Edited version of your written advice

Authorisation Number: 1012924454535

Date of advice: 8 December 2015

Ruling

Subject: Invalidity segment

Question

Does section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to increase the tax free component of the superannuation lump sum benefit received by a person (Your client) from a superannuation fund?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2015

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

During the 19XX income year, Your Client became a member of a complying superannuation fund (the Fund).

Several years later, Your Client commenced employment with their former employer (the Employer).

Subsequently, Your Client was medically discharged by the Employer as a result of injuries sustained in the course of their employment.

Two medical practitioners have certified that Your Client is unlikely to ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training due to ill-health.

During the relevant income year, Your Client received two lump sum payments from the Fund. Each payment comprised of:

• Tax free-component; and

• Taxable component - Taxed element

Relevant legislative provisions

Income Tax Assessment Act 1997 section 301-1

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Act 1997 section 307-120.

Income Tax Assessment Act 1997 section 307-145.

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Summary

Benefits received by Your Client from the Fund are disability superannuation benefits as defined in subsection 995-1(1) of the ITAA 1997. Accordingly, section 307-145 of the ITAA 1997 applies to determine the tax free components of these benefits.

Detailed reasoning

Superannuation benefit

Payments that are superannuation benefits are set out in subsection 307-5(1) of the ITAA 1997 and include a payment made to person from a superannuation fund because the person is a member of the fund. Consequently, payments to Your Client from the Fund are superannuation benefits.

In accordance with subsection 307-120(1) of the ITAA 1997, a superannuation benefit may consist of the tax free component and the taxable component.

The tax free component of a superannuation benefit is not assessable income and is not exempt income. The tax treatment of the taxable component varies depending on the age of the member when they receive the benefit (section 301-1 of the ITAA 1997).

Modification for disability superannuation benefits

Under section 307-145 of the ITAA 1997, where a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed.

A disability superannuation benefit is defined under subsection 995-1(1) of the ITAA 1997 as follows:

disability superannuation benefit means a superannuation benefit if:

(a) the benefit is paid to a person because he or she suffers from ill-health (whether physical or mental); and

(b) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

In this case, the two medical professionals have certified that, because of Your Client's ill-health, Your Client is unlikely to ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. Therefore, superannuation benefits received by Your Client from the Fund are disability superannuation benefits for the purposes of section 307-145 of the ITAA 1997.

In accordance with section 307-145 of the ITAA 1997, the tax free component of a disability superannuation benefit is increased by an amount worked out by applying the following formula:

Amount of benefit    ×

Days to retirement     Service days  +  Days to retirement

where:

days to retirement is the number of days from the day on which the person stopped being capable of being *gainfully employed to his or her *last retirement day.

service days is the number of days in the *service period for the lump sum.

As it relates to superannuation fund payments, 'service period' is defined in subsection 307-400(1) of the ITAA 1997 as:

(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.

Based on the above, in Your Client's case, the service period is taken to be from the date Your Client joined the Fund to the date of payments.