Edited version of private advice

Authorisation Number: 1052106784389

The private ruling on which this edited version is based has been overturned on objection.

This notice must not be taken to imply anything about the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 13 April 2023

Ruling

Subject: Days to retirement - lump sum disability superannuation benefit

Question

When determining the 'days to retirement'under subsection 307-145(3) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the lump sum superannuation disability benefit received by you, is the date you stopped being capable of being gainfully employed the last date you attended work?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 202XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The last day you attended work was prior to the termination date of your employment.

You sought workers compensation for a psychological injury.

You were awarded workers compensation in a determination (the Determination).

The period for which you were awarded workers compensation commenced on the last day you attended work.

Your employment was terminated in 20XX.

You provided medical reports which evidenced your incapacity for work.

You received a lump sum disability superannuation benefit (total and permanent disablement benefit) during the 20XX income year from your superannuation fund.

A Benefit Statement from the Fund listed the date of termination of your employment as being in 20XX, being the date provided by your employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 307-145

Income Tax Assessment Act 1997 subsection 307-145(2)

Income Tax Assessment Act 1997 subsection 307-145(3)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Detailed Reasoning

Where a person receives a superannuation lump sum which is a disability superannuation benefit, section 307-145 of the ITAA 1997 modifies how the tax free component of the lump sum is calculated. The effect of the modification is to increase the tax free component of the benefit to broadly reflect the period where the person would have expected to have been gainfully employed.

The amount of the tax free component will be modified in accordance with subsection 307-145(2) of the ITAA 1997, which states:

The tax free component is the sum of:

(a) the tax free component of the benefit worked out apart from this section; and:

(b) the amount worked out under subsection (3).

However, the tax free component cannot exceed the amount of the benefit.

Subsection 307-145(3) of the ITAA 1997 provides that the amount is worked out using the following formula:

Amount of benefit x Days to retirement / (Service days + Days to retirement)

where:

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.

The issue for consideration in this case is what is the day on which you stopped being capable of being gainfully employed.

Subsection 995-1(1) of the ITAA 1997 states:

gainfully employed means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

The Determination sets out the circumstances of your employment, which resulted in you suffering from a psychological injury, as evidenced by medical reports. You were awarded workers compensation for the period commencing from the last day you attended work.

In determining when you stopped being capable of being gainfully employed, we first need to consider if you were capable of being gainfully employed after that date.

The facts show you never returned to work after this date, and your employment was terminated in 2020. Prior to the Determination being made, you were on a mixture of paid and unpaid leave. Adjustments were made to those leave entitlements after you were awarded the compensation. Effectively, you remained employed, and in receipt of workers compensation payments, until your employment was terminated.

Workers compensation is a form of insurance payment paid to employees if they are injured at work or become sick due to their work. This is so the employee can take time off work while they recover, and still receive an income.

You were employed at the time when you commenced receiving workers compensation payments and remained so until your employment was terminated.

A person does not have to attend work and carry out the day-to-day duties of their role in order to be gainfully employed. A person on annual leave continues to be gainfully employed during that time, as does a person on sick leave.

When a person is receiving workers compensation, they are receiving payments in connection with their employment arrangement. The primary aim is that they will physically return to the workplace when they are recovered. Therefore, it cannot be said they have stopped being capable of being gainfully employed by their employer at that time.

When your employer terminated your employment in 20XX, this was the time that they determined you were no longer capable of being gainfully employed.