Product Ruling PR 2023/15
Date of effect: 1 July 2023

What this ruling is about: 1. This Ruling sets out the income tax consequences for entities referred to in paragraph 4 of this Ruling in connection with an investment in Challenger Guaranteed Annuity (Floating Rate Fixed Term) (the Annuity) issued by Challenger Life Company Limited (Challenger) and offered under a Product Disclosure Statement (PDS) dated 12 March 2021. 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1936, unless otherwise indicated. 3. This Ruling does not address: Who this Ruling applies to 4. This Ruling applies to you if you are an Australian resident for tax purposes and are one of the following: 5. This Ruling does not apply to you if you: 6. This Ruling applies from 1 July 2023 to the entities specified in paragraph 4 of this Ruling in connection with an Annuity purchased from 1 July 2023 until 30 June 2026. 7. However, the Ruling only applies and may be relied on to the extent that there is no change in the scheme or in the entity's involvement in the scheme. If the scheme carried out is materially different from the Scheme described at paragraphs 10 to 25 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified. 8. Subject to paragraph 3 and the assumptions in paragraph 9 of this Ruling: Assumptions 9. This Ruling is made on the basis of the following necessary assumptions: 10. The scheme is identified and described in the following: Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 11. For the purposes of describing the scheme, there are no other agreements (whether formal or informal, and whether or not legally enforceable) which an entity referred to in paragraph 4 of this Ruling, or any associate of such entity, will be a party to which are a part of the scheme. 12. All Australian Securities and Investments Commission requirements are, or will be, complied with for the term of the agreements. Overview of scheme 13. The Annuity satisfies the definition of a 'life insurance policy' under subsection 995-1(1) of the ITAA 1997 and is offered by Challenger in Australia to individuals over 18 years of age, companies and trusts (including self-managed superannuation funds). Individuals who purchase the Annuity can do so alone or jointly with another person. 14. To purchase the Annuity, policy owners are required to execute and lodge the application form attached to the PDS with Challenger, together with an initial investment amount of at least $10,000 which cannot be funded using a roll-over superannuation benefit. No additional fees or charges are payable to Challenger by a policy owner, and no further capital can be added to the initial investment amount once the Annuity has commenced. 15. Upon acceptance of a valid application, a policy owner is issued with the Policy Document (a legal contract between a policy owner and Challenger) and an Investor Certificate by Challenger, setting out the relevant terms and conditions. 16. In exchange for the initial investment amount, the Annuity provides regular payments (monthly, quarterly, half-yearly or yearly [2] ) for a term of 1 to 50 years, as chosen by the policy owner and subject to an event which causes the Annuity to end sooner. Regular payments made to joint policy owners are split in whatever proportion they nominate at the time the Annuity is purchased, or otherwise in equal proportions. 17. The amount of the regular payments payable by Challenger depends on a number of factors, including the amount of the initial investment, prevailing investment market conditions at the time the Annuity is purchased, the term of the Annuity and any choice to partially withdraw the Annuity early, and will be adjusted in line with changes in the Reserve Bank of Australia cash rate over the regular payment period chosen by the policy owner. 18. Where individuals purchase the Annuity jointly with another person and one of the joint policy owners dies during the term of the Annuity, the deceased joint policy owner's regular payments will be made to the surviving joint policy owner. 19. At the time the Annuity is purchased, an individual policy owner can nominate one or more beneficiaries in the event they die before the term of the Annuity ends. A reversionary beneficiary entitled to receive regular payments under the circumstances contemplated in paragraph 21 of this Ruling can, at the time that entitlement arises, nominate one or more beneficiaries of their own in the event they die before the term of the Annuity ends. Beneficiaries can only be nominated under an Annuity purchased jointly by individuals by the surviving joint policy owner where the other joint policy owner dies during the term of the Annuity. 20. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, does not nominate a beneficiary and dies during the term of the Annuity, the regular payments will continue to be made to their estate. 21. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, nominates a single beneficiary (as their reversionary beneficiary) and dies during the term of the Annuity, the regular payments will continue to be made to their reversionary beneficiary. 22. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, nominates multiple beneficiaries and dies during the term of the Annuity, the beneficiaries will be paid a withdrawal value as a lump sum death benefit in the proportions specified by the deceased, or otherwise in equal proportions, and the Annuity will end. Where a beneficiary predeceases the policy owner or reversionary beneficiary, as applicable, their proportion of the withdrawal value will be paid pro rata to the remaining beneficiaries. If all beneficiaries predecease the policy owner or reversionary beneficiary, as applicable, the withdrawal value will be paid to the estate of that policy owner or reversionary beneficiary. 23. The Annuity can be withdrawn in part or full prior to the end of its term by the policy owner (or by any other applicable entity receiving the regular payments at the time in accordance with paragraphs 20 and 21 of this Ruling). The applicable entity in receipt of the regular payments at the time will be paid a withdrawal value. The regular payments (and the Annuity) will end where the Annuity is withdrawn in full. 24. The amount of the withdrawal value paid under the circumstances contemplated by paragraphs 22 and 23 of this Ruling will be at least the present value of the future regular payments due for the remainder of the term of the Annuity and no less than the amount prescribed by the Life Insurance Act 1995. 25. Subject to any earlier partial withdrawals of the Annuity (which will likely reduce the residual capital value of the Annuity) or any decision at the end of the term of the Annuity to roll over the residual capital into another Annuity for a further term, at the conclusion of the term the initial investment amount is repaid to the policy owner (or to any other applicable entity receiving the regular payments at the time in accordance with paragraphs 20 and 21 of this Ruling), and the Annuity ends. Commissioner of Taxation 23 August 2023 Subsection 27H(4) - annuity 26. Subsection 27H(4) defines an 'annuity' to mean: 27. This definition encompasses an annuity on ordinary concepts, as contemplated within various judicial authorities and discussed in Taxation Ruling IT 2480 Income tax: variable annuities. An annuity on ordinary concepts is a contract under which a principal sum is converted into an income stream [3] of payments that are at least annual, fixed or variable in a way that is calculable, and which will continue to be paid for a fixed or determinable period. 28. A policy owner's initial investment amount is applied to purchase the regular payments payable by Challenger under the terms of the Annuity, a contract between the policy owner and Challenger. Those regular payments are a series of periodic payments (payable at least yearly), variable in a way calculated by reference to Reserve Bank of Australia cash rate movements, and (unless commuted in full earlier for the withdrawal value) continue for a fixed term. The ability of the policy owner (or of any other applicable entity receiving the regular payments at the time) to commute does not of itself result in the Annuity failing to be accepted as an annuity contract (see paragraph 25 of IT 2480). 29. An Annuity purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling therefore constitutes an annuity on ordinary concepts and, subject to the exclusions in paragraphs (a) and (b) of the definition (considered at paragraphs 30 to 34 of this Ruling), constitutes an annuity as defined in subsection 27H(4). Division 16E - qualifying security 30. An annuity is excluded from the definition of a 'qualifying security' in subsection 159GP(1) unless it is an annuity to which subsection 159GP(10) applies. An annuity will be one to which subsection 159GP(10) applies where, among other requirements, the annuity is not an 'ineligible annuity', a term also defined in subsection 159GP(1) to mean 'an annuity issued by a life assurance company to or for the benefit of a natural person other than in the capacity of trustee of a trust estate'. 