Private ruling: Taxation treatment of annuity payments
Date of advice: 19 February 2018
Published: June 2018
Ruling period: Income year ending 30 June 2020
Date scheme commenced: 1 July 2017

Ruling: Q1: Are the annuity payments received by a person (the Taxpayer) included in assessable income and subject to tax? | A1: No

Relevant facts and circumstances: The Taxpayer retired from a former employer in the late-1980s. At that time the Taxpayer received a lump sum superannuation benefit from their superannuation fund. In consultation with their financial planner, the Taxpayer used an amount to purchase two annuities with different life insurance companies. The annuities are lifetime non-reversionary indexed annuities payable monthly in arrears. The Taxpayer commenced both annuities after 30 June 1983 and before 3 August 1993. Documents provided by the Taxpayer state that both annuities have not been purchased with a rolled over amount. The Taxpayer is over 60 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 27H. | Income Tax Assessment Act 1997 Section 301-10. | Income Tax Assessment Act 1997 Subsection 307-5(1). | Income Tax Assessment Act 1997 Subsection 995-1(1). | Income Tax Assessment Regulations 1997 Regulation 995-1.01. | Superannuation Industry (Supervision) Act 1993 Subsection 10(1). | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.05(1).

Reasons for decision: Summary: Both the annuities received by the Taxpayer will come within the definition of ‘annuity’ as they are annuities at common law and are issued by life companies. Therefore, the annuities are also superannuation benefits. As the Taxpayer is over 60 years of age, the benefits are not assessable income and not exempt income. | Detailed Reasoning - Detailed reasoning: Division 301 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the taxation arrangements that apply to superannuation benefits received by members of complying superannuation plans, etc. This treatment varies depending on the age of the member when they receive the benefit. In the case of a person who is 60 years or over when he or she receives a superannuation benefit, section 301-10 of the ITAA 1997 provides that the benefit is not assessable income and is not exempt income. The term ‘superannuation benefit’ is defined under subsection 307-5(1) of the ITAA 1997 and includes a superannuation annuity payment which is defined under that subsection as being: A payment to you: (a) from a superannuation annuity; or (b) arising from the commutation of a superannuation annuity; because your are the annuitant. Subsection 995-1(1) of the ITAA 1997 defines superannuation annuity as having the meaning given in the regulations. Regulation 995-1.01 of the Income Tax Assessment Regulations 1997 (ITAR), in turn, defines superannuation annuity as meaning: (a) an income stream: (i) that is issued by a life insurance company or registered organisation; and (ii) that commenced before 20 September 2007; and (iii) that is an annuity within the meaning of: (A) subsection 10(1) of the SIS Act; or (B) subregulation 1.07(1A) of the RSA Regulations; or (b) an income stream that: (i) is issued by a life insurance company or registered organisation; and (ii) meets the standards set out in subregulation 1.05(1) of the SIS Regulations. Subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) defines annuity as including a benefit provided by a life insurance company or a registered organisation, if the benefit is taken, under the regulations, to be an annuity for the purposes of the SIS Act. This is an inclusive definition. It also includes any annuity that is an annuity at common law. Thus, an annuity that is an annuity at common law will be an annuity within the meaning of subsection 10(1) of the SIS Act as long as it is provided by a life insurance company or a registered organisation and commenced before 20 September 2007. In this case the Taxpayer is in receipt of two annuities. Both annuities are lifetime non-reversionary indexed annuities and commenced after 30 June 1983 and before 3 August 1993. Neither annuity was purchased by the roll-over of an eligible termination payment (ETP). Both annuities are what are commonly referred to as ordinary annuities or, prior to 1 July 2007, non-ETP annuities and are annuities at common law. As the annuities are annuities at common law and are issued by life companies they will come within the definition of ‘annuity’ under subsection 10(1) of the SIS Act. Hence, they will also be superannuation annuities under regulation 995-1.01 of the ITAR and subsection 995-1(1) of the ITAA 1997. Therefore, the annuities are also superannuation benefits as defined under subsection 307-5(1) of the ITAA 1997. As you are over 60 years of age, section 301-10 of the ITAA 1997 provides that the benefits are not assessable income and not exempt income. It is noted, however, that it was not the intention of Parliament that the concession afforded to persons over 60 years of age in respect of superannuation benefits be extended to ordinary annuities. This is evidenced by the following comment made at paragraph 2.23 of the Explanatory Memorandum to the Superannuation Legislation Amendment (Simplification) Bill 2007 which made consequential and other amendments to both the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936): Currently, section 27H of the ITAA 1936 includes amounts of annuities or superannuation pensions in assessable income. From 1 July 2007 revised taxation arrangements apply to Australian-sourced superannuation income streams, but section 27H continues to apply to other income streams (foreign sourced benefits and non-superannuation annuities ). There is no intention to modify the operation of this provision for foreign-sourced benefits or non-superannuation annuities . (emphasis added). Further, the Explanatory Statement to the Income Tax Assessment Amendment Regulations 2007 (No. 2), which inserted the definition of ‘superannuation annuity’ in regulation 995-1.01 of the ITAR, makes the following comment: ‘Superannuation annuity’ replaces what is currently known as an ‘ETP annuity’, that is, an income stream purchased from a life insurance company or registered organisation with the whole or part of a rolled over amount, roll-over superannuation benefit or directed termination payment.