Taxation Determination

TD 2000/28

Income tax: what is the method for valuing fixed term pensions other than purchased pensions for the purposes of the reasonable benefit limits (RBLs)?

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FOI status:

may be releasedFOI number: I 1021322

1. The capital value of a fixed term pension which is purchased is calculated using the method set out in Taxation Determination TD 2000/29. A pension is regarded as purchased where the rules providing for the pension are based on an identifiable lump sum amount or amount available in the member's account, for example an allocated pension.

2. The capital value of a fixed term pension other than a purchased pension is calculated using the method given in paragraph 4.

3. Under subsection 140ZO(2) of the Income Tax Assessment Act 1936, the Commissioner must determine in writing a method for calculating the capital value of a superannuation pension that is not payable for life. Pensions payable for a fixed term, including pensions which satisfy the standards of subregulation 1.06(7) of the Superannuation Industry (Supervision) Regulations, come within subsection 140ZO(2).

4. The capital value of a fixed term pension other than a purchased pension is calculated using the following formula:

Capital Value = [Annual Value * Fixed Term Valuation Factor] - Undeducted Purchase Price + Residual Capital Value


where:

Annual Value is the amount worked out by multiplying:

(a)

the greatest number of payments of the pension that could be made in respect of the 12 month period beginning on the commencement day of the pension, by

(b)

the amount of the first regular payment of the pension.

Fixed Term Valuation Factor is the pension valuation factor set out in the Table of Pension Valuation Factors for Fixed Term Pensions attached to this Determination.

Undeducted Purchase Price is the undeducted purchase price of the pension as defined in subsection 140ZO(1).

Residual Capital Value is the present value of the residual future capital value of the pension calculated by using the formula:

Residual Capital Value = A / (1.1)^n


where:

A

is the residual capital value of the pension. This is the dollar amount the fund expects will be paid as a lump sum after a fixed term of n years.

n

is the number of years, or parts of a year, between the commencement day of the pension and the payment of the residual capital value.

5. The capital value calculated in paragraph 4 is used to determine whether a fixed term pension paid to a person is within the person's lump sum or pension reasonable benefit limits (RBLs), as appropriate.

6. Where the indexation rate or the term of the pension lies outside the range of values specified in the Table of Pension Valuation Factors attached, full details surrounding the particular fixed term pension should be provided to the ATO in order to determine the relevant valuation factor.

Example

Mark has decided to retire and take a fixed term pension. The pension is for a term of 20 years and will be indexed at 5% pa. The first regular monthly payment of the pension will be $1,200 and will be paid on the first of each month. The annual value of the pension is $1,200 x 12 = $14,400. It has an undeducted purchase price of $80,000. There is no residual capital value.

For the purposes of applying the RBLs, the capital value of the pension is calculated as:

Capital Value = ($14,400 * 12.77) - $80,000 + $0


= $103,888.


Commissioner of Taxation
28 June 2000

Previously released in draft form as TD 2000/D6

References

ATO references:
NO T2000/6193

Related Rulings/Determinations:

TD 2000/29

Subject References:
fixed term pensions
pension capital value
reasonable benefit limits
superannuation funds
superannuation pensions

Legislative References:
140ZO(1)
140ZO(2)