

Please note, the Fund is obliged to withhold tax from the taxable component of the disablement benefit.