Issue
Can the Commissioner exercise his discretion under subsection 27C(1A) of the Income Tax Assessment Act 1936 (ITAA 1936) to render the pre-July 1983 component of an ETP tax-free?
Decision
No, the Commissioner cannot exercise his discretion under subsection 27C(1A) of the ITAA 1936 to render the pre-July 1983 component tax-free.
Facts
(1) The taxpayer was in receipt of a superannuation pension from a superannuation fund. (2) The pension commenced prior to 1 July 1983. (3) In 2001, the taxpayer commuted 100% of his pension to a lump sum. (4) The taxpayer received an ETP. (5) This comprised a pre-July 1983 component and a post-June 1983 component.
Reasons for Decision
The discretion under subsection 27C(1A) enables the inclusion in the taxpayer's assessable income of an amount which is something less than 5% of the pre July-1983 component. In deciding whether to exercise this discretion, the Commissioner is to have regard to the extent to which the ETP would have been included in assessable income of the taxpayer had the ETP legislation not been introduced.
Income Tax Ruling IT 2168 provides a description of the manner in which the discretion available under paragraph 27C(1)(d) of the ITAA 1936 (predecessor to subsection 27C(1A)), is to be exercised. Paragraph 72 of IT 2168 states that the discretion is not to be exercised in a case where an ETP was made as a result of commutation of a superannuation pension or annuity in circumstances where former paragraph 26(d) of the ITAA 1936 would have applied to the ETP because the payment is in consequence of retirement or the termination of employment. Paragraph 26(d) of the ITAA 1936 operated (prior to 1 July 1983) to include 5% of the capital amount of any allowance, gratuity or compensation paid in a lump sum in consequence of termination or retirement from any office or employment, as assessable income.
In Seabright v. Federal Commissioner of Taxation 99 ATC 2011; 40 ATR 1160 ( Seabright's Case ), it was held that an amount paid when a superannuation pension was commuted to a lump sum payment some 12 years after termination of employment was an ETP pursuant to section 27A of the ITAA 1936.
The payment was considered to be in consequence of termination of the person's employment even though there was a gap of 12 years between the termination and the commutation of the pension. The payment of the commuted amount was simply to change one form of payment, a pension, into another, a lump sum. As the payment in Seabright's Case was held to be an ETP, it follows that the payment would have been assessable under paragraph 26(d) of the ITAA 1936 if that provision were still in force.
In these circumstances, as in Seabright's Case , the question to be answered is whether the payment (commutation of the pension) could be said to have followed on from the termination of employment. Consistent with the reasoning in Seabright's Case , the gap of several years between when the pension commenced and when the lump sum payment was made is irrelevant. The payment of the ETP is considered to have been paid in consequence of the termination of the taxpayer's employment. As a result, the discretion under subsection 27C(1A) of the ITAA 1936 will not be exercised by the Commissioner to render the pre-July 1983 component tax-free.