How much of the annuity income is excluded?

Annuity income - how much income is excluded?

What is the relevant number? It is the the term of the annuity

Relevant number for a fixed term annuity

Relevant number for a 'rest of life' term annuity

Relevant share of an annuity

Residual capital value of an annuity

 

How to calculate the amount excluded

To do this we will have to return to the formula in sec 27H(2).

Undeducted Purchase Price of annuity (refer to previous topic if you are not sure what this means)

Less

any amount payable when the annuity ceases (we call this the residual capital value)

term over which annuity will be paid,

or can reasonably be expected to be paid

(we call this the relevant number)

 

We now know that we must divide the undeducted purchase price by the relevant number, but what is this relevant number?

Section 27H(4) says it can be any one of 3 things

( we will concentrate on (a)&(b) because choice (c) is any number chosen by the Commissioner after due consideration )

We will start with (a) - this deals with a fixed term annuity - relevant number = number of years over which annuity will be paid (in other the words, the term of the annuity)

Answer this question….

Let's say we have an annuity, which will be paid for a period of 10 years, and an undeducted purchase price of $100.

Sec 27H(2) requires us to divide the undeducted purchase price ($100) by the number of years the annuity will be paid (10)

What is the amount which will be excluded from assessable income

(Just enter the amount - no $ sign please)

 

 

$100 divided by 10 years = $10

So if the pension paid $200 a year ... How much of the $200 will be excluded?

$10 of that amount would be excluded.

As a result, the taxpayer would have only $190 included in assessable income.

The second definition - (b), is the more usual situation, where the pension is payable until the taxpayer's death - relevant number is the life expectancy when the annuity commenced to be paid.

How is the amount excluded arrived at?

Simply by dividing the undeducted purchase price by the life expectancy of the taxpayer when the annuity is first paid.

(Defined as the 'life expectation factor' in sec 27H(4))

Annuities and pensions - life expectation factors

                        1/7/83-31/8/88         1/9/88-30/4/93         1/5/93-31/12/95

            Age      Male    Female Male    Female Male    Female Male    Female

            30        42.18   48.26   43.51   49.67   44.84   50.49   46.07   51.48

            31        41.24   47.29   42.56   48.70   43.90   49.51   45.13   50.50

            32        40.29   46.32   41.61   47.72   42.95   48.54   44.19   49.53

            33        39.35   45.35   40.67   46.75   42.01   47.57   43.25   48.56

            34        38.40   44.39   39.72   45.78   41.06   46.60   42.31   47.58

            35        37.46   43.43   38.77   44.81   40.12   45.63   41.37   46.61

            36        36.52   42.47   37.82   43.84   39.17   44.66   40.42   45.64

            37        35.59   41.51   36.88   42.88   38.22   43.69   39.48   44.67

            38        34.66   40.56   35.94   41.91   37.28   42.72   38.54   43.70

            39        33.73   39.61   35.00   40.95   36.34   41.76   37.60   42.74

            40        32.81   38.67   34.07   40.00   35.40   40.80   36.66   41.77

            41        31.90   37.73   33.14   39.05   34.46   39.84   35.73   40.81

            42        30.99   36.79   32.22   38.10   33.53   38.89   34.79   39.85

            43        30.09   35.87   31.30   37.16   32.60   37.94   33.86   38.90

            44        29.20   34.94   30.39   36.22   31.68   36.99   32.94   37.95

            45        28.32   34.03   29.49   35.28   30.76   36.05   32.01   37.00

            46        27.44   33.11   28.60   34.36   29.85   35.11   31.09   36.05

            47        26.58   32.21   27.71   33.43   28.94   34.18   30.18   35.11

            48        25.73   31.31   26.84   32.52   28.04   33.26   29.27   34.18

            49        24.88   30.42   25.98   31.61   27.16   32.34   28.37   33.25

            50        24.05   29.53   25.12   30.70   26.28   31.43   27.48   32.32

            51        23.23   28.65   24.28   29.80   25.41   30.52   26.59   31.40

            52        22.42   27.77   23.45   28.91   24.55   29.62   25.71   30.49

            53        21.62   26.91   22.63   28.02   23.70   28.73   24.84   29.58

            54        20.83   26.04   21.82   27.14   22.86   27.84   23.98   28.68

            55        20.06   25.19   21.02   26.27   22.04   26.96   23.13   27.78

            56        19.30   24.34   20.24   25.40   21.23   26.08   22.30   26.90

            57        18.55   23.51   19.47   24.55   20.44   25.22   21.47   26.02

            58        17.82   22.68   18.71   23.70   19.65   24.35   20.66   25.14

            59        17.10   21.85   17.96   22.85   18.89   23.50   19.87   24.27

            60        16.40   21.04   17.23   22.02   18.13   22.65   19.09   23.42

            61        15.71   20.24   16.52   21.20   17.39   21.81   18.32   22.57

            62        15.04   19.45   15.81   20.38   16.67   20.98   17.57   21.72

            63        14.39   18.66   15.13   19.58   15.96   20.16   16.83   20.89

            64        13.75   17.89   14.46   18.78   15.27   19.35   16.12   20.07

            65        13.13   17.13   13.80   18.00   14.60   18.56   15.41   19.26

            66        12.53   16.38   13.17   17.22   13.93   17.77   14.73   18.45

            67        11.95   15.65   12.55   16.46   13.29   17.00   14.06   17.66

            68        11.38   14.93   11.95   15.72   12.66   16.24   13.40   16.89

            69        10.84   14.22   11.37   14.98   12.05   15.50   12.76   16.12 

            70        10.31   13.52   10.81   14.26   11.46   14.77   12.14   15.37

You can find a table of life expectancies at para 11-300 of the CCH Master Tax Guide

 

Answer this question….

A taxpayer has a life expectancy of 20 years when he retires.

Undeducted purchase price is $20,000. Pension = $10,000 a year for the rest of his life.

ENTER AMOUNT WHICH WILL BE INCLUDED IN HIS ASSESSABLE INCOME.

(Just enter the amount - no $ sign or comma, please)

 

 

$20,000 divided by 20 = $1,000.

$1,000 will be excluded from the $10,000 received - answer = 9000.

We return to sec 27H(2)

When we first considered the formula we ignored 2 factors - these were

relevant share - (a)

residual capital value - (c)

In fact, we even left relevant share out of the formula altogether. We did that because in the majority of cases they won't affect the calculation

We will think about them now.

 

A

Relevant

Share

(

B

Undeducted Purchase Price of annuity (refer to previous topic if you are not sure what this means)

-

C

any amount payable when the annuity ceases (we call this the residual capital value)

)

                                       D

term over which annuity will be paid,

or can reasonably be expected to be paid

(we call this the relevant number)

 

 

 

relevant share (A in formula)

Where the annuity is payable jointly to more than one person, this will equal

the fraction of the whole annuity actually derived by the taxpayer.

eg annuity paid to taxpayer & spouse - relevant share (a) = .5

Where a taxpayer derives the annuity in his own right the relevant share=1

 

residual capital value (C in formula)

If ... The agreement under which the annuity is paid makes provision for a capital amount to be paid on termination of the pension payments, then this sum must be deducted from the undeducted purchase price.

For most pensions this will = 0

 

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