Authorisation Number: 1012468834937
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Ruling
Subject: Pension and lump sum in arrears offset
Issue
Questions
(1) Is the taxpayer entitled to a superannuation pension tax offset under section 301-25 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the pension payments made in the relevant income year?
(2) Does the interest component represent an entitlement to superannuation?
(3) Is the taxpayer entitled to a superannuation tax offset on the interest payment?
(4) Do sections 159ZR to 159ZRD of Division 17 of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the lump sum payment in arrears of pension that accrued during the period from 1 July 1985 to 30 June 2012? (5) Do sections 159ZR to 159ZRD of Division 17 of the ITAA 1936 apply to the interest component?
Answers
(1) Yes.
(2) No.
(3) No.
(4) Yes.
(5) No.
This ruling applies for the following periods
Year ending 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
Your client's spouse was a member of a superannuation fund (the Fund).
The Fund is administered by a company (the Company) on behalf of a trustee, (the Trustee).
Upon the death of your client's spouse over 30 years ago, your client became entitled to receive a pension from the Fund. At the time of death your client's spouse was not receiving a pension.
As a result, your client commenced to receive a death in service spouse pension from the Fund.
In accordance with the then current rules of the Fund, your client's entitlement to receive this pension was suspended when your client remarried. Subsequent changes reinstated the entitlement to the pension over 20 years ago, however due to an administrative error by the Trustee the pension did not recommence to be paid to your client.
In the relevant year, the Trustee advised that your client was entitled to the reinstatement of your client's spouse pension benefit payable from the date the Fund's rules were changed, lifting of the suspension upon remarriage of a spouse pension.
In the relevant income year, the Trustee advised that the pension payment would be made to your client fortnightly and that the pension in arrears and interest amounts would be made to your client.
The Trustee provided your client with a year by year breakdown of pension in arrears payment.
The pension amounts are made up solely from a taxable component - taxed source and there were no undeducted contributions remaining to be applied to your client's pension benefit from the Fund. There are no tax free amounts or taxable amounts from an untaxed source.
In the relevant income year, a pension in arrears payment was made to your client which related to the relevant income year.
Also in the relevant income year, an interest payment was made to your client which was calculated on the arrears of pension from the date the Fund's rules were changed until the date the payment was made. This payment was designed to compensate for the time value of money over the period in which the pension payment was not made to your client.
Your client has reached preservation age.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 27H.
Income Tax Assessment Act 1936 Section 159SM.
Income Tax Assessment Act 1936 Subsection 159SM(1). Income Tax Assessment Act 1936 Subsection 159SM(2).
Income Tax Assessment Act 1936 Section 159ZR.
Income Tax Assessment Act 1936 Subsection 159ZR(1).
Income Tax Assessment Act 1936 Section 159ZRA.
Income Tax Assessment Act 1936 Section 159ZRD.
Income Tax Assessment Act 1997 Section 301-25.
Income Tax Assessment Act 1997 Section 302-75.
Income Tax Assessment Act 1997 Subsection 302-75(1).
Income Tax Assessment Act 1997 Subsection 302-75(2).
Income Tax Assessment Act 1997 Subsection 307-5(1).
Income Tax Assessment Act 1997 Subsection 995-1(1).
Issue
Summary
Your client is entitled to receive a tax offset for the superannuation spouse pension made to your client in the relevant income year.
The interest component is not a payment being made under the legislation governing the Fund. Therefore the payment is not a superannuation income stream or a superannuation lump sum benefit.
Your client is not entitled to a superannuation tax offset on the interest component as the payment does not represent an entitlement to superannuation.
The lump sum payment for arrears of spouse reversionary pension from the Fund is eligible income for the purposes of the lump sum payment in arrears (LSPIA) tax offset provisions. The lump sum payment of interest is not eligible income for the purposes of the LSPIA tax offset provisions.
Detailed reasoning
Superannuation pension tax rebate
Former section 159SJ of the Income Tax Assessment Act 1936 (ITAA 1936) defined the meaning of a 'rebatable superannuation pension', 'rebatable 27H amount' and 'complying superannuation fund'.
Former section 159SM of the ITAA 1936 allowed a tax rebate for a superannuation pension where the first payment date is on or after 1 July 1988.
