Edited version of your written advice

Authorisation Number: 1051348306651

Date of advice: 13 March 2018

Ruling

Subject: Taxation of superannuation benefits

Questions

Is any part of the total and permanent disability payment paid by a superannuation fund (the Fund) tax-free?

Is any part of the total and permanent disability payment paid under an insurance policy (the Policy) tax-free?

Can the total and permanent disability payments received from the Fund and the Policy be rolled over into a complying superannuation fund?

Answers

Yes

Yes

The Commissioner declines to rule.

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

A person (the Taxpayer) is a member of an Australian superannuation fund (the Fund).

The Taxpayer is a member of the Policy.

The Policy provides for a lump sum payment in the event of death, serious medical conditions, major surgery or total and permanent disablement.

The Taxpayer sustained severe injury. These injuries have prevented the Taxpayer from continuing their employment.

A memorandum from the Fund states that the Taxpayer has satisfied the policy definition of total and permanent disability (TPD).

A letter from the Policy stated that the TPD claim was accepted.

The Taxpayer received a lump sum payment from the Fund.

The Taxpayer received a lump sum payment from the Policy.

The Taxpayer’s is less than 60 years of age.

Relevant legislative provisions

Income tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section102-23

Income Tax Assessment Act 1997 Section 118-37

Income Tax Assessment Act 1997 Subsection 104-25 (1)

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

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

Income Tax Assessment Act 1997 Subdivision 301-B

Income Tax Assessment Act 1997 Subsection 301-20(1)

Income Tax Assessment Act 1997 Subsection 301-20(2)

Income Tax Assessment Act 1997 Subsection 307-345(1)

Reasons for decision

Question 1

Summary

The lump sum payment is a superannuation benefit. The tax-free component of the payment is not assessable income and is not exempt income. As such, it is tax-free.

The taxable component of the lump sum payment is assessable income. However, the Taxpayer has reached preservation age and a tax offset applies to ensure that the rate of income tax on the lump sum amount does not exceed 0% if the taxpayer has sufficient unused amounts of their low rate cap remaining.

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 person from a superannuation fund because the person is a member of the fund. Consequently, payments to the Taxpayer from the Fund are superannuation benefits.

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

Low rate cap

Subdivision 301-B of the ITAA 1997 encompasses member benefits that are taxed elements of a taxable component

Subsection 301-20(1) of the ITAA 1997 states that if a person is under 60 years but have reached their preservation age when they receive a superannuation lump sum, the taxable component of the lump sum is assessable income.

Under subsection 301-20(2) of the ITAA 1997, where a person receives a superannuation lump sum payment which does not exceed the low rate cap amount, they are entitled to a tax offset that ensures that the rate of income tax on the lump sum amount does not exceed 0%

Preservation age is the age at which retirees can access their superannuation benefits. The Taxpayer was born in 1959 therefore their preservation age is 55 years.

The low rate cap amount is set out under subsection 307-345(1) of the ITAA 1997 and is indexed annually. For the 2017-18 income year the low rate cap amount is $200,000.

When completing an income tax return, the taxable component must be included in the tax return. This is the case even if the amount received is below the low-rate cap amount and no tax has been withheld by the Fund.

Question 2

Summary

A payment against the Total and Permanent Disability (TPD) policy, is not classified as part of the Taxpayer’s taxable income under ordinary concepts of the Income Tax Assessment Act 1997 (ITAA 1997) and is not subject to income tax. The payment is classified as a capital gains event and would ordinarily be subject to capital gains tax (CGT). However as the payment is for compensation the capital gain would be disregarded.

Detailed reasoning

The compensation amount received from the Policy is not subject to income tax, as it is not assessable income under ordinary concepts. These ordinary concepts have generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include payments that:

● are earned

● are expected

● are relied upon; and

● have an element of periodicity, recurrence or regularity.

A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital payment and not ordinary income.

The Taxpayer’s payment was not earnt and it will not reoccur. Though the payment can be said to be expected, and perhaps relied upon, this expectation arises from the insurance policy and not than from any relationship to services that may have been performed.

The compensation payment is a C2 capital gain event (i.e. the cancellation, surrender and similar endings of an asset) under subsection 104-25 of the ITAA 1997. This section defines C2 events as being the end of an asset by:

a) being redeemed or cancelled; or

b) being released, discharged or satisfied; or

c) expiring; or

d) being abandoned, surrendered or forfeited; or

e) if the asset is an option--being exercised; or

f) if the asset is a convertible interest--being converted.

The awarded compensation is a C2 capital gains event because you received the payment due to the ending of the Policy.

Subsection 118-37 (1)(a) of the ITAA 1997 explains that a capital gain made from a CGT event where the amount relates to compensation or damages received for any ‘wrong, injury or illness you suffer personally is to be disregarded. Any tax on a capital gain is disregarded in accordance to subsection 118-37 (1) (a) ITAA 1997 because the nature of the capital gain is that of a compensation payment.

Question 3

Private rulings

Section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that the Commissioner of Taxation (the Commissioner) may, on application, make a written ruling (a private ruling) on the way in which a relevant provision applies, or would apply, to an entity in relation to a specified scheme.

For the purposes of section 359-5 of Schedule 1 to the TAA, the relevant provisions are defined in section 357-55 of Schedule 1 to the TAA and include certain provisions of Acts and Regulations of which the Commissioner has general administration. However, none of the paragraphs in section 357-55 allow a private ruling to be given in relation to rollovers between complying superannuation funds.

Paragraph 357-55(a) of Schedule 1 to the TAA does allow a ruling to be given on ‘tax’ however, in accordance with subsection 995-1(1) of the ITAA 1997, ‘tax’ means:

a) income tax imposed by the Income Tax Act 1986 as assessed under this Act; or

b) income tax imposed as such by any other Act, as assessed under this Act.

Rollover contributions between complying superannuation funds are governed under the Superannuation Industry Supervision Act 1994 (SISA). As such, it is not ‘tax’ for the purposes of section 327-55 of Schedule 1 to the TAA. Therefore, the Commissioner cannot make a ruling on issues relating to whether a rollover can be made between complying superannuation funds.

Additionally, the Fund Trust Deed provisions may also determine whether a roll-over can be received by superannuation fund. The Australian Taxation Office (ATO) regulates self-managed superannuation funds (SMSF) and is unable to provide specific advice regarding the governing rules in relation to Australian Prudential Regulation Authority (APRA) related funds. In this instance, the Fund is an APRA related fund.

Consequently, the Taxpayer should consult with their Fund to determine whether a rollover of the kind intended can be made.