31. An Annuity issued by Challenger to a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling (that is, a natural person other than in the capacity of trustee of a trust estate) is an ineligible annuity. Therefore, the Annuity is not one to which subsection 159GP(10) applies and, as such, is not a qualifying security for the purposes of Division 16E. Superannuation income stream 32. A 'superannuation income stream' has the meaning given by the ITAR (1997 Act) 2021 (subsection 307-70(2) of the ITAA 1997). Subsection 307-70.02(1) of the ITAR (1997 Act) 2021 defines superannuation income stream in relation to an annuity commenced after 19 September 2007 to mean an income stream that is taken to be an annuity for the purposes of the Superannuation Industry (Supervision) Act 1993 (SISA) in accordance with subregulation 1.05(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). 33. Subregulation 1.05(1) of the SISR provides a number of requirements that must be met for a benefit provided by a life insurance company to be taken to be an annuity for the purposes of the SISA. One of those requirements in respect of a benefit purchased on or after 1 July 2007 is that it is purchased with the whole or part of a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997, or the whole or part of a directed termination payment within the meaning of the IT(TP)A 1997. 34. As per paragraph 14 of this Ruling, the policy owner cannot purchase the Annuity using a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997 and, as per subparagraph 9(b) of this Ruling, it is assumed for the purposes of this Ruling that a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling will not purchase the Annuity using a directed termination payment within the meaning of the IT(TP)A 1997. As such, the Annuity is not a superannuation income stream for the policy owner. Division 230 of the ITAA 1997 - taxation of financial arrangements 35. Division 230 of the ITAA 1997 sets out the tax treatment of gains or losses from a 'financial arrangement'. Generally, a financial arrangement is a cash settlable legal or equitable right to receive a financial benefit, or obligation to provide such benefit, or a combination of one or more such rights or obligations (subsection 230-45(1) of the ITAA 1997). A right to receive or obligation to provide a financial benefit can be 'cash settlable' under subsection 230-45(2) of the ITAA 1997 if the benefit is money, or if it is a right the taxpayer intends to satisfy or settle by receiving money, or if it is an obligation that the taxpayer intends to satisfy or settle by providing money. 36. The Annuity constitutes a financial arrangement for the purposes of Division 230 of the ITAA 1997 on the basis that the entities referred to in paragraph 4 of this Ruling have cash settlable rights to receive a financial benefit in the form of the regular payments or the withdrawal value or both, as applicable, and on the basis that a policy owner has a cash settlable obligation to provide a financial benefit in the form of the initial investment amount. 37. Subject to exceptions under Subdivision 230-H of the ITAA 1997, gains made from a financial arrangement are included in assessable income under subsection 230-15(1) of the ITAA 1997 and are not (to any extent) to be included in assessable income pursuant to any other taxing provision of the income tax Acts (subsection 230-20(4) of the ITAA 1997), including section 27H. 38. However, where the rights or obligations under an arrangement are the subject of an exception under section 230-460 of the ITAA 1997, Division 230 of the ITAA 1997 does not apply in relation to gains or losses from a financial arrangement for any income year (subsection 230-460(1) of the ITAA 1997). Subsection 230-460(5) of the ITAA 1997 provides a specific exception as follows: 39. As the Annuity is a life insurance policy as defined in subsection 995-1(1) of the ITAA 1997 (as per paragraph 13 of this Ruling) that is not a qualifying security (as defined in subsection 159GP(1) and discussed at paragraphs 30 to 31 of this Ruling), the exception in subsection 230-460(5) applies and Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling. Section 27H - assessability of regular payments 40. Paragraph 27H(1)(a) includes in the assessable income of a taxpayer of a year of income the amount of any annuity derived by the taxpayer during that year excluding, in the case of an annuity that has been purchased, any amount that is the deductible amount in relation to the annuity in relation to the year of income. The regular payments made by Challenger to an entity referred to in subparagraphs 4(a), (b), (c), (d) or (f) of this Ruling, as applicable, are therefore assessable income under subsection 27H(1) to the extent that the regular payments exceed the deductible amount in relation to the Annuity. 41. The deductible amount is excluded from the assessable amount of the annuity and is tax free to the recipient because it represents the return to them of the amount paid to acquire the annuity. Subsection 27H(2) provides for the calculation of the deductible amount in relation to an annuity derived by a taxpayer during a year of income, subject to subsections 27H(3) and (3A), in accordance with the following formula: 42. In accordance with the definition of the term in subsection 27H(4), the 'relevant share' in relation to the Annuity (component A) for an entity referred to in subparagraphs 4(a), (c), (d) or (f) of this Ruling is 1. The relevant share in relation to the Annuity for a policy owner referred to in subparagraph 4(b) of this Ruling is a fraction corresponding with their respective share in the Annuity. 43. The undeducted purchase price in relation to an Annuity (component B) that is purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is the whole of the purchase price of the Annuity (the initial investment amount), reduced by any portion of the initial investment amount that is an allowable deduction. As per subparagraph 9(d) of this Ruling, it is assumed for the purposes of this Ruling that no portion of the initial investment amount is deductible. 44. The residual capital value in relation to an annuity is defined in subsection 27H(4) as 'the capital amount payable on the termination of the annuity'. Subject to any earlier partial withdrawal, the terms of the Annuity provide that the residual capital value in relation to the Annuity (component C) is the value of the purchase price. 45. Where an annuity is payable for a term of years certain, the relevant number in relation to that annuity in relation to a year of income is defined in subsection 27H(4) to mean the number of years in the term. The relevant number in relation to the Annuity (component D) is therefore the number of years in the term of the Annuity, as chosen by the policy owner. 46. Subject to any earlier partial withdrawal of the Annuity, the deductible amount ascertained in accordance with the formula under subsection 27H(2) will be zero and the whole of the regular payments received by an entity referred to in subparagraphs 4(a), (b), (c), (d) or (f) of this Ruling, as applicable, should be included in their assessable income pursuant to subsection 27H(1). Assessability of withdrawal value 47. The receipt of the withdrawal value from Challenger by: as applicable, is assessable income to the extent that it does not comprise a repayment of capital. The capital component of the withdrawal value in these circumstances is the undeducted purchase price of the Annuity less any deductible amounts previously applied to the regular payments from the Annuity, but not reduced to less than zero. 48. Any amount referred to in paragraph 47 of this Ruling which is included in the assessable income of a trustee of a deceased estate shall be deemed to be income to which no beneficiary is presently entitled pursuant to subsection 101A(1). Capital gain or capital loss from payments under the Challenger Guaranteed Annuity (Floating Rate Fixed Term) disregarded 49. Under subsection 108-5(1) of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of the entities referred to in paragraph 4 of this Ruling under the Annuity are legally-enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. Generally, the discharge or satisfaction of contractual rights give rise to a CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 50. Section 118-300 of the ITAA 1997 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual or an annuity instrument. An annuity instrument is defined broadly in subsection 995-1(1) of the ITAA 1997 to mean an instrument that secures the grant of an annuity (whether dependent on the life of an individual or not). Section 118-300 of the ITAA 1997 - regular payments 51. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to the original owner of the policy or instrument (other than the trustee of a complying superannuation entity). Where 2 or more persons jointly affect a policy of life assurance or an annuity instrument, each person may be an original owner. 52. As an individual to whom the Annuity is first issued, a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument. Pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss a policy owner makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. 53. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to an entity that acquired the interest in the policy or instrument for no consideration. 54. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling is an entity that acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration. Pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss such an entity makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. Section 118-300 of the ITAA 1997 - payment of withdrawal value 55. As a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument, pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, they will disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 56. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 57. An entity referred to in subparagraphs 4(e) or (g) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon the relevant death. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Class of entities or scheme: 13. The Annuity satisfies the definition of a 'life insurance policy' under subsection 995-1(1) of the ITAA 1997 and is offered by Challenger in Australia to individuals over 18 years of age, companies and trusts (including self-managed superannuation funds). Individuals who purchase the Annuity can do so alone or jointly with another person. 14. To purchase the Annuity, policy owners are required to execute and lodge the application form attached to the PDS with Challenger, together with an initial investment amount of at least $10,000 which cannot be funded using a roll-over superannuation benefit. No additional fees or charges are payable to Challenger by a policy owner, and no further capital can be added to the initial investment amount once the Annuity has commenced. 15. Upon acceptance of a valid application, a policy owner is issued with the Policy Document (a legal contract between a policy owner and Challenger) and an Investor Certificate by Challenger, setting out the relevant terms and conditions. 16. In exchange for the initial investment amount, the Annuity provides regular payments (monthly, quarterly, half-yearly or yearly [2] ) for a term of 1 to 50 years, as chosen by the policy owner and subject to an event which causes the Annuity to end sooner. Regular payments made to joint policy owners are split in whatever proportion they nominate at the time the Annuity is purchased, or otherwise in equal proportions. 17. The amount of the regular payments payable by Challenger depends on a number of factors, including the amount of the initial investment, prevailing investment market conditions at the time the Annuity is purchased, the term of the Annuity and any choice to partially withdraw the Annuity early, and will be adjusted in line with changes in the Reserve Bank of Australia cash rate over the regular payment period chosen by the policy owner. 18. Where individuals purchase the Annuity jointly with another person and one of the joint policy owners dies during the term of the Annuity, the deceased joint policy owner's regular payments will be made to the surviving joint policy owner. 19. At the time the Annuity is purchased, an individual policy owner can nominate one or more beneficiaries in the event they die before the term of the Annuity ends. A reversionary beneficiary entitled to receive regular payments under the circumstances contemplated in paragraph 21 of this Ruling can, at the time that entitlement arises, nominate one or more beneficiaries of their own in the event they die before the term of the Annuity ends. Beneficiaries can only be nominated under an Annuity purchased jointly by individuals by the surviving joint policy owner where the other joint policy owner dies during the term of the Annuity. 20. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, does not nominate a beneficiary and dies during the term of the Annuity, the regular payments will continue to be made to their estate. 21. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, nominates a single beneficiary (as their reversionary beneficiary) and dies during the term of the Annuity, the regular payments will continue to be made to their reversionary beneficiary. 22. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, nominates multiple beneficiaries and dies during the term of the Annuity, the beneficiaries will be paid a withdrawal value as a lump sum death benefit in the proportions specified by the deceased, or otherwise in equal proportions, and the Annuity will end. Where a beneficiary predeceases the policy owner or reversionary beneficiary, as applicable, their proportion of the withdrawal value will be paid pro rata to the remaining beneficiaries. If all beneficiaries predecease the policy owner or reversionary beneficiary, as applicable, the withdrawal value will be paid to the estate of that policy owner or reversionary beneficiary. 23. The Annuity can be withdrawn in part or full prior to the end of its term by the policy owner (or by any other applicable entity receiving the regular payments at the time in accordance with paragraphs 20 and 21 of this Ruling). The applicable entity in receipt of the regular payments at the time will be paid a withdrawal value. The regular payments (and the Annuity) will end where the Annuity is withdrawn in full. 24. The amount of the withdrawal value paid under the circumstances contemplated by paragraphs 22 and 23 of this Ruling will be at least the present value of the future regular payments due for the remainder of the term of the Annuity and no less than the amount prescribed by the Life Insurance Act 1995. 25. Subject to any earlier partial withdrawals of the Annuity (which will likely reduce the residual capital value of the Annuity) or any decision at the end of the term of the Annuity to roll over the residual capital into another Annuity for a further term, at the conclusion of the term the initial investment amount is repaid to the policy owner (or to any other applicable entity receiving the regular payments at the time in accordance with paragraphs 20 and 21 of this Ruling), and the Annuity ends. Commissioner of Taxation 23 August 2023 | Subsection 27H(4) - annuity: 26. Subsection 27H(4) defines an 'annuity' to mean: 27. This definition encompasses an annuity on ordinary concepts, as contemplated within various judicial authorities and discussed in Taxation Ruling IT 2480 Income tax: variable annuities. An annuity on ordinary concepts is a contract under which a principal sum is converted into an income stream [3] of payments that are at least annual, fixed or variable in a way that is calculable, and which will continue to be paid for a fixed or determinable period. 28. A policy owner's initial investment amount is applied to purchase the regular payments payable by Challenger under the terms of the Annuity, a contract between the policy owner and Challenger. Those regular payments are a series of periodic payments (payable at least yearly), variable in a way calculated by reference to Reserve Bank of Australia cash rate movements, and (unless commuted in full earlier for the withdrawal value) continue for a fixed term. The ability of the policy owner (or of any other applicable entity receiving the regular payments at the time) to commute does not of itself result in the Annuity failing to be accepted as an annuity contract (see paragraph 25 of IT 2480). 29. An Annuity purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling therefore constitutes an annuity on ordinary concepts and, subject to the exclusions in paragraphs (a) and (b) of the definition (considered at paragraphs 30 to 34 of this Ruling), constitutes an annuity as defined in subsection 27H(4). | Division 16E - qualifying security: 30. An annuity is excluded from the definition of a 'qualifying security' in subsection 159GP(1) unless it is an annuity to which subsection 159GP(10) applies. An annuity will be one to which subsection 159GP(10) applies where, among other requirements, the annuity is not an 'ineligible annuity', a term also defined in subsection 159GP(1) to mean 'an annuity issued by a life assurance company to or for the benefit of a natural person other than in the capacity of trustee of a trust estate'. 