Edited version of private advice

Authorisation Number: 1051833950661

Date of advice: 27 May 2021

Ruling

Subject: Disability lump sum benefit

Question

Can the tax-free component of the superannuation lump sum be further increased by amending the service period in calculation of the modification for disability benefits in accordance with section 307-145 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You have been a member of an Australian Superannuation Fund (the Fund) for more than XX years.

From date you joined the Fund, you have been receiving contributions on your behalf from several employers.

You ceased work due to an injury.

You lodged a claim for a Total and Permanent Disablement (TPD) Insurance Benefit in respect of your fund membership.

You have advised that you provided the Fund with, and the Fund accepted, two medical certificates from two legally qualified medical practitioners who have certified that due to ill-health you are unlikely to ever be gainfully employed in a capacity for which you are reasonably qualified because of education, training or experience

You received a lump sum payment (the Payment) from the Fund.

You have provided correspondence from the Fund showing their calculation of the disability medication to the TPD benefit.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 301-1

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Act 1997 section 307-120

Income Tax Assessment Act 1997 section 307-145

Reasons for decision

Summary

Based on the information provided, you have met the requirements for a modification for a disability superannuation benefit to apply to your superannuation benefit.

The modification has been applied by the Fund in accordance with section 307-145 of the ITAA 1997.

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, the payment made to you by the Fund is a superannuation benefit.

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).

Modification for disability superannuation benefit

Under section 307-145 of the ITAA 1997, where a person receives a disability superannuation benefit as a superannuation lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed (that is, their future employment service period).

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.

In accordance with section 307-145 of the ITAA 1997, the tax-free component of a disability superannuation benefit is increased by an amount worked out by applying the following formula:

Amount of benefit × Days to retirement ÷ Service days + Days to retirement

The definition of:

days to retirement is the number of days from the day on which the person stopped being capable of being *gainfully employed to his or her *last retirement day.

service days is the number of days in the *service period for the lump sum.

As it relates to superannuation fund payments, 'service period' is defined in subsection 307-400(1) of the ITAA 1997 as:

(a) if some or all of the *superannuation lump sum accrued while you were, or the deceased was, a member of the *superannuation fund - the period of membership;

(b) if some or all of the superannuation lump sum accrued while you were, or the deceased was, employed (or you or the deceased held office) - each period of employment (or of holding office) to which the lump sum relates.

Based on the information provided, the service period is taken to be from the date you joined the Fund to the date the Payment was made.