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Edited version of private advice
Authorisation Number: 1051618177568
Date of advice: 19 December 2019
Ruling
Subject: Total and permanent disability
Question
Will the amount of $X, paid by your superannuation fund as penalty interest into your personal bank account, be treated as a lump sum disability superannuation benefit for taxation purposes?
Answer
Yes
This ruling applies for the following period:
30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You were a member of the Fund.
You lodged a claim for a Total and Permanent Disablement (TPD) Insurance Benefit in respect of your fund membership.
The Fund approved your TPD claim, and a lump sum payment was made into your superannuation account.
Your TPD benefit was withdrawn and tax payable was deducted by the Fund before funds were transferred to your personal account.
Due to a delay in assessing and processing your claim, the Fund had to pay you interest for any provable delays
This interest payment was made on in the 20XX-XX income year into your personal account instead of your superannuation account.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 995-1.
Income Tax Assessment Act 1997 section 307-120.
Income Tax Assessment Act 1997 section 307-145.
Income Tax Assessment Act 1997 subsection 307 145(3)
Reasons for decision
Summary
The penalty interest should be included as a lump sum disability superannuation benefit in your income tax return in the year in which it was received.
Detailed reasoning
Superannuation benefit
A superannuation benefit includes a superannuation fund payment made to you from a superannuation fund because you are a fund member. When it is paid to you as a lump sum, this is referred to as a superannuation lump sum payment.
The components of a superannuation benefit are worked out under section 307-120 of the ITAA 1997 and consist of the tax free component and the taxable component.
Disability superannuation benefit
A disability superannuation benefit is defined under subsection 995-1(1) of the Income Tax Assessment Act 1997 (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.
Section 307-145 of the ITAA 1997 operates to effectively increase the tax-free component where the superannuation lump sum benefit is a 'disability superannuation benefit.'
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. Subsection 307-145(3) of the ITAA 1997 provides the formula for working out the amount.
Penalty interest
Total and Permanent Disability (TPD) payments that are paid in relation to a policy, that is owned by a fund trustee, to provide cover for insured members, are paid by the insurer into the superannuation fund and allocated to the member's account. They can then only be released from super if a condition of release, such as permanent incapacity, has been met.
In your case, the penalty interest represented the delay in determining your TPD claim under the policy.
It is the Commissioner's view that the penalty interest, having the same character as the TPD payout to the fund, should be included as a lump sum disability superannuation benefit in your income tax return in the year in which it was received.
The tax free component of the disability superannuation benefit will need to be calculated to determine the taxable component to be included in your income tax return. Only the taxable component (if any) will be assessable income.
The components of a superannuation benefit are worked out under section 307-120 of the ITAA 1997 and will consist of the tax free component and the taxable component.