Taxation of Benefits Received from Superannuation Funds

21.47. A benefit received from a superannuation fund in a lump sum on the occasion of the taxpayer's termination of office or employment is assessable as to 5 per cent under section 26 (d). In the absence of this provision such a receipt would be

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regarded as a capital amount and would not be subject to tax at all. Benefits paid from a fund upon the death of a member do not come within the scope of section 26 (d) and are regarded as receipts of capital. The question of whether or not the fund is an approved one for the purpose of total or partial exemption from tax of the fund's income is not relevant in determining whether or not section 26 (d) applies to the benefit received by the member.

21.48. Pension benefits received from a superannuation fund are wholly assessable in the hands of the recipient, either on general law principles or under the specific provisions of section 26AA. This latter section includes in assessable income of a taxpayer:

‘the amount of any annuity, excluding, in the case of an annuity which has been purchased, that part of the amount of the annuity which represents the undeducted purchase price.’

The exclusion does not operate in the case of a pension or annuity provided by a superannuation fund, since either the annuity is not a purchased annuity or, if it is, there is no ‘undeducted purchase price’, unless, and to the extent that, the member had made personal contributions to the fund in excess of the limits allowed as a deduction under section 82H.

21.49. Use can however be made of section 26AA to give a substantial relief from tax on a superannuation pension. If the retiring employee receives a lump-sum benefit and then elects to use this lump sum (after meeting his tax liability on 5 per cent of the amount under section 26 (d)) to purchase an annuity from a life insurance company, section 26AA will operate to exempt from tax that part of the annuity payments representing the undeducted purchase price of the annuity. The amount to be exempted in each year is found by dividing the purchase price of the annuity by the life expectancy of the employee at the time of purchase according to the prescribed tables of expectation of life. In spite of the theoretical tax-saving advantages of such a transaction, it is seldom encountered in practice.

21.50. Where a retiring employee wishes to receive a lump-sum superannuation benefit it is possible, subject to the rules of the fund concerned, for him to avoid even the minor imposition of tax on 5 per cent of the benefit. If he elects to receive a pension and then, after one or two pension payments have been made, exercises a right to exchange the pension for a lump sum, the latter amount is not received ‘in consequence of retirement’ but in consequence of giving up a right to future income and, according to long-standing legal authorities, is a receipt of capital. This technique is now not uncommon, retiring employees from some funds that pay pensions being advised to make use of it.

21.51. Where a lump-sum benefit is received from a superannuation fund other than in consequence of termination of an office or employment, it will normally be a capital receipt and, being outside the scope of section 26 (d), will escape tax altogether. This will usually be the case with benefits received from funds approved under section 23 (ja) or section 79, since the time of receipt of the benefit will be different to the time at which the office or employment terminated and since many members of such funds are self-employed people to whom section 26 (d) will not be applicable. However, it has been held that this exemption from tax will extend to cases where lump-sum benefits are paid to persons whose employment has not been terminated. It has come to the Committee's attention that this position is being increasingly abused by people who set up funds that comply with section 23F and

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then amend the deed governing the fund to permit benefits to be paid out of the fund while members of the fund are still employed. The benefits so received are exempt from tax; and while the fund can be taxed at the rate of 50 per cent on income derived in that year, the amount involved is usually quite small and there is no power to reopen the assessments of previous years.