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Ruling

Subject: Tax treatment of non-superannuation annuities

Question

Are the annuity payments received by you included in your assessable income and subject to tax?

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You and your spouse jointly own three annuities.

You commenced your first annuity on date X. This annuity is an immediate annuity lifetime reversionary 5% indexed annuity payable yearly. This was purchased by rolling over superannuation monies from your spouse's employer superannuation fund directly to the annuity.

You commenced your second annuity on date Y. This annuity is a lifetime reversionary 5% index annuity payable half-yearly in arrears.

You commenced your third annuity on date Y. This annuity is a lifetime reversionary 5% indexed annuity payable half-yearly in arrears.

You are the first annuitant in your second and third annuity and second annuitant in your first annuity.

You are over 60 years of age.

Assumptions

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H.

Income Tax Assessment Act 1997 Section 301-10.

Income Tax Assessment Act 1997 Subsection 307-5(1).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Act Regulations 1997 Regulation 995-1.01.

Superannuation Industry (Supervision) Act 1993 Subsection 10(1).

Superannuation Industry (Supervision) Regulations 1994 Subregulation1.05(1).

Reasons for decision

Issue

Question

Are the annuity payments received by you included in assessable income and subject to tax?

Summary of decision

You received three annuities from life insurance companies.

At present, the annuities you received are within the definition of 'annuity' as they are annuities at common law and are issued by life companies. Therefore, the annuities are also superannuation benefits.

As you are over 60 years of age, the benefits are not assessable income and not exempt income.

Detailed reasoning

From 1 July 2007, there have been changes to the tax treatment of superannuation benefits.

Division 301 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the taxation arrangements that apply to superannuation benefits received by members of complying superannuation plans. This treatment varies depending on the age of the member when they receive the benefit.

In the case of a person who is 60 years or over when he or she receives a superannuation benefit, section 301-10 of the ITAA 1997 provides that the benefit is not assessable income and is not exempt income.

The term 'superannuation benefit' is defined under subsection 307-5(1) of the ITAA 1997 and includes a superannuation annuity payment which is defined under that subsection as being:

A payment to you:

Subsection 995-1(1) of the ITAA 1997 defines superannuation annuity as having the meaning given in the regulations. Regulation 995-1.01 of the Income Tax Assessment Regulations 1997 (ITAR), in turn, defines superannuation annuity as meaning:

Subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) defines annuity as including a benefit provided by a life insurance company or a registered organisation, if the benefit is taken, under the regulations, to be an annuity for the purposes of the SIS Act. This is an inclusive definition. It also includes any annuity that is an annuity at common law.

Thus, an annuity that is an annuity at common law will be an annuity within the meaning of subsection 10(1) of the SIS Act provided it is provided by a life insurance company or a registered organisation and commenced before 20 September 2007.

In your case, you are in receipt of three annuities. Your first annuity was purchased with the rollover of superannuation monies and clearly meets the definition of annuity and is therefore a superannuation benefit. As you are over 60 years of old, this benefit is not assessable income and not exempt income.

In regards to your second and third annuities, both annuities are lifetime reversionary indexed annuities which both commenced on 14 July 1989. Neither annuity was purchased by the roll-over of an eligible termination payment (ETP). Both annuities are what are commonly referred to as ordinary annuities or, prior to 1 July 2007, non-ETP annuities and are annuities at common law.

As the two annuities are annuities at common law and are issued by life companies they will come within the definition of 'annuity' under subsection 10(1) of the SIS Act. Hence, they will also be superannuation annuities under regulation 995-1.01 of the ITAR and subsection 995-1(1) of the ITAA 1997.

Therefore, at present, all three annuities are also superannuation benefits as defined under subsection 307-5(1) of the ITAA 1997. As you are over 60 years of age, section 301-10 of the ITAA 1997 provides that the benefits are not assessable income and not exempt income.

It should be noted in relation to the second and third annuities, it was not the intention of Parliament that the concession afforded to persons over 60 years of age in respect of superannuation benefits be extended to these ordinary annuities. This is evidenced by the following comment made at paragraph 2.23 of the Explanatory Memorandum to the Superannuation Legislation Amendment (Simplification) Bill 2007 which made consequential and other amendments to both the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936):

Currently, section 27H of the ITAA 1936 includes amounts of annuities or superannuation pensions in assessable income. From 1 July 2007 revised taxation arrangements apply to Australian - sourced superannuation income streams, but section 27H continues to apply to other income streams (foreign sourced benefits and non-superannuation annuities). There is no intention to modify the operation of this provision for foreign-sourced benefits or non-superannuation annuities. (emphasis added).

Further, the Explanatory Statement to the Income Tax Assessment Amendment Regulations 2007 (No.2), which inserted the definition of 'superannuation annuity' in regulation 995-1.01 of the ITAR, makes the following comment:

'Superannuation annuity' replaces what is currently known as an 'ETP annuity', that is, an income stream purchased from a life insurance company or registered organisation with the whole or part of a rolled over amount, roll-over superannuation benefit or directed termination payment.

Treasury have been advised that amendment to the definitions is required.

Amendment

As you consider the amount your received from your second and third annuity have been included in your assessable income for the year ended 2010, you should request an amendment of that return at your local taxation office and enclose a copy of this ruling.

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