Edited version of your written advice

Authorisation Number: 1013110939708

Date of advice: 24 October 2016

Ruling

Subject: Medical Levy and Surcharge; The Budget Repair Tax

Question 1

Are you required to pay the Medicare levy surcharge?

Answer 1

No

Question 2

Are you required to pay the Temporary Budget Repair Levy?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commences on:

01 July 20XY

Relevant facts and circumstances

Your relative passed away.

They had a superannuation fund account.

You received a Death Benefit Lump Sum from their superannuation fund.

The Death Benefit was $xxx. taxed withheld $xxx, taxed element $xxx, untaxed element $xxx

Excluding the Death Benefit income your taxable income was $xxx with no fringe benefit or reportable superannuation contributions.

You do not have private hospital cover due to your low income.

You have purchased a home with the Death Benefit.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 251S

Medicare Levy Act 1986 Section 8B

Income Tax Assessment Act 1997 Section 995-1

Income Tax (Transitional Provisions) Act 1997 Section 4-11

Income Tax Assessment Act 1997 Subdivison 302-C

Reasons for decision

Medicare levy

Section 251S of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a Medicare levy is levied at the rate applicable in the Medicare Levy Act 1986 (MLA) on the taxable income of a person who is a resident of Australia.

Section 8B of the MLA imposes an increase in the Medicare levy (the MLS) for a single person for the period they are not covered by an insurance policy that provides private patient hospital cover and their income for surcharge purposes exceeds the singles surcharge threshold.

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states income for surcharge purposes for a person and an income year means the sum of the following:

● the person's taxable income for the income year

● the person's reportable fringe benefits total for the income year

● the person's reportable superannuation contributions for the income year

● the person's total net investment loss for the income year

less a superannuation lump sum payment made to a member for which a tax offset is calculated under subsection 301-20(2) of the ITAA 1997.

Based on the above definition a superannuation lump sum death benefit is included in calculating your income for surcharge purposes.

There is no provision within the taxation legislation which allows the Commissioner to exclude the receipt of the Death Benefit payment from the calculation of your income for Medicare levy surcharge purposes. Nor is the Commissioner able to omit any one-off payments which you would not normally receive during a financial year.

Accordingly, the Medicare levy surcharge will be calculated based on your total taxable income for the year.

Temporary Budget Repair Levy

As part of the 2014-15 Federal budget the Government introduced a Temporary Budget Repair Levy ('the Levy') for the 2014-15 to 2016-17 financial years, inclusive.

Section 4-11 of the Income Tax (Transitional Provisions) Act 1997 states individuals must pay extra income tax for a financial year if your taxable income exceeds $180,000.

The Levy is payable at a rate of two per cent of each dollar of a taxpayer's taxable income over $180,000.

The legislation provides no exclusions or exemptions for one off payments when calculating your taxable income for the levy purposes.

In your case, your taxable income for the year ended 30 June 20xx was more than $180,000 and therefore you are liable for the Levy.

However, Schedule 1 to the Income Tax Rates Amendment (Temporary Budget Repair Levy) Bill 2014, item 1, section 37-39 of the Income Tax Rates Act 1986] states

Maximum tax rate provisions

1.37 Certain types of income of an individual are subject to an effective tax rate cap. These caps are given effect through a tax offset mechanism that gives a taxpayer a tax offset to reduce the ordinary tax rates as they are applied to those types of income so that the effective marginal rate applied does not exceed a specified fixed rate.

1.38 These caps apply to parts of employment termination payments, other lump sum payments received on termination of employment and certain superannuation lump sum payments.

1.39 While the levy applies to these payments to the extent that a taxpayer's taxable income (including the lump sum) exceeds $180,000, the tax offset mechanism will continue to apply to further reduce a taxpayer's basic income tax liability by the levy amount so that the effective overall income tax rate applying to the lump sum payment does not exceed the relevant cap.

The superannuation lump sum death benefit payment you received is subject to an effective tax rate cap under subdivision 302-C of the ITAA 1997. This subdivision ensures that the rate of income tax on

● the taxed element in the fund of the lump sum does not exceed 15%, and

● the untaxed element in the fund of the lump sum does not exceed 30%.

In practical terms, the ATO will calculate

● the tax payable on the lump sum death benefit payment including any applicable Levy

● the maximum tax that should be paid on the lump sum death benefit payment (that is the 15% relating the taxed element and 30% relating to the untaxed element)

● calculate a tax offset equal to the difference to the two amounts.

As all of your income in excess of $180,000 relates to the lump sum death benefit payment, the offset will include an amount equal to the Levy imposed.