ap_ann02

Annuity

Annuity income is included in assessable income - some history

Annuity income (in all its many forms) is included in assessable income

In the previous topic we saw how the character of annuity is a complex thing - is it capital or income, and if it is income, when is it derived?

To overcome these problems, section 27 specifically includes payments, which fall within the definition of an annuity in assessable income.

Did we say definition?

Make that 'definitions'!

There are few of them scattered through the hodge podge of provisions starting with the definitions section (27A) and continuing on from there.

The problem seems to be that the annuity provision just grew like topsy over the years, being amended in a most obtuse manner to make them fit any changes in government policy, of which there have been many.

For example, section 27H includes in assessable income, pensions or annuities which first commenced to be payable on or after 1 July 1983. However, if the pension or annuity commenced to be payable prior to this date, it is assessed under section 26AA, which has been repealed!

By the time you get through these provisions, you will become a great fan of the Tax Law Improvement Project!

Annuity income (in all its many forms)

is included in assessable income

Section 27H includes in assessable income "annuities" and "superannuation pensions" (ie pensions payable from a superannuation fund),

which commence to be payable after 30 June 1983

However, they are reduced by something called 'the deductible amount' which is determined under s 27H(2) or (3)

They are taxed at the taxpayer's ordinary marginal rates of tax subject to a possible rebate of tax.

So, annuities and superannuation pensions are included in assessable income - is that it?

Not quite! Supplements to annuities are also included!

So what are supplements to annuities?

Due to the effects of inflation upon 'fixed' superannuation pensions, some funds have voluntarily paid supplements to assist retired employees with their living costs. These supplements have been held not to be income according to ordinary concepts - refer the Harris case - CCH Master Tax Guide - para 10-010.

Section 27H(1)(b) includes such amounts in assessable income (after 30/5/84) Don't worry that you can't find this date of effect in sec 27H (It was contained in the amending act which introduced this section.)

Answer this question….

A retired taxpayer receives an amount from his former employer to assist him with his living expenses.

Would this be income according to general concepts?

Yes No

If the payment was unexpected and unsolicited it would not be income in the general meaning of the word

Refer sec 27H(1)(b)

So what is an annuity?

In section 27A(1) annuity is defined as having the same meaning as in section 10 of the Superannuation Industry (Supervision) Act 1993. It includes…

a benefit provided by a life insurance company or a registered organisation if the benefit arises under a contract which meets the prescribed minimum standards.

A pension is defined in similar terms. The definition in the Income Tax Assessment Act applies to

annuities purchased after 21 December 1992

pension payments after 21 December 1992

The advantage of doing it this way is that the Commissioner of Taxation can ensure that any receipts answering the definition of annuities or pensions are not just the visible portion of some tax avoidance scheme concocted to exploit the generous tax treatment provided to superannuation funds.

What are these prescribed minimum standards?

You can read about them in paragraph 11-308 of the CCH Master Tax Guide. They govern the conditions under which the annuity is paid eg

frequency of payments (at least one a year),

minimum and maximum payments,

return of capital, etc

Such income streams are included in assessable income as annuities and pensions and are taxed at marginal rates. However the taxpayer can

deduct that part of the cost of the annuity for which no tax concession has been allowed (the deductible amount)

receive a rebate if the amount is within the Reasonable Benefit Limit

But remember, the statutory definition of annuity only expands upon the common law definition which we considered in the previous topic (what is an annuity?)

Taxation of Annuities

Section 27H includes in assessable income, pensions or annuities which first commenced to be payable on or after 1 July 1983.

We have mentioned that if the pension or annuity commenced to be payable prior to this date, it is assessed under section 26AA, which has been repealed!

All income streams, which meet minimum standards, are taxed as annuities and pensions in the hands of the taxpayer. We considered an exception to this rule in the previous topic - deferred interest securities.

Another exception is a pension or annuity paid from a fund that is a resident non complying superannuation fund - such payments are exempt from income tax. (section 27H(1A).