Taxation Determination

TD 2006/34

Income tax: will the Commissioner exercise his discretion under subsection 27H(3) of the Income Tax Assessment Act 1936 in determining the deductible amount in relation to a superannuation pension or 'eligible annuity' split pursuant to an agreement or court order on marriage breakdown?

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FOI status:

may be released

Ruling

1. Yes. The Commissioner will exercise his discretion under subsection 27H(3) of the Income Tax Assessment Act 1936 (ITAA 1936) in the manner set out below, where a superannuation pension or annuity payment is split in the way described in this Determination. If a taxpayer's circumstances do not fully come within this description, or they believe the Commissioner should exercise his discretion a different way, they should apply for a private ruling on how the discretion applies to their situation.

2. An arrangement to which this Determination applies will have the following features:

•

a superannuation agreement or court order is made on marriage breakdown in accordance with Part VIIIB of the Family Law Act 1975;

•

under that superannuation agreement or court order a 'superannuation pension' or 'eligible annuity' that has commenced to be paid to a 'member spouse' (the original pension or annuity) is to be split on a specified percentage basis in accordance with section 90MJ (agreement) or section 90MT (court order) of the Family Law Act 1975. 'Superannuation pension' and 'eligible annuity' have the meaning^[1] which applies to those terms in subsection 140M(1A) of the ITAA 1936. For the purposes of subsection 140M(1A) an eligible annuity is an immediate annuity that has been purchased wholly with rolled-over amounts;

•

the original pension or annuity is not commuted;

•

paragraph (a) of the definition of 'undeducted purchase price' in section 27A of the ITAA 1936 does not apply to the original pension or annuity; ^[2] and

•

either:

-

the pension or annuity payable to the member spouse after the split does not revert on the death of the member spouse to someone other than the non-member spouse; or

-

the pension or eligible annuity does revert to someone other than the non-member spouse but the pension or annuity is 'payable for a term of years certain', for the purposes of paragraph (a) of the definition of 'relevant number' in subsection 27H(4) of the ITAA 1936.

3. The discretion in subsection 27H(3) of the ITAA 1936 will be exercised in the following way where the relevant number in the formula in subsection 27H(2) of the ITAA 1936 otherwise applicable in relation to the original pension or annuity is still appropriate. The relevant number will be appropriate where the terms and conditions of the pension or annuity do not change as a consequence of the marriage breakdown. This method is simply to split the deductible amount calculated in relation to the original pension or annuity between the member spouse (MS) and the non-member spouse (NMS) in the same proportion as the payment split. This method can be represented by the following formula:

Deductible amount non-member spouse (DA NMS) = Original DA x NMS%


Deductible amount member spouse (DA MS) = Original DA - DA NMS


Original DA is the deductible amount of the original annuity


NMS% is the percentage of each original annuity payment that the NMS is entitled to receive under the payment split.


Example 1

4. Rex commenced a lifetime non-reversionary superannuation pension on 1 July 2000 when he was 60. The undeducted purchase price (UPP) was $20,000 and there was no residual capital value. The relevant number was 20.05. The deductible amount of the pension each year was $998. Rex and Martha divorce and as the rules of the superannuation fund do not allow the pension to be commuted they agree to split the pension payments effective from 1 July 2004. Under the terms of the superannuation agreement Martha (the NMS) is to receive 45% of each pension payment and Rex (the MS) is to receive 55% of each pension payment. The deductible amount of Martha's new pension is:

Original DA x NMS%


= $998 x 45%


= $449


The deductible amount of Rex's new pension is:

Original DA - DA NMS


= $998 - $449


= $549


Example 2

5. Ted commenced a fixed term superannuation pension on 1 January 2005. The pension is payable for a term of 35 years. The UPP was $70,000 and there is no residual capital value. The relevant number was 35, being the number of years in the term of the pension. The deductible amount of the pension was $2000.

Ted and Alice divorce and a splitting order is made directing that pension payments are to be split. The order specifies that payments are to be split effective from 1 July 2005.

Under the terms of the splitting order both Ted and Alice are to receive 50% of each pension payment.