31. An Annuity issued by Challenger to a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling (that is, a natural person other than in the capacity of trustee of a trust estate) is an ineligible annuity. Therefore, the Annuity is not one to which subsection 159GP(10) applies and, as such, is not a qualifying security for the purposes of Division 16E. | Superannuation income stream: 32. A 'superannuation income stream' has the meaning given by the ITAR (1997 Act) 2021 (subsection 307-70(2) of the ITAA 1997). Subsection 307-70.02(1) of the ITAR (1997 Act) 2021 defines superannuation income stream in relation to an annuity commenced after 19 September 2007 to mean an income stream that is taken to be an annuity for the purposes of the Superannuation Industry (Supervision) Act 1993 (SISA) in accordance with subregulation 1.05(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). 33. Subregulation 1.05(1) of the SISR provides a number of requirements that must be met for a benefit provided by a life insurance company to be taken to be an annuity for the purposes of the SISA. One of those requirements in respect of a benefit purchased on or after 1 July 2007 is that it is purchased with the whole or part of a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997, or the whole or part of a directed termination payment within the meaning of the IT(TP)A 1997. 34. As per paragraph 14 of this Ruling, the policy owner cannot purchase the Annuity using a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997 and, as per subparagraph 9(b) of this Ruling, it is assumed for the purposes of this Ruling that a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling will not purchase the Annuity using a directed termination payment within the meaning of the IT(TP)A 1997. As such, the Annuity is not a superannuation income stream for the policy owner. | Division 230 of the ITAA 1997 - taxation of financial arrangements: 35. Division 230 of the ITAA 1997 sets out the tax treatment of gains or losses from a 'financial arrangement'. Generally, a financial arrangement is a cash settlable legal or equitable right to receive a financial benefit, or obligation to provide such benefit, or a combination of one or more such rights or obligations (subsection 230-45(1) of the ITAA 1997). A right to receive or obligation to provide a financial benefit can be 'cash settlable' under subsection 230-45(2) of the ITAA 1997 if the benefit is money, or if it is a right the taxpayer intends to satisfy or settle by receiving money, or if it is an obligation that the taxpayer intends to satisfy or settle by providing money. 36. The Annuity constitutes a financial arrangement for the purposes of Division 230 of the ITAA 1997 on the basis that the entities referred to in paragraph 4 of this Ruling have cash settlable rights to receive a financial benefit in the form of the regular payments or the withdrawal value or both, as applicable, and on the basis that a policy owner has a cash settlable obligation to provide a financial benefit in the form of the initial investment amount. 37. Subject to exceptions under Subdivision 230-H of the ITAA 1997, gains made from a financial arrangement are included in assessable income under subsection 230-15(1) of the ITAA 1997 and are not (to any extent) to be included in assessable income pursuant to any other taxing provision of the income tax Acts (subsection 230-20(4) of the ITAA 1997), including section 27H. 38. However, where the rights or obligations under an arrangement are the subject of an exception under section 230-460 of the ITAA 1997, Division 230 of the ITAA 1997 does not apply in relation to gains or losses from a financial arrangement for any income year (subsection 230-460(1) of the ITAA 1997). Subsection 230-460(5) of the ITAA 1997 provides a specific exception as follows: 39. As the Annuity is a life insurance policy as defined in subsection 995-1(1) of the ITAA 1997 (as per paragraph 13 of this Ruling) that is not a qualifying security (as defined in subsection 159GP(1) and discussed at paragraphs 30 to 31 of this Ruling), the exception in subsection 230-460(5) applies and Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling. | Section 27H - assessability of regular payments: 40. Paragraph 27H(1)(a) includes in the assessable income of a taxpayer of a year of income the amount of any annuity derived by the taxpayer during that year excluding, in the case of an annuity that has been purchased, any amount that is the deductible amount in relation to the annuity in relation to the year of income. The regular payments made by Challenger to an entity referred to in subparagraphs 4(a), (b), (c), (d) or (f) of this Ruling, as applicable, are therefore assessable income under subsection 27H(1) to the extent that the regular payments exceed the deductible amount in relation to the Annuity. 41. The deductible amount is excluded from the assessable amount of the annuity and is tax free to the recipient because it represents the return to them of the amount paid to acquire the annuity. Subsection 27H(2) provides for the calculation of the deductible amount in relation to an annuity derived by a taxpayer during a year of income, subject to subsections 27H(3) and (3A), in accordance with the following formula: 42. In accordance with the definition of the term in subsection 27H(4), the 'relevant share' in relation to the Annuity (component A) for an entity referred to in subparagraphs 4(a), (c), (d) or (f) of this Ruling is 1. The relevant share in relation to the Annuity for a policy owner referred to in subparagraph 4(b) of this Ruling is a fraction corresponding with their respective share in the Annuity. 43. The undeducted purchase price in relation to an Annuity (component B) that is purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is the whole of the purchase price of the Annuity (the initial investment amount), reduced by any portion of the initial investment amount that is an allowable deduction. As per subparagraph 9(d) of this Ruling, it is assumed for the purposes of this Ruling that no portion of the initial investment amount is deductible. 44. The residual capital value in relation to an annuity is defined in subsection 27H(4) as 'the capital amount payable on the termination of the annuity'. Subject to any earlier partial withdrawal, the terms of the Annuity provide that the residual capital value in relation to the Annuity (component C) is the value of the purchase price. 45. Where an annuity is payable for a term of years certain, the relevant number in relation to that annuity in relation to a year of income is defined in subsection 27H(4) to mean the number of years in the term. The relevant number in relation to the Annuity (component D) is therefore the number of years in the term of the Annuity, as chosen by the policy owner. 46. Subject to any earlier partial withdrawal of the Annuity, the deductible amount ascertained in accordance with the formula under subsection 27H(2) will be zero and the whole of the regular payments received by an entity referred to in subparagraphs 4(a), (b), (c), (d) or (f) of this Ruling, as applicable, should be included in their assessable income pursuant to subsection 27H(1). | Assessability of withdrawal value: 47. The receipt of the withdrawal value from Challenger by: as applicable, is assessable income to the extent that it does not comprise a repayment of capital. The capital component of the withdrawal value in these circumstances is the undeducted purchase price of the Annuity less any deductible amounts previously applied to the regular payments from the Annuity, but not reduced to less than zero. 48. Any amount referred to in paragraph 47 of this Ruling which is included in the assessable income of a trustee of a deceased estate shall be deemed to be income to which no beneficiary is presently entitled pursuant to subsection 101A(1). | Capital gain or capital loss from payments under the Challenger Guaranteed Annuity (Floating Rate Fixed Term) disregarded: 49. Under subsection 108-5(1) of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of the entities referred to in paragraph 4 of this Ruling under the Annuity are legally-enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. Generally, the discharge or satisfaction of contractual rights give rise to a CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 50. Section 118-300 of the ITAA 1997 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual or an annuity instrument. An annuity instrument is defined broadly in subsection 995-1(1) of the ITAA 1997 to mean an instrument that secures the grant of an annuity (whether dependent on the life of an individual or not). | Section 118-300 of the ITAA 1997 - regular payments: 51. