Edited version of your private ruling

Authorisation Number: 1012480813570

Ruling

Subject: Superannuation lump sum payment

Question

Will the superannuation lump sum payment to be made to the fund member who has reached 60 years of age be subject to income tax?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

The individual is the sole member and beneficiary of the superannuation fund (the Fund). The Fund is a complying self-managed superannuation fund.

The Fund has a corporate trustee. The fund member is a director of the corporate trustee of the Fund. The fund member will turn 60 years of age on the Saturday before the end of the 2012-13 income year.

The fund member has cash and in-specie benefits in the Fund. The fund member intends to access and cash all of their entitlements in the Fund after they turn 60 years of age.

The Fund's bank account will be closed on the Friday before the end of the 2012-13 income year. As described in the Notice of Private Ruling issued to the fund member during the 2012-13 income year, on this date the final balance of this bank account will be calculated and the Fund will write a cheque in favour of the fund member for the balance of the closed bank account. The fund member states in this application that the cheque issued to them will be held by the Fund until the following Sunday as a cash cheque.

The fund member intends to close the Fund. On this date all of the assets of the Fund will be transferred to the fund member, including the cash cheque.

The fund member will deposit the cheque into their bank account on the following Monday.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-10.

Income Tax Assessment Act 1997 Section 307-5.

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

Income Tax Assessment Act 1997 Section 307-15.

Income Tax Assessment Act 1997 Subsection 307-15(1).

Income Tax Assessment Act 1997 Paragraph 307-15(2)(a).

Income Tax Assessment Act 1997 Section 307-65.

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.01(1).

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.18(1).

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.19(1).

Superannuation Industry (Supervision) Regulations 1994 Schedule 1.

Reasons for decision

Summary

On the facts provided, the superannuation lump sum payment will not be subject to tax when the fund member receives the payment on the day after their 60^th birthday.

Subject to the fund member satisfying the necessary condition for the release of the member benefit, the superannuation lump sum payment will be tax-free in their hands.

Consequently, there will be no income tax liability in respect of this payment.

Detailed Reasoning

The taxation treatment of superannuation lump sums is set out in Divisions 301 and 307 of the Income Tax Assessment Act 1997 (ITAA 1997).

Superannuation benefit

A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream.

Section 307-5 of the ITAA 1997 defines what is a 'superannuation benefit'. A superannuation benefit is a payment described in the table contained in subsection 307-5(1) and will either be a superannuation member benefit or a superannuation death benefit.

Item 1, column 2 of the table contained in subsection 307-5(1) of the ITAA 1997 defines a 'superannuation member benefit' as being:

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

As noted in the facts, the bank account of the Fund will be closed on the Friday. On this date the bank will write a cheque to the fund member for the final balance of this bank account. The cheque issued to the fund member will be held by the Fund until Sunday as a cash cheque.

The Fund will be closed on the Sunday, and all of the assets of the Fund will be transferred to the sole member of the Fund, on this date. The assets of the Fund which will be transferred to the fund member will include the cash cheque issued by the bank for the closing balance of the bank account of the Fund.

The fund member's benefit is a lump sum which will be paid part in cash and part in-specie. As such, the entire benefit is a lump sum superannuation benefit. The benefit will be paid to the fund member because they are the only member of the Fund.

Therefore, the member benefit is a superannuation benefit as defined under subsection 307-5(1) of the ITAA 1997.

Subsection 307-15(1) of the ITAA 1997 provides that section 307-15 applies for the purposes of determining:

(a) whether a payment is a superannuation benefit; and

(b) whether a superannuation benefit is made to a person, or received by a person.

Paragraph 307-15(2)(a) of the ITAA 1997 provides that a superannuation lump sum payment is treated as being made to a person, or received by a person, if the payment is made for his or her benefit. In this instance, the facts show that the lump sum which will be represented by the cheque for the closing balance of the Fund's bank account, is a payment which will be made for the benefit of the fund member.

Therefore, as the superannuation lump sum payment will be made to the fund member because they are the sole member of the Fund, the entire lump sum payment is a superannuation benefit as defined under subsection 307-5(1) of the ITAA 1997.