Five years later Ted marries Carol. The terms of the pension provide that if Ted dies before the expiry of the 35 year term the pension will revert to his spouse, Carol for the remainder of the 35 year term.

The 'relevant number' for the purpose of calculating the deductible amount for Ted and Alice will remain at 35 being the term of the pension even though the pension reverts to Carol on Ted's death.

The deductible amount of Alice's new pension (DA NMS) (using the method in paragraph 3) is:

Original DA x NMS%


= $2,000 x 50%


= $1,000


The deductible amount of Ted's new pension (using the method in paragraph 3) is:

Original DA - DA NMS


= $2,000 - $1,000


= $1,000


6. However, the method in paragraph 3 of this Determination will not be appropriate where the terms and conditions of the pension change as a consequence of the marriage breakdown so that the relevant number applicable in relation to the original pension is no longer appropriate. This is most likely to occur where the original pension was reversionary and subsequent to the marriage breakdown the pension ceases to be reversionary. Additionally, there is no other reversionary beneficiary and the pension will cease on the death of the member spouse. If the life expectancy of the member spouse is less than that used as the relevant number in the original calculation of the deductible amount then a different relevant number will need to be used in calculating the deductible amount of the new pensions.

7. This method will recalculate the deductible amount of the original pension using the relevant number at the commencement day of the original pension assuming that the circumstances that exist immediately following the split had existed as at the commencement day of the original pension.

Example 3

8. Luke commenced a superannuation pension payable for life on 1 July 1999. He is the member spouse (MS). Under the governing rules of the fund, the pension reverts to Luke's wife on his death. Luke was 55 when he commenced the pension and his wife, Angela was 50. The UPP was $100,000 and residual capital value was $0. The relevant number reflecting Angela's life expectancy was 32.32. The deductible amount of the pension was $3094.

Luke and Angela divorce and as the rules of the fund do not allow the pension to be commuted they agree to split the pension payments effective from 1 July 2004. Under the terms of the superannuation agreement Angela is to receive 60% of each pension payment and Luke is to receive 40% of each pension payment. Angela is the non-member spouse (NMS).

However, under the governing rules of the fund the pension will no longer revert to Angela on Luke's death because of the divorce. Hence the existing relevant number based on Angela's life expectancy is no longer appropriate. The life expectation factor to be used as the relevant number is that for Luke as at the commencement day of the original pension which is 23.13.

The deductible amount of Angela's new pension is:

Recalculated DA = ($100,000 - 0 ) / 23.13


= $4,323


DA NMS (Angela) = Recalculated deductible amount x NMS%


= $4,323 x 60%


= $2,593


The deductible amount of Luke's new pension is:

DA MS (Luke) = Recalculated DA - DA NMS


= $4,323 - $2,593


= $1, 730


Date of effect

9. This Determination applies both before and after its date of issue. However, it only applies to payment splits in respect of eligible annuities (as defined in section 90MD of the Family Law Act 1975), occurring on or after 29 June 2005. ^[3]

10. The Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination.

Commissioner of Taxation
24 May 2006

Appendix 1 - Explanation

Explanation

11. Subsection 27H(1) of the ITAA 1936 includes in assessable income the amount of any annuity received during the year, excluding the deductible amount. Subsection 27H(4) defines annuity to include a superannuation pension.

12. The deductible amount of an annuity is the amount calculated in accordance with the formula in subsection 27H(2) of the ITAA 1936. The formula calculates the deductible amount by dividing that part of the purchase price of the annuity that has not attracted a tax deduction ('the undeducted purchase price') by the 'relevant number'. ^[4]

13. Where an annuity is payable for a specific number of years, the relevant number equals that specific number of years. Where the annuity is payable only during the lifetime of the annuitant, the relevant number is the number of years of the life expectation of that person. Where an annuity is not payable for a fixed term or over the annuitant's lifetime, the Commissioner is required to calculate the relevant number.

