Draft Taxation Determination

TD 93/D126 (Withdrawn)

Income tax: before an annuity commenced to be payable under a deferred annuity (DA) contract, the DA is commuted and the resulting eligible termination payment (ETP) is rolled-over to purchase an immediate annuity (IA). What will be the rebate of tax under section 159SU of the Income Tax Assessment Act 1936 in respect of that annuity?

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  This document has been Withdrawn.

FOI status:

draft only - for comment

Preamble

1. Nil.

2. Section 159SU allows a rebate of tax in respect of a "rebatable ETP annuity" included in assessable income under section 27H. The IA is such an annuity.

3. The amount of rebate is calculated as follows:

(i)

statutory formulae are applied to determine the intermediate percentage for each component of the purchase price of the annuity;

(ii)

these percentages are added together to provide the final percentage for the annuity; and

(iii)

the final percentage is the multiplied by the amount of the annuity assessable under section 27H to determine the section 159SU rebate.

4. A withdrawal from a DA is an ETP in terms of paragraph (g) of the definition of "eligible termination payment" in subsection 27A(1). This type of ETP is defined as a "commutation type ETP" under subsection 159SJ(1).

5. As the commutation type ETP was rolled-over to purchase the IA, the purchase price of the annuity will consist of a commutation component only. The intermediate and final percentages will therefore be the same.

6. Subsection 159SX(1) provides a formula for calculating the intermediate percentage for the commutation component. A multiplier in this formula is the underlying percentage. However, unless there is an underlying annuity which is also a rebatable ETP annuity, the underlying percentage is zero.

7. A rebatable ETP annuity is defined in subsection 159SJ(1). To come within the definition, it is necessary that an annuity first commenced to be payable on or after 1 July 1988. This condition is not met in the case of the DA.

8. Thus, although the DA is an underlying annuity in relation to the IA, it is not a rebatable ETP annuity. Consequently, the intermediate percentage for the purposes of section 159SX is zero.

9. The final percentage will likewise be zero and no rebate will be allowable under section 159SU in connection with the IA.

10. This result would not necessarily occur where the commutation of the DA occurs after an IA commences to be payable under the DA contract.

Example

On 2/7/88 a retiree receives an ETP from a superannuation fund and rolls it over to purchase a DA. Under the DA contract an immediate annuity will commence on or before the retiree's 65th birthday (2/7/95). On 2/7/92 he commutes the DA and rolls it over the amount received to purchase a replacement annuity (an immediate annuity) payable from that date.

As no payments were made under the DA before commutation there was no rebate percentage determined for that original (i.e. the underlying annuity). Therefore, the original annuity does not have a rebate percentage to carry over to the replacement annuity and paragraph (b) of the definition of underlying percentage would apply resulting in a zero rebate percentage.

Commissioner of Taxation
27 May 1993

References

BO SYD/DTD/92/21

Subject References:
rebates
immediate annuity
deferred annuity
eligible termination payment
commutation component
commutation
underlying annuity
underlying pension
underlying percentage

Legislative References:
ITAA 27A(1)
ITAA 159SJ(1)
ITAA 159SV(a)
ITAA 159SW
ITAA 159SX(1)