Edited version of your written advice

Authorisation Number: 1013034051321

Date of advice: 16 June 2016

Ruling

Subject: Disability benefits

Questions

1. Where two instalments of a Total and Permanent Disability (TPD) benefit are payable from a superannuation fund pursuant to an insurance policy, does section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997) apply?

2. Where two instalments of a TPD benefit are payable in applying section 307-145 of the ITAA 1997, does the formula in that section apply to each instalment without regard to any future or past TPD benefit?

Advice/Answers

1. Yes.

2. Yes.

This ruling applies for the following period

Year ended 30 June 2017

The scheme commenced on

1 July 2016

Relevant facts and circumstances

A company (the Trustee) is the trustee of the superannuation scheme (the Fund).

The Fund was established by a Trust Deed (the Deed) under an Act of the state parliament for the purposes of providing retirement benefits for employees of certain industry entities.

Under the Deed, the Fund is divided into pools and divisions. Each pool is a separate complying superannuation fund.

The Fund is a division of a pool that is open to new members.

The Deed defines 'Total and Permanent Disability' (TPD) as follows:

(a) the same meaning as the corresponding term in the policy of insurance for the member; and

(b) Where (a) does not apply, in relation to a member who has ceased to be gainfully employed, where the trustee is reasonably satisfied that the members ill health makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience.

The Trustee seeks to externally insure its member for TPD and provide a form of TPD cover which is payable in instalments.

The Fund will be the policy owner and make TPD payments to members pursuant to the terms of the external TPD cover policy.

Under the external cover, TPD benefits may be payable in instalments (the Payments), with the first instalment potentially payable up to three years before the second instalment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-1

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

Income Tax Assessment Act 1997 Section 307-65

Income Tax Assessment Act 1997 Section 307-70

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

Income Tax Assessment Act 1997 Section 307-145

Income Tax Assessment Act 1997 Section 307-215

Income Tax Assessment Act 1997 Section 307-400

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

Income Tax Assessment Regulations 1997 Regulation 995-1.01

Reasons for decision

Summary

Section 307-145 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the Payment.

The formula in section 307-145 of the ITAA 1997 applies to each instalment without regard to any future or past payments.

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 Payments to members of the Fund pursuant to the insurance policy are superannuation benefits.

A superannuation benefit may be paid as an income stream or a lump sum. A superannuation income stream benefit is defined under section 307-70 of the ITAA 1997 as a superannuation benefit specified in the regulations that is paid from a superannuation income stream. A superannuation lump sum is defined under section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream benefit.

Regulation 995-1.01 of the Income Tax Assessment Regulations 1997 (ITAR) states:

superannuation income stream means:

(a) an income stream that is taken to be:

(i) an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations; or

(ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or

(iii) a pension for the purposes of the RSA Act in accordance with regulation 1.07 of the RSA Regulations; or

(b) an income stream that:

(i) is an annuity or pension within the meaning of the SIS Act; and

(ii) commenced before 20 September 2007.

In this case, the Payments will not be made at least annually and will commence after 20 September 2007. Therefore, the Payments are not a superannuation income stream. Hence, the Payments are superannuation lump sums.

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

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.

Subsection 995-1(1) of the ITAA 1997 defines a 'disability superannuation benefit' as follows:

disability superannuation benefit means a superannuation benefit if:

(a) the benefit is paid to an individual 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 individual can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

Subject to certification from two legally qualified medical practitioners as required above for each payment, the Payments would satisfy the definition of a disability superannuation benefit under subsection 995-1(1) of the ITAA 1997.

If the requirements above are satisfied, the amount of the tax-free component for the proposed lump sum in this case will be modified in accordance with subsection 307-145(2) of the ITAA 1997, which states:

(2) The tax-free component is the sum of:

(a) the tax free component of the benefit worked out apart from this section; and:

(b) the amount worked out under subsection (3).

However, the tax free component cannot exceed the amount of the benefit.

Subsection 307-145(3) of the ITAA 1997 provides that the amount is worked out using the following formula:

Amount of benefit ×

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.

A person's last retirement day is generally when they would turn 65 years of age. 'Service period' is defined under section 307-400 of the ITAA 1997. In relation to the denominator in the formula in subsection 307-145(3) of the ITAA 1997, any days that are included in both 'service days' and 'days to retirement' are to be counted only once.

The result of the calculation in subsection 307-145(3) of the ITAA 1997 will then be added to the tax free component of the benefit worked out using the proportioning rule to determine the total tax-free component.

Note that the total tax-free component for the proposed benefit cannot exceed the amount of the benefit itself.

Under section 307-215 of the ITAA 1997 the taxable component of a lump sum superannuation benefit is the amount remaining (if any) after reducing the benefit by the tax-free component.

For each payment, a calculation would be made at the time of the payment under subsection 307-145(3) of the ITAA 1997. The calculation would not be affected by prior instalments made.