ATO Interpretative Decision
ATO ID 2003/60
Superannuation
Undeducted Purchase Price - Relevant NumberFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Should the annual deductible amount of the undeducted purchase price (UPP) of a superannuation pension be recalculated using the taxpayer's life expectancy upon the taxpayer's divorce?
Decision
Yes. The annual deductible amount of the UPP of a superannuation pension should be recalculated using the taxpayer's life expectancy upon the taxpayer's divorce.
Facts
The taxpayer receives a superannuation pension from an unfunded defined benefit scheme.
The annual deductible amount of the superannuation pension was originally determined based on the ex-spouse's life expectancy.
Subsequent to the pension commencing the taxpayer became divorced.
According to the governing rules of the fund, the pensioner must be legally married at the time of death for the pension to revert to the spouse.
Reasons for Decision
Subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936) provides the formula for calculating the deductible amount to be applied against the gross pension or annuity payments received during a year of income. The formula under subsection 27H(2) is as follows:
(A(B - C)) / D
Where:
- •
- A = the relevant share of the pension payable to the taxpayer in relation to the year of income (in this case all of the pension is payable to the taxpayer, so A = 1)
- •
- B = the amount of the UPP of the pension
- •
- C = the residual capital value
- •
- D = the relevant number in relation to the pension.
Subsection 27H(4) of the ITAA 1936 defines 'relevant number', as meaning:
- a)
- 'where the annuity is payable for a term of years certain - the number of years in the term,
- b)
- where the annuity is payable during the lifetime of a person and not thereafter - the life expectation factor of the person, and
- c)
- in any other case - the number that the Commissioner considers appropriate having regard to the number of years in the total period during which the annuity will be, or may reasonably be expected to be, payable.'
The Commissioner will not exercise his discretion under paragraph 27H(4)(c) of the ITAA 1936 to determine the relevant number unless he considers it appropriate to do so.
In Administrative Appeals Tribunal Case Z19 92 ATC 204; AAT Case 7904 (1992) 23 ATR 1143, Member Fayle stated that:
'The deduction is to be calculated by reference to ascertainable criteria with a general application and not by some administrative decision based on individual preferences unrelated to the tests laid down in the legislation. To replace the statutory tests in subs (2) with some other test or opinion where the statutory test clearly applies would be to make the taxing measure arbitrary. There can be no scope to overlook the statutory test where its application cannot give rise to a harsh or an unreasonable incidence with regard to the object of the provision.'
In circumstances, where a taxpayer's superannuation pension becomes non-reversionary following a divorce, or subsequently becomes reversionary upon remarriage, it is considered appropriate to redetermine the relevant number.
In Case U89 87 ATC 513; AAT Case 67 (1987) 18 ATR 3484, Senior Member P M Roach stated that:
'when there is no prospect of any person becoming entitled to an annuity following the death of the contributor-annuitant the 'undeducted purchase price' is appropriately related by the Commissioner to the period of his life expectancy.'
As there is no longer the prospect of any other person becoming entitled to the taxpayer's superannuation pension following the taxpayer's death, it is considered appropriate to recalculate the deductible amount of the pension using the taxpayer's life expectancy as the relevant number.
Year of income: Year ended 30 June 1996 Year ended 30 June 1997 Year ended 30 June 1998 Year ended 30 June 1999 Year ended 30 June 2000 Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1936
subsection 27H(2)
subsection 27H(4)
Case References:
AAT Case U89
87 ATC 513.
92 ATC 204.
Keywords
Marriage breakdown
Life expectancy
Undeducted purchase price
Undeducted purchase price commissioner's discretion
Date reviewed: 6 November 2019
ISSN: 1445-2782