Edited version of private advice

Authorisation Number: 1051660613182

Date of advice: 30 April 2020

Ruling

Subject: Taxation of a superannuation benefit

Question 1

Is the lump sum payment (Payment 1) you received in early 20XX from your Fund upon retiring from your Employer tax free?

Question 2

Is the lump sum payment (Payment 2) you received in early 20XX from your Fund upon retiring from your Employer tax free?

Answer 1

No

Answer 2

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You retired from the Employer due to a cancer diagnosis.

You were under 60 years of age at the time you retired.

In early 20XX you attended a Re-settlement seminar conducted by your Employer where you had discussions with a representative of the Fund as to your financial intentions post employment. They were aware of your plan to set up an Account based pension (ABP) with the funds from your Superannuation Account and other savings to supplement your Pension.

You attempted to set up an ABP through the Fund but were informed that they don't provide ABPs and at discharge from the Employer all Fund accounts must be terminated. Consequently all funds were deposited into your bank account on discharge.

A copy of the Application for Fund retirement payment commutation and superannuation productivity (including your Fund Super Ancillary Benefit) form signed in late 2018 confirms you elected to commute your maximum entitlement and take your benefit in cash to be paid to your nominated bank account.

A copy of the Application to claim an Ancillary Benefit form signed in late November 2018 provided confirms you elected to take your benefit in cash to be paid to your nominated bank account.

The PAYG payment summaries dated early January 20XX that you provided outline the components of the benefits you received from the Fund as follows:

Tax withheld

Taxable component taxed element

untaxed element

Tax free component

A letter dated early January 20XX from the Fund confirms the following Fund Ancillary benefit payment:

Ancillary Benefit Amount of your benefit

Tax Tax withheld

Payment Ancillary Benefit less Tax

A letter dated 22 January 20XX from the Fund confirms the following lump sum payment in cash

Commutation Value of your benefit

Less previously indexed

commutation Amount of previous commutation

Commutation paid Amount of commutation paid

Productivity: An amount for productivity

TOTAL Sum of the above amounts

Less Tax Tax withheld

NET PAID Amount paid to you

A bank statement for a joint account you have with your wife shows the following deposits were made:

a.    Early January 20XX - deposit from the Fund - Payment 1

b.    Early January 20XX - deposit from Fund - Payment 2

This statement also shows transfers to another account for your wife of several amounts in early January 20XX.

The funds were transferred into your wife's account in preparation for the commencement of an account based pension. The process was being managed by a Financial Services Company.

A letter dated late 20XX shows the establishment of a Pension Plan in later 20XX for an account based income stream in your wife's name.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-15

Income Tax Assessment Act 1997 Section 301-20

Income Tax Assessment Act 1997 Section 301-105

Reasons for Decision

Summary

Payment 1 is a superannuation lump sum benefit received by you upon retirement.

The payment is not a rollover superannuation benefit and as you had reached preservation age but were less than 60 years of age when you received the payment the "taxable component - untaxed element" must be included in your assessable income for the relevant year. Therefore the entire payment is not tax free.

Payment 2 is a superannuation lump sum benefit received by you on retirement.

The payment is not a rollover superannuation benefit and as you had reached preservation age but were less than 60 years of age when you received the payment the "taxable component - taxed element" must be included in your assessable income for the relevant year. Therefore the entire payment is not tax free.

Detailed reasoning

Superannuation benefits received after preservation age but less than age 60

Division 301 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the tax treatment applying to superannuation benefits received by members of complying superannuation funds.

Where a person has reached their preservation age but is under 60 years of age when they receive a superannuation lump sum benefit:

a)    section 301-15 sets out the tax treatment for the tax free component;

b)    section 301-20 sets out the tax treatment for the taxable component - taxed element; and

c)    secton 301-105 sets out the tax treatment for the taxable component - untaxed element.

Section 301-15 provides that the tax free component of the benefit is not assessable income and is not exempt income.

Section 301-20 provides that the taxable component - taxed element is assessable income with the amount up to the low rate cap subject to a maximum tax rate of Nil with the amount above the low rate cap subject to a maximum rate of tax of 15%.

Section 301-105 provides that the taxable component - untaxed element is assessable income with the amount up to the low rate cap subject to a maximum tax rate of 15% with the amount above the low rate cap (up to the untaxed plan cap) subject to a maximum tax rate of 30%.

The untaxed plan cap amount limits the concessional tax treatment of benefits that have not been subject to tax in a fund. The untaxed plan cap amount for the 20XX-XX income year was $X. However, that amount is reduced by the untaxed element of any previous payments of superannuation lump sums from the same fund.

The low rate cap amount is the limit set on the amount of taxable components (taxed and untaxed elements) of superannuation lump sums that can receive a lower (or nil) rate of tax. It applies to members that have reached their preservation age but are below 60 years. It is a lifetime cap. Once the member has reached the low rate cap, any further benefits are subject to a higher rate of tax. The low rate cap amount for the 20XX-XX year was $Y.

The superannuation lump sums you have received will be subject to tax as follows:

a)    the tax free component is not included in your assessable income;

b)    the taxable component - taxed element is included in your assessable income;

c)    the taxable component - untaxed element is included in your assessable income;

d)    you are entitled to a tax offset that ensures the rate of income tax payable on the portion of the taxed element up to the low rate cap amount will be Nil;

e)    you are entitled to a tax offset that ensures the rate of tax on the portion of the taxed element above the low rate cap amount will be a maximum of 15%; and

f)     you are entitled to a tax offset that ensures the rate of income tax payable on the untaxed element of the taxable component does not exceed 30% provided this amount does not exceed the amount of your untaxed plan cap amount.

Accordingly in relation to Payment 1 and Payment 2 the amounts specified as taxable component - untaxed element and taxable component - taxed element in the relevant payment summaries must be included in your assessable income for the 20XX-20XX income year.