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to the original owner of the policy or instrument (other than the trustee of a complying superannuation entity). Where 2 or more persons jointly affect a policy of life assurance or an annuity instrument, each person may be an original owner. 52. As an individual to whom the Annuity is first issued, a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument. Pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss a policy owner makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. 53. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to an entity that acquired the interest in the policy or instrument for no consideration. 54. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling is an entity that acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration. Pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss such an entity makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. | Section 118-300 of the ITAA 1997 - payment of withdrawal value: 55. As a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument, pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, they will disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 56. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 57. An entity referred to in subparagraphs 4(e) or (g) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon the relevant death. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Ruling: 1. This Ruling sets out the income tax consequences for entities referred to in paragraph 4 of this Ruling in connection with an investment in Challenger Guaranteed Annuity (Floating Rate Fixed Term) (the Annuity) issued by Challenger Life Company Limited (Challenger) and offered under a Product Disclosure Statement (PDS) dated 12 March 2021. 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1936, unless otherwise indicated. 3. This Ruling does not address: | Who this Ruling applies to: 4. This Ruling applies to you if you are an Australian resident for tax purposes and are one of the following: 5. This Ruling does not apply to you if you: 6. This Ruling applies from 1 July 2023 to the entities specified in paragraph 4 of this Ruling in connection with an Annuity purchased from 1 July 2023 until 30 June 2026. 7. However, the Ruling only applies and may be relied on to the extent that there is no change in the scheme or in the entity's involvement in the scheme. If the scheme carried out is materially different from the Scheme described at paragraphs 10 to 25 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified. 8. Subject to paragraph 3 and the assumptions in paragraph 9 of this Ruling: | Assumptions: 9. This Ruling is made on the basis of the following necessary assumptions: 10. The scheme is identified and described in the following: Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 11. For the purposes of describing the scheme, there are no other agreements (whether formal or informal, and whether or not legally enforceable) which an entity referred to in paragraph 4 of this Ruling, or any associate of such entity, will be a party to which are a part of the scheme. 12. All Australian Securities and Investments Commission requirements are, or will be, complied with for the term of the agreements. | Overview of scheme: 13. The Annuity satisfies the definition of a 'life insurance policy' under subsection 995-1(1) of the ITAA 1997 and is offered by Challenger in Australia to individuals over 18 years of age, companies and trusts (including self-managed superannuation funds). Individuals who purchase the Annuity can do so alone or jointly with another person. 14. To purchase the Annuity, policy owners are required to execute and lodge the application form attached to the PDS with Challenger, together with an initial investment amount of at least $10,000 which cannot be funded using a roll-over superannuation benefit. No additional fees or charges are payable to Challenger by a policy owner, and no further capital can be added to the initial investment amount once the Annuity has commenced. 15. Upon acceptance of a valid application, a policy owner is issued with the Policy Document (a legal contract between a policy owner and Challenger) and an Investor Certificate by Challenger, setting out the relevant terms and conditions. 16. In exchange for the initial investment amount, the Annuity provides regular payments (monthly, quarterly, half-yearly or yearly [2] ) for a term of 1 to 50 years, as chosen by the policy owner and subject to an event which causes the Annuity to end sooner. Regular payments made to joint policy owners are split in whatever proportion they nominate at the time the Annuity is purchased, or otherwise in equal proportions. 17. The amount of the regular payments payable by Challenger depends on a number of factors, including the amount of the initial investment, prevailing investment market conditions at the time the Annuity is purchased, the term of the Annuity and any choice to partially withdraw the Annuity early, and will be adjusted in line with changes in the Reserve Bank of Australia cash rate over the regular payment period chosen by the policy owner. 18. Where individuals purchase the Annuity jointly with another person and one of the joint policy owners dies during the term of the Annuity, the deceased joint policy owner's regular payments will be made to the surviving joint policy owner. 19. At the time the Annuity is purchased, an individual policy owner can nominate one or more beneficiaries in the event they die before the term of the Annuity ends. A reversionary beneficiary entitled to receive regular payments under the circumstances contemplated in paragraph 21 of this Ruling can, at the time that entitlement arises, nominate one or more beneficiaries of their own in the event they die before the term of the Annuity ends. Beneficiaries can only be nominated under an Annuity purchased jointly by individuals by the surviving joint policy owner where the other joint policy owner dies during the term of the Annuity. 20. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, does not nominate a beneficiary and dies during the term of the Annuity, the regular payments will continue to be made to their estate. 21. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, nominates a single beneficiary (as their reversionary beneficiary) and dies during the term of the Annuity, the regular payments will continue to be made to their reversionary beneficiary. 22. Where an individual policy owner (including any surviving joint policy owner) or a reversionary beneficiary, as applicable, nominates multiple beneficiaries and dies during the term of the Annuity, the beneficiaries will be paid a withdrawal value as a lump sum death benefit in the proportions specified by the deceased, or otherwise in equal proportions, and the Annuity will end. Where a beneficiary predeceases the policy owner or reversionary beneficiary, as applicable, their proportion of the withdrawal value will be paid pro rata to the remaining beneficiaries. If all beneficiaries predecease the policy owner or reversionary beneficiary, as applicable, the withdrawal value will be paid to the estate of that policy owner or reversionary beneficiary. 23. The Annuity can be withdrawn in part or full prior to the end of its term by the policy owner (or by any other applicable entity receiving the regular payments at the time in accordance with paragraphs 20 and 21 of this Ruling). The applicable entity in receipt of the regular payments at the time will be paid a withdrawal value. The regular payments (and the Annuity) will end where the Annuity is withdrawn in full. 24. The amount of the withdrawal value paid under the circumstances contemplated by paragraphs 22 and 23 of this Ruling will be at least the present value of the future regular payments due for the remainder of the term of the Annuity and no less than the amount prescribed by the Life Insurance Act 1995. 25. Subject to any earlier partial withdrawals of the Annuity (which will likely reduce the residual capital value of the Annuity) or any decision at the end of the term of the Annuity to roll over the residual capital into another Annuity for a further term, at the conclusion of the term the initial investment amount is repaid to the policy owner (or to any other applicable entity receiving the regular payments at the time in accordance with paragraphs 20 and 21 of this Ruling), and the Annuity ends. Commissioner of Taxation 23 August 2023 | Subsection 27H(4) - annuity: 26. Subsection 27H(4) defines an 'annuity' to mean: 27. This definition encompasses an annuity on ordinary concepts, as contemplated within various judicial authorities and discussed in Taxation Ruling IT 2480 Income tax: variable annuities. An annuity on ordinary concepts is a contract under which a principal sum is converted into an income stream [3] of payments that are at least annual, fixed or variable in a way that is calculable, and which will continue to be paid for a fixed or determinable period. 