Issue
Is an eligible termination payment (ETP) received from a superannuation fund as a result of financial hardship to be included as separate net income under section 159J of the Income Tax Assessment Act 1936 (ITAA 1936) for the purpose of claiming a dependent spouse tax offset?
Decision
No, an ETP received from a superannuation fund as a result of financial hardship is not included as separate net income under section 159J of the ITAA 1936 for the purpose of claiming a dependent spouse tax offset.
Facts
The taxpayer's spouse suffered an illness while employed.
The spouse is now on leave without pay but remains an employee.
The spouse applied to the superannuation fund to withdraw their contributions as a result of financial hardship.
The application was successful and the taxpayer's spouse received a lump sum eligible termination payment which included their superannuation contributions as well as the employer superannuation contributions.
Reasons for Decision
A resident taxpayer who contributes to the maintenance of a dependent may be able to claim a tax offset under section 159J of the ITAA 1936.
A dependent includes the spouse of the taxpayer under subsection 159J(2) of the ITAA 1936.
The amount of the tax offset may be reduced in part or in full by the separate net income derived by the dependent during the income year under subsection 159J(4) of the ITAA 1936.
Taxation Ruling IT 2391 discusses what is meant by separate net income.
A capital amount is not treated as separate net income unless it is included in the dependent's assessable income under the capital gains tax (CGT) provisions. A payment of a capital nature is not separate net income even though it may be wholly or partly assessable as an ETP.
Subsection 27A(1) of the ITAA 1936 defines an 'eligible termination payment'. It includes any payment made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is, or was, a member of the fund.
A superannuation fund ETP does not have to be made at the time of termination of employment or retirement. It is sufficient if it relates to a taxpayer's fund membership, past or present.
Pre-retirement compassionate payments made by a fund in the event of a member's ill health or financial hardship can be ETP's. However, if the payments are regular over a protracted period, they are not considered to be an ETP but rather ordinary income.
The lump sum payment received by the taxpayer from the superannuation fund is capital in nature even though it was not paid at retirement or upon termination of employment. The payment is however, assessable as an ETP. As the payment is capital in nature and is not assessable under the CGT provisions, it is not included as separate net income for the purpose of calculating the taxpayer's dependent spouse tax offset entitlement.