ATO Interpretative Decision
ATO ID 2008/137
Income Tax
Separate Net Income: account-based pensionsFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Can the gross amount of an account-based pension received during an income year, be reduced by a proportionate amount of the personal superannuation contributions made during the accumulation phase of the pension, when calculating the separate net income of a dependant under section 159J of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The gross amount of an account-based pension received during an income year, can be reduced by a proportionate amount of the personal superannuation contributions made during the accumulation phase of the pension, when calculating the separate net income of a dependant under section 159J of the ITAA 1936.
Facts
On 1 July 2008, the taxpayer's spouse commenced receiving payments from an account-based pension.
During the accumulation phase of the pension, the taxpayer's spouse made personal superannuation contributions of $100,000.
Reasons for Decision
A resident taxpayer who contributes to the maintenance of a person who is a dependant may be entitled to a tax offset in accordance with Subdivision A of Division 17 of Part III of the ITAA 1936.
Subsection 159J(1) of the ITAA 1936 provides:
[Maintenance of dependant] Where during the year of income, a taxpayer contributes to the maintenance of a person (in this section referred to as a "dependant") specified in column 2 of the table set out in subsection (2) and that person is a resident, the taxpayer is entitled, in his assessment in respect of income of that year of income, to a rebate of tax ascertained in accordance with this section.
A spouse of a taxpayer is a person specified in column 2 of the table set out in subsection 159J(2) of the ITAA 1936.
Subsection 159J(4) of the ITAA 1936 provides:
[Separate net income] The amount of the rebate otherwise allowable under this section in respect of a dependant shall be reduced by $1 for every $4 by which the separate net income derived by the dependant in the year of income exceeds $282.
Subsection 159J(6) of the ITAA 1936 provides certain specific inclusions and exclusions to the meaning of the phrase 'separate net income'.
The ordinary meaning of the phrase 'separate net income' is dealt with in Taxation Ruling IT 2391. Broadly, 'separate net income' is the ordinary income of the dependant, less expenses which are regarded, according to ordinary accountancy and commercial principles, as a direct charge against the income.
Receipts from a superannuation pension are ordinary income (Federal Commissioner of Taxation v. Harris 80 ATC 4238 at 4243; (1980) 10 ATR 869 at 874, per Bowen CJ). Therefore, account-based pension receipts of a dependant for an income year, reduced by any amounts that are a direct charge against that income in accordance with ordinary accounting and commercial principles, will be included in separate net income of the dependant for the income year.
In Federal Commissioner of Taxation v. Knight 83 ATC 4096; (1983) 14 ATR 1, in the context of the former section 26AA of the ITAA 1936 (which concerned the assessability of annuities), Kelly J held that the pension arising from the contributing scheme in that case was within the ordinary meaning of the word 'annuity'. In deciding whether the annuity was purchased, Kelly J adopted the reasoning of Jacobs J.A. in Wayne v. Commissioner of Stamp Duties (1966) 85 WN (Pt 1) (NSW) 301 at 311-312, where it was said:
...where the scheme is a contributing scheme, even though the contributions are compulsory, I think that the interest created must be regarded as one which is purchased or provided by the employee.
On ordinary accounting principles, something which is purchased and which gives rise to an enduring benefit requires recognition as an asset. Therefore, at the end of the accumulation phase of a contributory pension, there would, under ordinary accounting principles, be an asset representing the sum total of the contributions made by the member during the accumulation phase.
As that asset proportionally dissipates on receipt by the member of payments from the contributory scheme, ordinary accounting principles would require an appropriate allocation of the purchase price as a direct charge against the income received.
The quantum of the direct charge will need to be determined on a case by case basis. This may be done on any reasonable basis in accordance with ordinary accounting principles.
Date of decision: 15 July 2008Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1936
section 159J
subsection 159J(1)
subsection 159J(2)
subsection 159J(4)
subsection 159J(6)
section 26AA
Case References:
Federal Commissioner of Taxation v. Harris
80 ATC 4238
83 ATC 4096
Related Public Rulings (including Determinations)
Taxation Ruling IT 2391
Keywords
Dependant rebates
Rebates and offsets
Separate net income of dependants
Superannuation pensions
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 15 July 2008 | Original statement |
| 31 March 2017 | Archived |