28. A policy owner's initial investment amount is applied to purchase the regular payments payable by Challenger under the terms of the Annuity, a contract between the policy owner and Challenger. Those regular payments are a series of periodic payments (payable at least yearly), variable in a way calculated by reference to Reserve Bank of Australia cash rate movements, and (unless commuted in full earlier for the withdrawal value) continue for a fixed term. The ability of the policy owner (or of any other applicable entity receiving the regular payments at the time) to commute does not of itself result in the Annuity failing to be accepted as an annuity contract (see paragraph 25 of IT 2480). 29. An Annuity purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling therefore constitutes an annuity on ordinary concepts and, subject to the exclusions in paragraphs (a) and (b) of the definition (considered at paragraphs 30 to 34 of this Ruling), constitutes an annuity as defined in subsection 27H(4). | Division 16E - qualifying security: 30. An annuity is excluded from the definition of a 'qualifying security' in subsection 159GP(1) unless it is an annuity to which subsection 159GP(10) applies. An annuity will be one to which subsection 159GP(10) applies where, among other requirements, the annuity is not an 'ineligible annuity', a term also defined in subsection 159GP(1) to mean 'an annuity issued by a life assurance company to or for the benefit of a natural person other than in the capacity of trustee of a trust estate'. 31. An Annuity issued by Challenger to a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling (that is, a natural person other than in the capacity of trustee of a trust estate) is an ineligible annuity. Therefore, the Annuity is not one to which subsection 159GP(10) applies and, as such, is not a qualifying security for the purposes of Division 16E. | Superannuation income stream: 32. A 'superannuation income stream' has the meaning given by the ITAR (1997 Act) 2021 (subsection 307-70(2) of the ITAA 1997). Subsection 307-70.02(1) of the ITAR (1997 Act) 2021 defines superannuation income stream in relation to an annuity commenced after 19 September 2007 to mean an income stream that is taken to be an annuity for the purposes of the Superannuation Industry (Supervision) Act 1993 (SISA) in accordance with subregulation 1.05(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). 33. Subregulation 1.05(1) of the SISR provides a number of requirements that must be met for a benefit provided by a life insurance company to be taken to be an annuity for the purposes of the SISA. One of those requirements in respect of a benefit purchased on or after 1 July 2007 is that it is purchased with the whole or part of a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997, or the whole or part of a directed termination payment within the meaning of the IT(TP)A 1997. 34. As per paragraph 14 of this Ruling, the policy owner cannot purchase the Annuity using a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997 and, as per subparagraph 9(b) of this Ruling, it is assumed for the purposes of this Ruling that a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling will not purchase the Annuity using a directed termination payment within the meaning of the IT(TP)A 1997. As such, the Annuity is not a superannuation income stream for the policy owner. | Division 230 of the ITAA 1997 - taxation of financial arrangements: 35. Division 230 of the ITAA 1997 sets out the tax treatment of gains or losses from a 'financial arrangement'. Generally, a financial arrangement is a cash settlable legal or equitable right to receive a financial benefit, or obligation to provide such benefit, or a combination of one or more such rights or obligations (subsection 230-45(1) of the ITAA 1997). A right to receive or obligation to provide a financial benefit can be 'cash settlable' under subsection 230-45(2) of the ITAA 1997 if the benefit is money, or if it is a right the taxpayer intends to satisfy or settle by receiving money, or if it is an obligation that the taxpayer intends to satisfy or settle by providing money. 36. The Annuity constitutes a financial arrangement for the purposes of Division 230 of the ITAA 1997 on the basis that the entities referred to in paragraph 4 of this Ruling have cash settlable rights to receive a financial benefit in the form of the regular payments or the withdrawal value or both, as applicable, and on the basis that a policy owner has a cash settlable obligation to provide a financial benefit in the form of the initial investment amount. 37. Subject to exceptions under Subdivision 230-H of the ITAA 1997, gains made from a financial arrangement are included in assessable income under subsection 230-15(1) of the ITAA 1997 and are not (to any extent) to be included in assessable income pursuant to any other taxing provision of the income tax Acts (subsection 230-20(4) of the ITAA 1997), including section 27H. 38. However, where the rights or obligations under an arrangement are the subject of an exception under section 230-460 of the ITAA 1997, Division 230 of the ITAA 1997 does not apply in relation to gains or losses from a financial arrangement for any income year (subsection 230-460(1) of the ITAA 1997). Subsection 230-460(5) of the ITAA 1997 provides a specific exception as follows: 39. As the Annuity is a life insurance policy as defined in subsection 995-1(1) of the ITAA 1997 (as per paragraph 13 of this Ruling) that is not a qualifying security (as defined in subsection 159GP(1) and discussed at paragraphs 30 to 31 of this Ruling), the exception in subsection 230-460(5) applies and Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling. | Section 27H - assessability of regular payments: 40. Paragraph 27H(1)(a) includes in the assessable income of a taxpayer of a year of income the amount of any annuity derived by the taxpayer during that year excluding, in the case of an annuity that has been purchased, any amount that is the deductible amount in relation to the annuity in relation to the year of income. The regular payments made by Challenger to an entity referred to in subparagraphs 4(a), (b), (c), (d) or (f) of this Ruling, as applicable, are therefore assessable income under subsection 27H(1) to the extent that the regular payments exceed the deductible amount in relation to the Annuity. 41. The deductible amount is excluded from the assessable amount of the annuity and is tax free to the recipient because it represents the return to them of the amount paid to acquire the annuity. Subsection 27H(2) provides for the calculation of the deductible amount in relation to an annuity derived by a taxpayer during a year of income, subject to subsections 27H(3) and (3A), in accordance with the following formula: 42. In accordance with the definition of the term in subsection 27H(4), the 'relevant share' in relation to the Annuity (component A) for an entity referred to in subparagraphs 4(a), (c), (d) or (f) of this Ruling is 1. The relevant share in relation to the Annuity for a policy owner referred to in subparagraph 4(b) of this Ruling is a fraction corresponding with their respective share in the Annuity. 43. The undeducted purchase price in relation to an Annuity (component B) that is purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is the whole of the purchase price of the Annuity (the initial investment amount), reduced by any portion of the initial investment amount that is an allowable deduction. As per subparagraph 9(d) of this Ruling, it is assumed for the purposes of this Ruling that no portion of the initial investment amount is deductible. 44. The residual capital value in relation to an annuity is defined in subsection 27H(4) as 'the capital amount payable on the termination of the annuity'. Subject to any earlier partial withdrawal, the terms of the Annuity provide that the residual capital value in relation to the Annuity (component C) is the value of the purchase price. 45. Where an annuity is payable for a term of years certain, the relevant number in relation to that annuity in relation to a year of income is defined in subsection 27H(4) to mean the number of years in the term. The relevant number in relation to the Annuity (component D) is therefore the number of years in the term of the Annuity, as chosen by the policy owner. 