This definition was amended by section 19 of the Taxation Laws Amendment (Superannuation) Act 1992 to replace the existing rebate and allow eligible superannuation annuities or pensions a rebate from an effect date on or after 1 July 1994. The rebate applied to a 'rebatable 27H amount'.
To be eligible for the rebate, the superannuation pension must be paid from a taxed complying superannuation fund. Furthermore, the rebate was only available in respect of amounts payable on or after the taxpayer's 55th birthday where those payments are made on or after 1 July 1994, or in respect of payments made at any age where the person retired on grounds of permanent disability, or the person is deceased and a dependant is receiving a pension from the deceased's superannuation fund.
Former subsection 159SM(1) of the ITAA 1936 details the entitlement to a superannuation pension rebate. It states:
Subject to subsection (2), for each rebatable 27H amount included in a taxpayer's assessable income of a year of income in respect of a rebatable superannuation pension, the taxpayer is entitled to a rebate of tax in the taxpayer's assessment for the year of income of an amount worked out using the formula:
Reduced 27H amount x Rebatable proportion of pension x 15% where:
'Reduced 27H amount' is the rebatable 27H amount, reduced by the total of the amounts specified in notices under section 159SS given in relation to payments of the pension during the year of income (other than payments made before the taxpayer's 55th birthday).
Former subsection 159SM(2) of the ITAA 1936 applied to certain pensions that are not paid from taxed superannuation funds.
In order to determine if a taxpayer is entitled to a tax offset it must first be determined if the taxpayer has a 'rebatable 27H amount'.
A 'rebatable 27H amount' is defined in former subsection 159SJ(1) of the ITAA 1936 as:
in relation to a rebatable ETP annuity or a rebatable superannuation pension and in relation to a year of income, means:
(a) if:
(i) the 55th birthday of the recipient of the annuity or pension occurred before the year of income; or
(ii) the annuity or pension is a death or disability annuity/pension for the recipient;
an amount included in assessable income under section 27H in respect of the annuity or pension; or
(b) in any other case so much (if any) of an amount included in assessable income under section 27H in respect of the annuity or pension made on or after the recipient's 55th birthday;
A tax rebate applied in respect of superannuation pensions paid from a taxed source provided they first became payable on or after 1 July 1988.
Superannuation income stream - tax offset From 1 July 2007, section 301-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you are entitled to a tax offset equal to 15% of the taxable component of the benefit from the superannuation income stream if you are between your preservation age and under the age of 60.
There is no tax offset available to a superannuation income stream from the untaxed element for persons under the age of 60 unless it is a superannuation death benefit paid to a dependant.
Under section 302-75 of the ITAA 1997 the taxable component of a superannuation income stream benefit attracts a 15% offset.
At subsection 302-75(1) of the ITAA 1997 it states:
The taxable component of a superannuation income stream benefit that you receive because of the death of a person of whom you are a death benefits dependant is assessable income if:
(a) you are under 60 when you receive the benefit; and
(b) the deceased died aged under 60.
Furthermore, at subsection 302-75(2) of the ITAA 1997 it states:
You are entitled to a tax offset equal to 15% of the taxable component of the benefit.
In the facts of this case, your client commenced to receive a pension over 30 years ago, after the death of your client's former spouse. In accordance with the then current rules of the Fund, your client's entitlement to receive this pension was suspended when your client remarried.
The Fund is a taxed complying superannuation fund.
Your client's entitlement to a pension was reinstated over 20 years ago. Due to an administrative error by the Trustee, the pension did not recommence to be paid to your client at that time. The Trustee advised that your client became entitled to receive a pension and that a payment (which included a lump sum pension in arrears and a payment for interest on arrears of late pension) was made to your client during the relevant income year.
The information provided shows the pension amounts are made up solely from a taxable component - taxed source and there were no undeducted contributions remaining to be applied to your client's pension benefit. Therefore the pension that your client receives does not have an undeducted purchase price.
Your client is receiving a superannuation spouse pension made from the Fund in the relevant income year. Therefore your client is entitled to receive a 15% tax offset for the pension payment made to your client in the relevant income year.
Superannuation lump sum
A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70 of the ITAA 1997.
Under subsection 307-70(2) of the ITAA 1997 it states:
A superannuation income stream has the meaning given by the regulations.
