Edited version of your written advice

Authorisation Number: 1013071634957

Date of advice: 22 August 2016

Ruling

Subject: Lump sum payment in arrears tax offset and the Medicare and Medicare Levy surcharge

Issue 1

Questions

1. Is the lump sum paid to your client for back payment of a superannuation pension an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is your client eligible for a lump sum payment in arrears tax offset for the lump sum payment received in the 2015-16 income year?

Answers

1. No.

2. Yes.

This ruling applies for the following period:

2015-16 income year

The scheme commences on:

1 July 2015

Issue 2

Question

Is your client exempt from paying the Medicare levy and Medicare levy surcharge?

Answer

Yes.

This ruling applies for the following period:

2015-16 income year

The scheme commences on:

1 July 2015

Relevant facts and circumstances

Your client has been under government department privileges since prior to leaving their employment. Your client had a medical procedure several years ago which entitled them to full temporary, total and permanent disablement for a period of time.

This allowed your client's entitlement to a wage at a particular level with their Employer. Your client was then subsequently granted permanent status of a percentage disablement. Your client was yet to complete a particular number of years of service and continued to be employed for a period of time when they retired and became eligible for all of their retirement benefits under the scheme.

Your client's health degraded which resulted in a further medical procedure several years ago. Full Total and Permanent Incapacity status was granted several years ago after the second medical procedure and has been entitled to full free medical treatment for all conditions under their employment health card.

Due to your client's injuries, their ability to earn income was greatly diminished, relying on the disability income part employment pension for both your client and their spouse and income derived from your client's employment pension. Your client has not been employed or worked for several years. Jointly your client and their spouse have not had any other income except the disability pension since several years ago.

Recently your client was advised of the possible eligibility to a particular class of pension. Your client is now classified as a percentage of that particular class of pension with effect several years ago, the day after your client was discharged from the Employer.

A total amount was paid from the Fund during the 2015-16 income year as pension in arrears which accrued from the 19XX-XX income year to the 2014-15 income year. You provided the breakdown of the lump sum for the pension in arrears.

A PAYG payment summary for the 2015-16 income year from the Employer stated that your client received a lump sum in arrears amount. The whole amount was a taxable component - untaxed element.

Your client's taxable income for the 2013-14 income year was provided.

Your client's taxable income for the 2014-15 income year was provided.

Your client is a resident of Australia for taxation purposes.

Your client has a Medicare exemption certificate and their spouse is covered by private hospital cover.

Your client is over 60 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1936 Section 159ZRA

Income Tax Assessment Act 1936 Paragraph 251S(1)(a)

Income Tax Assessment Act 1936 Paragraph 251U(1)(a)

Medicare Levy Act 1986 Section 3A

Medicare Levy Act 1986 Section 8D

Issue 1

Reasons for decision

Summary

The lump sum paid to your client for a back payment of their superannuation pension is not an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997).

Your client is eligible for a lump sum payment in arrears tax offset for the lump sum payment received in the 2015-16 income year.

Detailed reasoning

Employment termination payment

Subsection 82-130(1) of the ITAA 1997 states that a payment is an employment termination payment (ETP) if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

To treat a payment as an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any one of the conditions under subsection 82-130(1) will result in the payment not being treated as an ETP.

Payments mentioned in section 82-135 are not ETPs. Paragraphs (a) and (b) of subsection 82-135 excludes the payment of a superannuation benefit and a payment of a pension or an annuity from being ETPs.

In the current case, the lump sum is a payment made by a superannuation scheme for pension in arrears. The payment is excluded from being an ETP under paragraphs (a) and (b) of subsection 82-135. Therefore, paragraph 82-130(1)(c) has not been satisfied.

As noted above all conditions under subsection 82-130(1) must be satisfied before the payment will be treated as an ETP. As one condition has not been satisfied, the payment is not an ETP.

The payment is a superannuation income stream payment. For a taxpayer over 60 years of age the taxable component - untaxed element of a superannuation income stream is taxed in accordance with section 301-100 of the ITAA 1997:

(1) If you are 60 years or over when you receive a *superannuation income stream benefit, the element untaxed in the fund of the benefit is assessable income

(2) You are entitled to a *tax offset equal to 10% of the *element untaxed in the fund of the benefit

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

Lump sum payment in arrears tax offset

Individual taxpayers, who receive certain assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued.

To be eligible for the tax offset, the amount of the eligible lump sum must not be less than 10% of the amount (if any) remaining after deducting the lump sum amount from the normal taxable income of the year of receipt.

In this case, the lump sum payment that your client received in the 2015-16 income year is greater than 10% of the amount remaining after deducting the lump sum amount from their taxable income in the 2015-16 income year. As such, they are eligible for the tax offset under section 159ZRA of the ITAA 1936 as part of their lump sum payment was for the pension payment in arrears which accrued in earlier income years.

Issue 2

Reasons for decision

Section 251S of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the Medicare levy is payable by any person who was, at any time during the year, a resident of Australia.

Some prescribed taxpayers may be exempt from the Medicare levy.

Prescribed person

A 'prescribed person' is defined in paragraph 251U(1)(a) of the ITAA 1936 to include a person who was employed by an employer and was entitled to free medical treatment, or under veterans' entitlement (repatriation) legislation, or a relative of a member of the Defence Force who was entitled to free medical treatment. However, a person will not be a 'prescribed person' if any of their dependants are not prescribed persons (subsection 251U(2) of the ITAA 1936).

Your client is a prescribed person in receipt of free medical treatment as outlined above, and your client's dependant is also in a Medicare levy exemption category. As such your client is exempt from the Medicare levy.

Medicare Levy Surcharge

The Medicare Levy Surcharge is an additional amount to the Medicare Levy, which taxpayers may be liable to pay where they have no private hospital cover.

Where taxpayers are exempt from the previously discussed Medicare Levy as prescribed persons, they will generally also be exempt from the Medicare levy surcharge for the same period.

Dependants for purposes of the Medicare levy surcharge are a spouse, a child under 21 and a child in receipt of full-time education who is 21 or more but less than 25. They will be dependants regardless of the level of their adjusted taxable income under section 251V of the ITAA1936.

As your client qualifies as a prescribed person and your client's dependant was covered by their own private patient hospital cover your client is fully exempt from the Medicare levy surcharge.