46. Subject to any earlier partial withdrawal of the Annuity, the deductible amount ascertained in accordance with the formula under subsection 27H(2) will be zero and the whole of the regular payments received by an entity referred to in subparagraphs 4(a), (b), (c), (d) or (f) of this Ruling, as applicable, should be included in their assessable income pursuant to subsection 27H(1). | Assessability of withdrawal value: 47. The receipt of the withdrawal value from Challenger by: as applicable, is assessable income to the extent that it does not comprise a repayment of capital. The capital component of the withdrawal value in these circumstances is the undeducted purchase price of the Annuity less any deductible amounts previously applied to the regular payments from the Annuity, but not reduced to less than zero. 48. Any amount referred to in paragraph 47 of this Ruling which is included in the assessable income of a trustee of a deceased estate shall be deemed to be income to which no beneficiary is presently entitled pursuant to subsection 101A(1). | Capital gain or capital loss from payments under the Challenger Guaranteed Annuity (Floating Rate Fixed Term) disregarded: 49. Under subsection 108-5(1) of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of the entities referred to in paragraph 4 of this Ruling under the Annuity are legally-enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. Generally, the discharge or satisfaction of contractual rights give rise to a CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 50. Section 118-300 of the ITAA 1997 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual or an annuity instrument. An annuity instrument is defined broadly in subsection 995-1(1) of the ITAA 1997 to mean an instrument that secures the grant of an annuity (whether dependent on the life of an individual or not). | Section 118-300 of the ITAA 1997 - regular payments: 51. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to the original owner of the policy or instrument (other than the trustee of a complying superannuation entity). Where 2 or more persons jointly affect a policy of life assurance or an annuity instrument, each person may be an original owner. 52. As an individual to whom the Annuity is first issued, a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument. Pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss a policy owner makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. 53. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to an entity that acquired the interest in the policy or instrument for no consideration. 54. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling is an entity that acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration. Pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss such an entity makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. | Section 118-300 of the ITAA 1997 - payment of withdrawal value: 55. As a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument, pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, they will disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 56. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 57. An entity referred to in subparagraphs 4(e) or (g) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon the relevant death. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


Appendix: Subsection 27H(4) - annuity: 26. Subsection 27H(4) defines an 'annuity' to mean: 27. This definition encompasses an annuity on ordinary concepts, as contemplated within various judicial authorities and discussed in Taxation Ruling IT 2480 Income tax: variable annuities. An annuity on ordinary concepts is a contract under which a principal sum is converted into an income stream [3] of payments that are at least annual, fixed or variable in a way that is calculable, and which will continue to be paid for a fixed or determinable period. 28. A policy owner's initial investment amount is applied to purchase the regular payments payable by Challenger under the terms of the Annuity, a contract between the policy owner and Challenger. Those regular payments are a series of periodic payments (payable at least yearly), variable in a way calculated by reference to Reserve Bank of Australia cash rate movements, and (unless commuted in full earlier for the withdrawal value) continue for a fixed term. The ability of the policy owner (or of any other applicable entity receiving the regular payments at the time) to commute does not of itself result in the Annuity failing to be accepted as an annuity contract (see paragraph 25 of IT 2480). 29. An Annuity purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling therefore constitutes an annuity on ordinary concepts and, subject to the exclusions in paragraphs (a) and (b) of the definition (considered at paragraphs 30 to 34 of this Ruling), constitutes an annuity as defined in subsection 27H(4). | Division 16E - qualifying security: 30. An annuity is excluded from the definition of a 'qualifying security' in subsection 159GP(1) unless it is an annuity to which subsection 159GP(10) applies. An annuity will be one to which subsection 159GP(10) applies where, among other requirements, the annuity is not an 'ineligible annuity', a term also defined in subsection 159GP(1) to mean 'an annuity issued by a life assurance company to or for the benefit of a natural person other than in the capacity of trustee of a trust estate'. 31. An Annuity issued by Challenger to a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling (that is, a natural person other than in the capacity of trustee of a trust estate) is an ineligible annuity. Therefore, the Annuity is not one to which subsection 159GP(10) applies and, as such, is not a qualifying security for the purposes of Division 16E. | Superannuation income stream: 32. A 'superannuation income stream' has the meaning given by the ITAR (1997 Act) 2021 (subsection 307-70(2) of the ITAA 1997). Subsection 307-70.02(1) of the ITAR (1997 Act) 2021 defines superannuation income stream in relation to an annuity commenced after 19 September 2007 to mean an income stream that is taken to be an annuity for the purposes of the Superannuation Industry (Supervision) Act 1993 (SISA) in accordance with subregulation 1.05(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). 33. Subregulation 1.05(1) of the SISR provides a number of requirements that must be met for a benefit provided by a life insurance company to be taken to be an annuity for the purposes of the SISA. One of those requirements in respect of a benefit purchased on or after 1 July 2007 is that it is purchased with the whole or part of a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997, or the whole or part of a directed termination payment within the meaning of the IT(TP)A 1997. 34. As per paragraph 14 of this Ruling, the policy owner cannot purchase the Annuity using a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997 and, as per subparagraph 9(b) of this Ruling, it is assumed for the purposes of this Ruling that a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling will not purchase the Annuity using a directed termination payment within the meaning of the IT(TP)A 1997. As such, the Annuity is not a superannuation income stream for the policy owner. | Division 230 of the ITAA 1997 - taxation of financial arrangements: 35. Division 230 of the ITAA 1997 sets out the tax treatment of gains or losses from a 'financial arrangement'. Generally, a financial arrangement is a cash settlable legal or equitable right to receive a financial benefit, or obligation to provide such benefit, or a combination of one or more such rights or obligations (subsection 230-45(1) of the ITAA 1997). A right to receive or obligation to provide a financial benefit can be 'cash settlable' under subsection 230-45(2) of the ITAA 1997 if the benefit is money, or if it is a right the taxpayer intends to satisfy or settle by receiving money, or if it is an obligation that the taxpayer intends to satisfy or settle by providing money. 36. The Annuity constitutes a financial arrangement for the purposes of Division 230 of the ITAA 1997 on the basis that the entities referred to in paragraph 4 of this Ruling have cash settlable rights to receive a financial benefit in the form of the regular payments or the withdrawal value or both, as applicable, and on the basis that a policy owner has a cash settlable obligation to provide a financial benefit in the form of the initial investment amount. 