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Ruling

Subject: Undeducted purchase price of an Australian pension

Question 1:

Are you entitled to a deductible amount in respect of the undeducted purchase price (UPP) of your Australian pension?

Answer:

Yes, your annual deductible amount has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936.

This ruling applies for the following periods:

2002-03 income year

2003-04 income year

2004-05 income year

2005-06 income year

2006-07 income year

The scheme commences on:

18 April 2003

Relevant facts and circumstances

· You receive a pension from a complying superannuation fund.

· Your assessable income includes your pension income.

· Your pension is paid by an untaxed superannuation fund.

· All the pension is payable to you.

· The pension became payable on or after 1 July 1983.

· The pension commenced on 18 April 2003.

· The pension is payable for life, and reverted to you on the death of your spouse.

· The residual capital value of the pension is nil.

· Your age when the pension commenced was 52 years.

· Your pension is paid on a monthly basis.

· Your pension was paid for 74 days in the 2002-03 income year.

Relevant legislative provisions

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(4)

Income Tax Regulations 1936 Regulation 9

Reasons for decision

Section 27H of the ITAA 1936 operates to include in assessable income the amount of any pension derived by a taxpayer during a year of income reduced by the annual deductible amount.

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

The deductible amount is calculated based on the UPP of your pension.

The UPP is the amount your spouse contributed towards the purchase price of your pension for which your spouse did not claim, and were not eligible to claim, a tax deduction in Australia. 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.

Prior to 1 July 2007, the pre July 1983 excess amount together with any post June 1983 undeducted contributions made up the undeducted purchase price of non-rebatable pensions. This total amount was then used to calculate your annual deductible amount, which from 1 July 2007 is referred to as your tax-free component. The pre-July 1983 excess amount represents money used to buy your superannuation pension or annuity. These are amounts which were contributed by your spouse to the superannuation fund before 1 July 1983, and for which he did not receive any deduction or rebate.

Under subsection 27H(2) of the ITAA 1936 and 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

C = is the residual capital value, and

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

The Commissioner has considered the discretion under subsection 27H(3) of the ITAA 1936, but deems the formula in subsection 27H(2) to be appropriate as the basis for the calculation of your 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.

In Taxation Determination TD 2006/72 Income tax: does the relevant number determined for the purposes of working out the deductible amount of a superannuation pension or annuity under subsection 27H(2) of the Income Tax Assessment Act 1936 take into account the life expectancy of a reversionary pensioner or annuitant?, the Commissioner states, in paragraph 1, that the relevant number used to calculate the deductible amount of a superannuation pension that is payable to a person (the original pensioner) for life and on the death of that person is payable to another person for their life (the reversionary pensioner) will be the greater of the life expectancies of the original and reversionary pensioners.

The factors for determining the life expectancy are:

· date the pension first became payable;

· your age when the pension commenced;

Your annual deductible amount of the UPP will apply for the 2002-03 to 2006-07 income years, as stated in the ruling, do not change.

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 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.

Other relevant comments

Please note that from 1 July 2007, the legislation changed in relation to superannuation pensions and benefits paid from complying superannuation funds. These changes do affect you as you are paid the pension from complying superannuation fund under section 42 of the Superannuation Industry (Supervision) Act 1993.

Therefore, your ruling will apply only until 2006-07 income year in relation to the annual deductible amount of an undeducted purchase price (UPP) of your pension. Since 1 July 2007, Australian super benefits, such as pensions and annuities, have been referred to as income streams. The deductible amount of your pension or annuity is still relevant in working out the tax-free component of your income stream. This amount is calculated by your super fund. Your fund will convert your deductible amount into the tax-free component of your income stream. The tax-free component is not assessable. You don't have to include this amount in your income tax return.

Important information to note

Income tax returns may be amended within two years from the date upon which the Commissioner gives notice of the assessment to the individual for assessments for the 2004-05 and later income years

In regards to assessments that fall outside the two/four year period, you will need to lodge an objection request and a request for an extension of time to lodge an objection form. Please complete the attached form and forward to the above address.

ATO view documents

TD 2006/72

TD 2006/17