Treatment of a superannuation benefit where the recipient is age 60 or above

The tax treatment of a superannuation benefit depends on the age of the person at the time the superannuation benefit is received and, for persons under 60 years of age, whether or not the person has reached their preservation age.

Preservation age is the age at which retirees can access their superannuation benefits. For a person born before 1 July 1960 their preservation age is 55 years.

The fund member's preservation age is 55 years.

However, because the fund member is receiving the member benefit after they turn age 60, their preservation age is not relevant in this situation.

Section 301-10 of the ITAA 1997 applies to member benefits where the recipient is age 60 or above. Section 301-10 states:

If you are 60 years or over when you receive a superannuation benefit, the benefit is not assessable income and is not exempt income.

Taxation treatment of the superannuation lump sum benefit

The fund member will turn age 60 on the Saturday. As noted above, the closure of the Fund and transfer of the Fund's assets will occur on the following day. The fund member states that all of the Fund's assets, including the cheque for the superannuation lump sum, will be transferred to them on this date. As such, the transfer of these assets will occur on the next day after their 60^th birthday.

A private ruling for the 2012-13 income year was issued to the fund member during the 2012-13 income year. In the private ruling it is stated that the fund member is taken to have received the superannuation benefit in this income year. This is because the fund member is taken to have received the superannuation payment on the date the cheque for the lump sum payment is handed to them, as they will receive a benefit from the payment being applied or dealt with on their behalf.

The cheque for the lump sum payment will be held by the Fund until the Sunday, and it will be received by the fund member in their own right on this date. Accordingly, the fund member will receive the payment on the next day after their 60^th birthday.

From the foregoing it is evident that the fund member will be receiving the member benefit after they turn age 60. Because the fund member will have reached age 60 when they receive the superannuation benefit, the benefit is not assessable income and is not exempt income in accordance with section 301-10 of the ITAA 1997.

However, the fund member must satisfy a condition of release of benefits specified in the Superannuation Industry (Supervision) Regulations 1994, to enable the Fund to cash the benefit.

Therefore, provided the fund member satisfies the relevant condition of release of benefits when the benefit is cashed, the superannuation lump sum payment will be non-assessable income and non-exempt income under section 301-10 of the ITAA 1997.

Conclusion

In view of all the above, the superannuation lump sum payment will not be subject to tax as the fund member will receive the cheque for the payment after they turn 60.

Rather, the superannuation lump sum will be tax-free in the fund member's hands, provided they satisfy the necessary condition for the release of the member benefit.

Consequently, there will be no income tax liability in respect of the member benefit.

Further issues for the fund trustee to consider

As previously advised, the fund member must satisfy the necessary condition for the release of their member benefit, to enable the Fund to cash the member benefit.

Subdivision 6.3.1 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) governs the ability of regulated superannuation funds (such as the L R E Superannuation Fund) to cash member benefits.

Subregulation 6.18(1) of the SIS Regulations provides that the member's preserved benefits in the Fund can be cashed on or after the satisfaction by the member of a condition of release. Similarly, subregulation 6.19(1) of the SIS Regulations provides that the member's restricted non- preserved benefits in the Fund can be cashed on or after the satisfaction by the member of a condition of release.

Under subregulation 6.01(1) of the SIS Regulations 'condition of release' is defined as meaning:

a condition of release specified in Column 2 of Schedule 1 and … a member of a fund is taken to have satisfied a condition of release if the event specified in that condition has occurred in relation to the member.

Also under subregulation 6.01(1) of the SIS Regulations 'cashing restriction' in relation to a condition of release is defined as meaning:

a cashing restriction specified in Column 3 of the item in Schedule 1 that mentions the condition of release.

The various conditions for the release of benefits from regulated superannuation funds are listed in Column 2 of Schedule 1 of the SIS Regulations. The cashing restriction relating to each condition of release are listed in Column 3 of Schedule 1.

The conditions of release specified in Column 2 of Schedule 1 include, but are not restricted to, retirement. The condition of release relating to retirement has no cashing restriction on the payment of benefits.

In light of the above, the fund member must ensure that the event specified in the applicable condition for the release of their member benefit has in fact occurred, to enable the Fund to cash the member benefit in accordance with the SIS Regulations.