Edited version of your written advice

Authorisation Number: 1012934966119

Date of advice: 13 January 2016

Ruling

Subject: Superannuation income streams

Questions

1. Is the full amount of the taxable component withdrawn from the taxpayer's transition to retirement (TTR) income stream assessable income under section 301-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Can the taxpayer claim a deduction in the relevant income year for the tax paid in relation to an amount withdrawn from their TTR income stream to pay for work-related legal expenses?

3. Can the taxpayer claim a deduction for any part of the amounts withdrawn from their TTR income stream to make up for shortfalls in income as a result of being stood down from active duty?

Answers

1. Yes

2. No

3. No

This ruling applies for the following period:

Income year ended 30 June 20XX; and

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer was stood down from active duty by their employer during the 20XX-XX income year.

Since then, the taxpayer has been engaged in ongoing legal action against the employer.

During the 20XX-XX income year, the taxpayer engaged a law firm to appear in court against the employer.

The taxpayer has provided a Trust Account Statement from the law firm showing the total amount of legal fees billed in the 20XX-XX income year.

The Australian Taxation Office has previously determined that the legal fees were deductible as a work-related expense in the 20XX-XX income year.

The taxpayer withdrew funds from their TTR income stream account to pay for these legal expenses. The amount withdrawn was in excess of the amount billed in order to account for the taxation of superannuation income stream benefits.

In addition, the taxpayer was no longer able to work overtime as a result of the stand down notice. This resulted in a loss of income.

The taxpayer also withdrew funds from their TTR income stream account to make up for this shortfall in income. These additional withdrawals were reported in the taxpayer's tax returns for the 20XX-XX and 20XX-XX income years. Those tax returns also indicate that the entirety of the taxable component was comprised of a taxed element.

The taxpayer's application outlined their position as follows:

• There should be no tax on the amounts withdrawn from the taxpayer's TTR income stream account since these withdrawals were for the purposes of funding work-related expenses.

• Alternatively, the amount withdrawn from the taxpayer's TTR income stream account for legal expenses in excess of amount billed (i.e. the amount of tax paid in relation to the withdrawal) should be tax deductible as a work-related expense.

• In addition, the amounts withdrawn from the taxpayer's TTR income stream account to make up for shortfalls in income should also be tax deductible as a work-related expense.

During the relevant income years, the taxpayer was over their preservation age but under than 60 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-5

Income Tax Assessment Act 1997 Division 301

Income Tax Assessment Act 1997 Section 301-25

Reasons for decision

Summary

The full amount of the taxable component withdrawn from the taxpayer's TTR income stream account must be included in the taxpayer's assessable income under section 301-25 of ITAA 1997 for the 20XX-XX and 20XX-XX income years.

The taxpayer cannot claim a deduction under either section 25-5 of the ITAA 1997 or section 8-1 of the ITAA 1997 for the tax paid in relation to amounts withdrawn from their TTR income stream account.

The taxpayer cannot claim a deduction under section 8-1 of the ITAA 1997 for any part of the amounts withdrawn from their TTR income stream account to make up for shortfalls in income as a result of being stood down from active duty.

Detailed reasoning

Taxation of superannuation income stream benefits

The taxation treatment of superannuation member benefits paid from complying plans is outlined in Division 301 of the ITAA 1997.

The tax treatment of the taxable component of a superannuation member benefit depends on the age of the member when they receive the benefit, the elements that comprise the component (i.e. taxed or untaxed) and the form of the payment (i.e. lump sum or income stream).

During the 20XX-XX and 20XX-XX income years, when the relevant income stream benefits were received, the taxpayer was over their preservation age of 55 but under 60 years of age. The facts of the case also indicate that the entirety of the taxable component was comprised of a taxed element.

The relevant taxation provision is thus section 301-25 of the ITAA 1997 which states:

301-25(1) If you are under 60 years but have reached your *preservation age when you receive a *superannuation income stream benefit, the *taxable component of the benefit is assessable income.

301-25(2) You are entitled to a *tax offset equal to 15% of the *taxable component of the benefit.

The legislation in this section is quite specific and clearly states that taxpayers who are within a certain age range must include the amount of the benefit in their assessable income. As such, extraneous matters, such as the taxpayer's personal circumstances or the taxpayer's purpose for withdrawing the benefit, cannot be taken into account in determining the tax treatment.

Furthermore, there is no discretion under Division 301 of the ITAA 1997 or anywhere else in the tax legislation that would allow the Commissioner to alter the rate of income tax prescribed by section 301-25 of the ITAA 1997. As the taxpayer was under 60 years of age but over their preservation age of 55 when they received the income stream benefit, the entirety of the taxable component of the benefit must be included in the taxpayer's assessable income for the relevant income years.

Deductibility of certain tax related expenses

Section 25-5 of the ITAA 1997 allows a deduction for certain tax related expenses. However, paragraph 25-1(2)(a) of the ITAA 1997 states that you cannot claim a deduction under this section for amounts incurred to pay tax.

In the taxpayer's case, the taxpayer has incurred tax on an amount withdrawn from their TTR income stream account used to pay legal fees. Under section 25-5 of the ITAA 1997, the taxpayer is not entitled to claim a deduction for the tax paid.

Deductibility of work-related expenses

Under section 8-1 of the ITAA 1997 you can claim deductions for expenses 'to the extent' they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

You cannot claim deductions under section 8-1 of the ITAA 1997 for expenses 'to the extent' to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income.

In the taxpayer's case, the taxpayer has incurred tax on amounts withdrawn from their TTR income stream account. These amounts have been used to pay legal fees and to make up a shortfall in income.

The tax levied on the amounts withdrawn from the taxpayer's TTR income stream account was incurred as a result of accessing the funds and not in gaining or producing them. Therefore, the taxpayer is not entitled to claim a deduction for the tax incurred on the amounts withdrawn under section 8-1 of the ITAA 1997.

Similarly, the amounts withdrawn to make up a shortfall in the taxpayer's income were not incurred in gaining or producing assessable income and therefore not an allowable deduction under section 8-1 of the ITAA 1997. The deductibility of any work related expenses that the funds may have been used to pay has already been addressed in a previous objection.