Edited version of private ruling

Authorisation Number: 1012230977416

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Ruling

Subject: Deductible amount of undeducted purchase price

Issue 1

Question

Are you entitled to a deductible amount of the UPP in respect of your pension?

Answer

Yes, your annual deductible amount, and part year deductible amount for the 2006-07 income year have been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936).

This ruling applies for the following period:

2006-07 income year

The scheme commences on:

On or after 1 July 1983

Issue 2

Question

Are you entitled to a superannuation pension tax offset?

Answer

Yes, your superannuation pension tax offset for the 2006-07 income year has been calculated in accordance with subsection 159SM(1) of the ITAA 1936.

This ruling applies for the following period:

2006-07 income year

The scheme commences on:

On or after 1 July 1983

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You receive a pension from a complying superannuation fund.

Your assessable income includes your pension income.

Your pension is paid by a superannuation fund.

The superannuation fund is a taxed superannuation fund.

All of the pension is payable to you.

The pension commenced on or after 1 July 1983.

The pension is payable for life, but is reversionary to your spouse upon your death.

You provided documentary evidence of the personal contributions paid towards the purchase price of the pension.

The residual capital value of the pension is nil.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 27A(1),

Income Tax Assessment Act 1936 Section 27H,

Income Tax Assessment Act 1936 Subsection 27H(2),

Income Tax Assessment Act 1936 Subsection 27H(3),

Income Tax Assessment Act 1936 Subsection 27H(3A),

Income Tax Assessment Act 1936 Subsection 27H(4),

Income Tax Assessment Act 1936 Subsection 159SM(1),

Income Tax Assessment Act 1936 Subsection 159SM(2),

Income Tax Assessment Act 1936 Subsection 159SM(3),

Income Tax Assessment Act 1936 Subsection 159SJ(1) and

Income Tax Regulations 1936 Regulation 9.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) operates to include in assessable income the amount of any pension or annuity (pension) derived by a taxpayer during a year of income reduced by the deductible amount.

The deductible amount is deemed to be a return of part of your contribution towards the purchase of the pension.

The calculation of the deductible amount is based on the undeducted purchase price (UPP) of your pension.

The UPP is the amount you contributed towards the purchase price of your pension for which you did not claim, and were not eligible to claim, a tax deduction. Contributions made by an employer or by another person under an agreement to which the employer was a party, cannot form part of the UPP of the pension.

Under subsection 27H(2) of the ITAA 1936, subject to subsection 27H(3) or (3A) of the ITAA 1936, the annual deductible amount of a superannuation pension is ascertained in accordance with the formula:

where:

A = is the relevant share of the pension payable to the taxpayer in relation to the year of income (if all of the pension is payable to the taxpayer, A = 1)

B = is the amount of the UPP of the pension as defined in section 27A(1) of the ITAA 1936

C = is the residual capital value, and

D = is the relevant number in relation to the pension.

Under subsection 27H(4) of the ITAA 1936, when a pension is payable during the lifetime of a person, the 'life expectation factor' is to be used as the relevant number.

Regulation 9 of the Income Tax Regulations 1936 states that for the purposes of the definition of life expectation factor in subsection 27H(4) of the ITAA 1936, the Australian Life Tables published by the Australian Government Actuary are to be used.

The factors for determining the life expectancy are:

(1) the date the pension first become payable;

(2) your age when the pension commenced;

The annual deductible amount of UPP has been calculated in accordance with the above formula.

Paragraph 2 of Taxation Determination TD 2006/17 Income tax: is the deductible amount that is excluded from assessable income when a superannuation pension or annuity is paid reduced when the pension or annuity commences or finishes being paid to a taxpayer part-way through an income year?, states that where a pension or annuity has commenced or finished during an income year, the deductible amount should be determined under subsection 27H(3) of the ITAA 1936. The deductible amount in these circumstances is the amount that would be calculated under subsection 27H(2) of the ITAA 1936 apportioned in accordance with the number of days the pension was payable to you in that year.

The part year deductible amount of UPP has been calculated in accordance with the above formula.

Issue 2:

A taxpayer is entitled to a superannuation pension tax rebate (offset) under subsection 159SM(1) of the ITAA 1936 against the superannuation pension income included in their assessable income in an income year. However, under subsections 159SM(2) and (3) of the ITAA 1936, the taxpayer is not entitled to a rebate if the superannuation fund is not a taxed fund in the year of income, nor if it is a constitutionally protected fund on the first day of the income period.

In addition, under subsection 159SJ(1) of the ITAA 1936, to be eligible to claim the superannuation pension tax offset in relation to an income year, the taxpayer is required to be aged 55 years or over during the whole or part of the income year unless they are receiving a death or disability annuity/pension. In that case, they will be eligible regardless of age.

Where the pension is provided to a person following the death of another person, whether reversionary or not, the offset is available irrespective of the age of the recipient.

If the payment is made from a taxed fund which is not a constitutionally protected fund on the first day of the income period, then the offset is applied using the formula:

Reduced 27H amount x Rebatable proportion of pension x 15%

The reduced 27h amount is the amount of the gross rebatable pension income less the deductible amount of your UPP.

The rebatable proportion is determined by the ATO by measuring the pension or annuity against your reasonable benefit limits (RBL). The rebatable proportion will be 1 unless advised by the ATO. The advice will come in the form of a RBL determination.

The superannuation pension tax offset amounts have been calculated in accordance with the above formula.