Subsection 995-1(1) of the ITAA 1997 states: superannuation benefit has the meaning given by section 307-5.
A superannuation benefit is defined in subsection 307-5(1) of the ITAA 1997 as a payment described in the table set out in this provision.
In this case the interest component is a payment being made by the fund's trustee. However, it does not represent an entitlement to superannuation (lump sum or pension) under the rules governing the Fund. The payment represents the potential interest forgone by your client as a result of the non-payment of the pension over the relevant period. In other words, it represents the interest your client may have possibly received had your client received the income stream and invested those monies over the relevant periods.
Therefore as the payment is not being made under the governing rules of the Fund it is not a superannuation income stream or a superannuation lump sum benefit.
Lump sum payment in arrears (LSPIA) tax offset
Taxpayers who receive certain income in a lump sum payment containing an amount that accrued in earlier income years may be entitled to a LSPIA tax offset.
The tax offset (if any) is calculated as the difference between the extra amount of tax payable in the year of receipt because of the lump sum and the amount of tax that would have been payable if the lump sum had been taxed as it accrued. It is calculated under sections 159ZR to 159ZRD of the ITAA 1936.
Section 159ZRA of the ITAA 1936 sets out the requirements for eligibility for the LSPIA tax offset. One of those requirements is that the taxpayer's assessable income in the year of income includes one or more 'eligible lump sums'.
An 'eligible lump sum' is a lump sum payment of 'eligible income' received on or after 1 July 1986 that is included in the assessable income of the taxpayer and accrued, in whole or in part, in an earlier year or years of income (as defined in subsection 159ZR(1) of the ITAA 1936).
'Eligible income' for the purposes of the LSPIA tax offset is defined in subsection 159ZR(1) of the ITAA 1936, and includes superannuation income streams and annuities.
Consequently, the lump sum payment for arrears of spouse pension from the Fund that your client received in the relevant year of income, and which accrued in earlier income years, is an 'eligible lump sum' as defined in subsection 159ZR(1) of the ITAA 1936.
Calculating the LSPIA tax offset
The relevant year of income has not yet ended and so your client's taxable income for the current income year cannot be ascertained with certainty. We therefore cannot calculate your client's entitlement (if any) to the LSPIA tax offset at this stage.
However once your client has lodged their tax return for the relevant year of income with the relevant details, we will then calculate your client's entitlement (if any) to the LSPIA tax offset. Your client will need to provide additional information, as specified in the tax return instructions, with your client's tax return so that your client's entitlement can be calculated.
Relevant details, including the total amount of the arrears and the amount of the arrears which accrued in each of the income years involved, should be included with the tax return in a separate schedule of additional information.
Please note that Australian superannuation income streams (including lump sum in arrears amounts) paid by Australian superannuation funds are included at the 'Australian annuities and superannuation income streams' question of the tax return.
LSPIA tax offset and lump sum interest
'Eligible income' is defined in subsection 159ZR(1) of the ITAA 1936 to mean certain specified types of income. The definition does not include interest.
As the lump sum payment of interest is not an 'eligible lump sum'', this payment is not eligible for the LSPIA tax offset.
Other relevant comments
'Eligible income' for the purposes of the LSPIA tax offset is defined in subsection 159ZR(1) of the ITAA 1936, and includes superannuation income streams and annuities (as covered by section 12-80 in Schedule 1 to the Taxation Administration Act 1953).
The term 'superannuation income stream' is defined in subsection 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as having the meaning given by section 307-70 of the ITAA 1997. Subsection 307-70(2) states that a superannuation income stream has the meaning given by the regulations.
Regulation 995-1.01(1) of the Income Tax Assessment Regulations 1997 states that:
Superannuation income stream means:
(a) an income stream that is taken to be:
(i) an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations; or
(ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or
(iii) a pension for the purposes of the RSA Act in accordance with regulation 1.07 of the RSA Regulations; or
(b) an income stream that:
(i) is an annuity or pension within the meaning of the SIS Act; and
(ii) commenced before 20 September 2007.
Therefore, even though the spouse reversionary pension from the Fund has a pension commencement date of over 30 years ago (refer to the private ruling application), it would still be a superannuation income stream as defined above.