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Authorisation Number: 1012942135153

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Date of advice: 27 January 2016

Ruling

Subject: Superannuation lump sum benefit - Total and Permanent Disability

Questions

1. Can the taxable component of your client's disability superannuation benefit be treated as non-assessable non-exempt income?

2. Can the superannuation lump sum payment received by your client be treated as non-assessable non-exempt income if the terminal illness condition requirements under section 303-10 of the Income Tax Assessment Act 1997 (ITAA 1997) are not met?

Answers

1. No.

2. No.

This ruling applies for the following period:

Year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

Your client was employed by an employer for more than 20 years.

Your client ceased work during the 20XX-XX income year and was unable to work again in any capacity due to a broad range of physical injuries and psychological conditions.

You provided medical reports and documentation that detail the severity of your client's psychological and physical disablement. The array of interrelated injuries and conditions all necessitate ongoing medical support.

During the relevant income year your client submitted a total and permanent disability (TPD) claim to the superannuation fund (the Fund).

A letter from the Fund to your client during the subsequent income year advised that the TPD benefit was approved.

During the subsequent income year your client received a gross payment from the Fund. This comprised of a tax free component and a taxable component (taxed element). Tax was withheld from the payment.

You advised that based on accredited clinical papers and studies undertaken overseas and in Australia, your client has clinically diagnosed conditions that significantly reduce their life expectancy by a number of years which were in excess of 24 months.

Your client is under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-1

Income Tax Assessment Act 1997 Section 303-10

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

Income Tax Assessment Act 1997 Subsection 307-120(1)

Income Tax Assessment Act 1997 Section 307-145

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Regulations 1997 Regulation 303-10.01

Reasons for decision

Summary of decision

The benefit received by your client from the Fund is a disability superannuation benefit. Accordingly, section 307-145 of the ITAA 1997 applies to determine the tax free components of the benefit. The taxable component of the disability superannuation benefit is assessable income.

The Commissioner does not have discretion to treat the taxable component of your client's disability superannuation benefit as non-assessable non-exempt income.

Reduced life expectancy only results in a superannuation lump sum payment being non-assessable non-exempt income where the terminal illness condition requirements under section 303-10 of the ITAA 1997 are satisfied. The Commissioner does not have discretion to treat a superannuation lump sum otherwise where the section 303-10 requirements have not been met.

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 a person from a superannuation fund because the person is a member of the fund. Consequently, the payment to your client from the Fund is a superannuation benefit.

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

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.

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 (that is, their future employment service period).

As the payment of the superannuation lump sum from the Fund in respect of your client's membership is also a disability superannuation benefit, the modification for disability benefits under section 307-145 of the ITAA 1997 applies.

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.

From the facts the total and permanent disability (TPD) payment that your client received from the Fund is a disability superannuation benefit.

As noted above, 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 (that is, their future employment service period). From the information provided, the Fund has paid your client a total benefit of an amount and has calculated a tax free component of an amount and a taxable component (taxed element) of an amount.

The size of the tax free amount of the lump sum in your client's case indicates that the formula under 307-145 of the ITAA 1997 was taken into account.

Further, it should be noted that the Commissioner does not have discretion to treat the taxable component of your client's disability superannuation benefit as not assessable income and not exempt income.

Terminal medical condition

Section 303-10 of the ITAA 1997 sets out the tax treatment of a superannuation lump sum member benefit paid to members having a terminal medical condition. Sections 303-10(1) and (2) of the ITAA 1997 state:

(1) This section applies to a superannuation member benefit that:

(a) is a superannuation lump sum; and

(b) is:

(i) paid from a complying superannuation plan; or

(ii) a superannuation guarantee payment, a small superannuation account payment, an unclaimed money payment, a superannuation co-contribution benefit payment or a superannuation annuity payment.

(2) The lump sum is not assessable income and is not exempt income if a terminal medical condition exists in relation to you when you receive the lump sum or within 90 days after you receive it.

Subsection 995-1(1) of the ITAA 1997 defines 'terminal medical condition' to have the meaning given by the regulations.

In accordance with regulation 303-10.01 of the Income Tax Assessment Regulations 1997 (ITR 1997), a terminal medical condition exists in relation to a person at a particular time if:

(a) two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period) that ends not more than 24 months after the date of the certification;

(b) at least one of the registered medical practitioners is a specialist practising in an area related to the illness or injury suffered by the person;

(c) for each of the certificates, the certification period has not ended.

As mentioned above, your client received a lump sum payment from the superannuation fund because your client is a member of the fund. As such, the lump sum payment is a superannuation member benefit.

You have provided medical reports and documentation that detail the severity of your client's psychological and physical disablement. The array of interrelated injuries and conditions all necessitate ongoing medical support.

Further, you advised that based on accredited clinical papers and studies undertaken overseas and in Australia, your client has clinically diagnosed conditions that significantly reduce their life expectancy by a number of years.

Under subsection 303-10(2) of the ITAA 1997, a superannuation lump sum is not assessable income and is not exempt income if a terminal medical condition exists. From the facts, it is recognised that your client suffers from a broad range of physical injuries and a psychological condition. The injuries cause extreme incapacitation and has reduced your client's life expectancy. The injuries also prevent your client from working.

However, the legislation under section 303-10 of the ITAA 1997 and regulation 303-10.01 of the ITR 1997 is very specific, particularly in relation to a person's reduced life expectancy being no more than 24 months. Accordingly, from the facts it is seen that your client does not satisfy the requirements in section 303-10 and regulation 303-10.01 in relation to a terminal medical condition.

Further to the above, it should be noted that where the conditions set in the terminal medical condition provisions are not met, the Commissioner has no discretion within those provisions to treat superannuation lump sum payments as non-assessable non-exempt income.

Accordingly, the Commissioner cannot treat the taxable component of the lump sum payment as non-assessable non-exempt income.

Therefore, as your client was under their preservation age when your client received the superannuation lump sum, the taxable component of the payment is assessable income and taxed at a rate not exceeding 20% (section 301-35 of the ITAA 1997) plus Medicare levy.