Edited version of private advice

Authorisation Number: 1012646837283

Ruling

Subject: Low rate cap

Questions

1. How much tax would be paid on a lump sum superannuation withdrawal of X made by the taxpayer in 2013-14 income year?

2. Will this lump sum superannuation withdrawal of X made by the taxpayer in 2013-14 income year be treated as assessable income?

Answers

1. Nil

2. Yes

This ruling applies for the following periods

Year ending 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

1. You intend to make a lump sum superannuation withdrawal from your self-managed superannuation fund in June 2014. X of this amount will not be tax free.

2. You have reached your preservation age of 55 but will be under 60 years of age in the 2013-14 income year.

3. You are fully retired.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 301-20

Income Tax Assessment Act 1997 section 307-345

Income Tax Assessment Act 1997 subsection 307-345(2)

Income Tax Assessment Act 1997 subsection 307-345(3)

Income Tax Assessment Act 1997 section 960-285

Reasons for decision

Summary

If you make a lump sum superannuation withdrawal of X in the 2013-14 income year, you will have ($180,000 - X) remaining life cap, which is indexed each year. While no tax is payable on the X lump sum withdrawal, it is still classified as assessable income. As a result, the amount of X will be added to your other assessable income and can therefore affect your marginal tax rate for the 2013-14 income year.

Detailed reasoning

1. The low cap rate is dealt with by section 301-20 of ITAA 1997, which outlines the following conditions:

301-20 Superannuation lump sum-taxable component taxed at 0%

up to low rate cap amount, 15% on remainder

1. If you are under 60 years but have reached your preservation age when you receive a superannuation lump sum, the taxable component of the lump sum is assessable income.

2. You are entitled to a tax offset that ensures that the rate of income tax on the amount mentioned in subsection (3) does not exceed 0%.

3. The amount is so much of the total of the *taxable components included in your assessable income for the income year under subsection (1) as does not exceed your low rate cap amount (see section 307-345) for the income year.

4. You are entitled to a tax offset that ensures that the rate of income tax on the amount mentioned in subsection (5) does not exceed 15%.

5. The amount is so much of the total of the taxable components included in your assessable income for an income year under subsection (1) as exceeds your low rate cap amount for the income year.
Note: This amount will be nil if the total of the taxable components falls short of your low rate cap amount for the income year.

2. According to section 307-345 of ITAA 1997, the starting low rate cap amount was $140,000 in the 2007-08 income year. In accordance with section 960-285 of the ITAA 1997, the low rate cap amount is indexed in line with average weekly ordinary time earnings (AWOTE), in increments of $5,000 (rounded down).

3. The low cap rate in 2013-14 income year is $180,000, which means your taxed element of X will be under the low cap rate. Furthermore, you are under 60 years of age and have reached your preservation age. As such, section 301-20 of ITAA 1997 applies an offset to keep the amount of X you withdraw to 0% tax rate.

4. Subsection 307-345(2) of the ITAA 1997 applies such that once you make the withdrawal of X, you will then have ($180,000 - X) remaining life cap. The remaining life cap is indexed in line with AWOTE under subsection 307-345(3) of the ITAA 1997.

5. While there will be no tax paid on the X withdrawal, the amount will still be classified as assessable income. If you had other assessable income (before any deduction and offsets) you will add X to your other assessable income. As a result, the amount of X can affect your marginal tax rate.