14. Under subsection 27H(3) of the ITAA 1936 if the Commissioner is of the opinion that the deductible amount calculated under subsection 27H(2) is 'inappropriate' having regard to the terms and conditions of the annuity and such other matters as the Commissioner considers relevant, the Commissioner may determine the deductible amount that applies. Under subsection 27H(3) the deductible amount is so much of the annuity as, in the opinion of the Commissioner, represents the undeducted purchase price having regard to:

•

the terms and conditions of the annuity;

•

any certificates of an actuary stating the extent to which in the opinion of the actuary the amount of the annuity derived by the taxpayer in the year of income represents the undeducted purchase price; and

•

such other matters as the Commissioner considers relevant.

15. Part VIIIB of the Family Law Act 1975 provides for the splitting of superannuation on marriage breakdown. Splitting of superannuation in the family law context applies in relation to the superannuation interest of a member spouse.

16. For the arrangement described in paragraph 2 of this Determination, paragraph 140M(1C)(g) of the ITAA 1936 provides that, the payer is taken to have commenced to make payments of another superannuation pension or annuity to the member spouse. Paragraph 140M(1A)(e) of the ITAA 1936 provides that the payer is also taken to have commenced to pay a superannuation pension or annuity to the non-member spouse.

17. On the basis that section 140M of the ITAA 1936 deems there to be two new pensions to the member spouse and the non-member spouse, neither of which have been purchased, it is arguable that the deductible amount is nil for both pensions.

18. The definition of 'undeducted purchase price' (UPP) in subsection 27A(1) of the ITAA 1936 refers to the 'purchase price of the pension or annuity'. 'Purchase price' is defined in subsection 27A(1) as:

(a)

in relation to a superannuation pension - the sum of:

(i)

contributions made by any person to a superannuation fund to obtain superannuation benefits; and

(ii)

so much as the Commissioner considers reasonable of contributions made by any person to a superannuation fund to obtain superannuation benefits including the superannuation pension.

19. A literal reading of the words in the above definition suggests that the new pensions now payable to the member spouse and the non-member spouse do not have a 'purchase price'. The contributions that have been made by 'any person' have been made to 'obtain superannuation benefits' consisting of the superannuation pension originally payable to the member spouse. On this basis no contributions have been made to purchase the pensions now being deemed to be paid to the member spouse and the non-member spouse. Hence there is no purchase price for either of the deemed two new pensions and the deductible amount is nil.

20. Alternatively, it could be argued that the member spouse is entitled to the entire UPP of the original pension. On this basis the member spouse would be entitled to the deductible amount as calculated for the original pension.

21. In the opinion of the Commissioner, using either a nil UPP for each new pension or allocating the entire UPP to the member spouse in applying the formula in subsection 27H(2) of the ITAA 1936 will produce an inappropriate result. It fails to meet the legislative intent of apportioning the taxed amount of the purchase price of the annuity stream over the term of the annuity payments. In addition, it is not consistent with the scheme of section 27ACA of the ITAA 1936 which splits the 'undeducted contributions' element of certain eligible termination payments on the same proportional basis that applies under the Family Law agreement or court order.

22. Therefore, the Commissioner will exercise his discretion under subsection 27H(3) of the ITAA 1936 to determine the deductible amount applicable to each of the deemed new pensions having regard to primarily 'such other matters as the Commissioner considers relevant' as per paragraph 27H(3)(e).

Previously issued as TD 2006/D3

References

ATO references:
NO 2005/13653

Subject References:
deductible amount
eligible annuity
purchase price
residual capital value
superannuation
superannuation pension
undeducted purchase price

Legislative References:
TAA 1953
ITAA 1936 27A
ITAA 1936 27A(1)
ITAA 1936 27ACA
ITAA 1936 27H(1)
ITAA 1936 27H(2)
ITAA 1936 27H(3)
ITAA 1936 27H(3)(e)
ITAA 1936 27H(4)
ITAA 1936 140C
ITAA 1936 140M
ITAA 1936 140M(1A)
ITAA 1936 140M(1A)(e)
ITAA 1936 140M(1C)(g)
Family Law Act 1975 Pt VIIIB
Family Law Act 1975 90MD
Family Law Act 1975 90MJ
Family Law Act 1975 90MT