37. Subject to exceptions under Subdivision 230-H of the ITAA 1997, gains made from a financial arrangement are included in assessable income under subsection 230-15(1) of the ITAA 1997 and are not (to any extent) to be included in assessable income pursuant to any other taxing provision of the income tax Acts (subsection 230-20(4) of the ITAA 1997), including section 27H. 38. However, where the rights or obligations under an arrangement are the subject of an exception under section 230-460 of the ITAA 1997, Division 230 of the ITAA 1997 does not apply in relation to gains or losses from a financial arrangement for any income year (subsection 230-460(1) of the ITAA 1997). Subsection 230-460(5) of the ITAA 1997 provides a specific exception as follows: 39. As the Annuity is a life insurance policy as defined in subsection 995-1(1) of the ITAA 1997 (as per paragraph 13 of this Ruling) that is not a qualifying security (as defined in subsection 159GP(1) and discussed at paragraphs 30 to 31 of this Ruling), the exception in subsection 230-460(5) applies and Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling. | Section 27H - assessability of regular payments: 40. Paragraph 27H(1)(a) includes in the assessable income of a taxpayer of a year of income the amount of any annuity derived by the taxpayer during that year excluding, in the case of an annuity that has been purchased, any amount that is the deductible amount in relation to the annuity in relation to the year of income. The regular payments made by Challenger to an entity referred to in subparagraphs 4(a), (b), (c), (d) or (f) of this Ruling, as applicable, are therefore assessable income under subsection 27H(1) to the extent that the regular payments exceed the deductible amount in relation to the Annuity. 41. The deductible amount is excluded from the assessable amount of the annuity and is tax free to the recipient because it represents the return to them of the amount paid to acquire the annuity. Subsection 27H(2) provides for the calculation of the deductible amount in relation to an annuity derived by a taxpayer during a year of income, subject to subsections 27H(3) and (3A), in accordance with the following formula: 42. In accordance with the definition of the term in subsection 27H(4), the 'relevant share' in relation to the Annuity (component A) for an entity referred to in subparagraphs 4(a), (c), (d) or (f) of this Ruling is 1. The relevant share in relation to the Annuity for a policy owner referred to in subparagraph 4(b) of this Ruling is a fraction corresponding with their respective share in the Annuity. 43. The undeducted purchase price in relation to an Annuity (component B) that is purchased by a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is the whole of the purchase price of the Annuity (the initial investment amount), reduced by any portion of the initial investment amount that is an allowable deduction. As per subparagraph 9(d) of this Ruling, it is assumed for the purposes of this Ruling that no portion of the initial investment amount is deductible. 44. The residual capital value in relation to an annuity is defined in subsection 27H(4) as 'the capital amount payable on the termination of the annuity'. Subject to any earlier partial withdrawal, the terms of the Annuity provide that the residual capital value in relation to the Annuity (component C) is the value of the purchase price. 45. Where an annuity is payable for a term of years certain, the relevant number in relation to that annuity in relation to a year of income is defined in subsection 27H(4) to mean the number of years in the term. The relevant number in relation to the Annuity (component D) is therefore the number of years in the term of the Annuity, as chosen by the policy owner. 46. Subject to any earlier partial withdrawal of the Annuity, the deductible amount ascertained in accordance with the formula under subsection 27H(2) will be zero and the whole of the regular payments received by an entity referred to in subparagraphs 4(a), (b), (c), (d) or (f) of this Ruling, as applicable, should be included in their assessable income pursuant to subsection 27H(1). | Assessability of withdrawal value: 47. The receipt of the withdrawal value from Challenger by: as applicable, is assessable income to the extent that it does not comprise a repayment of capital. The capital component of the withdrawal value in these circumstances is the undeducted purchase price of the Annuity less any deductible amounts previously applied to the regular payments from the Annuity, but not reduced to less than zero. 48. Any amount referred to in paragraph 47 of this Ruling which is included in the assessable income of a trustee of a deceased estate shall be deemed to be income to which no beneficiary is presently entitled pursuant to subsection 101A(1). | Capital gain or capital loss from payments under the Challenger Guaranteed Annuity (Floating Rate Fixed Term) disregarded: 49. Under subsection 108-5(1) of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of the entities referred to in paragraph 4 of this Ruling under the Annuity are legally-enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. Generally, the discharge or satisfaction of contractual rights give rise to a CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 50. Section 118-300 of the ITAA 1997 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual or an annuity instrument. An annuity instrument is defined broadly in subsection 995-1(1) of the ITAA 1997 to mean an instrument that secures the grant of an annuity (whether dependent on the life of an individual or not). | Section 118-300 of the ITAA 1997 - regular payments: 51. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to the original owner of the policy or instrument (other than the trustee of a complying superannuation entity). Where 2 or more persons jointly affect a policy of life assurance or an annuity instrument, each person may be an original owner. 52. As an individual to whom the Annuity is first issued, a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument. Pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss a policy owner makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. 53. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to an entity that acquired the interest in the policy or instrument for no consideration. 54. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling is an entity that acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration. Pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss such an entity makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. | Section 118-300 of the ITAA 1997 - payment of withdrawal value: 55. As a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument, pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, they will disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 56. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 57. An entity referred to in subparagraphs 4(e) or (g) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon the relevant death. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


What this Ruling is about | If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling. | This Ruling has been given on the basis that the entity who applied for the Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Ruling. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | (a) an annuity that is a qualifying security for the purposes of Division 16E; or | (b) a superannuation income stream (within the meaning of the Income Tax Assessment Act 1997). | (a) you are not a life insurance company that is the insurer under the policy; and | (b) the policy is an annuity that is a qualifying security. | A is the relevant share in relation to the annuity in relation to the taxpayer in relation to the year of income. | B is the amount of the undeducted purchase price of the annuity. | (a) if there is a residual capital value in relation to the annuity and that residual capital value is specified in the agreement by virtue of which the annuity is payable or is capable of being ascertained from the terms of that agreement at the time when the annuity is first derived - that residual capital value; or | (b) in any other case - nil; and | D is the relevant number in relation to the annuity.

Withdrawal notice: 47. The receipt of the withdrawal value from Challenger by: as applicable, is assessable income to the extent that it does not comprise a repayment of capital. The capital component of the withdrawal value in these circumstances is the undeducted purchase price of the Annuity less any deductible amounts previously applied to the regular payments from the Annuity, but not reduced to less than zero. 48. Any amount referred to in paragraph 47 of this Ruling which is included in the assessable income of a trustee of a deceased estate shall be deemed to be income to which no beneficiary is presently entitled pursuant to subsection 101A(1). Capital gain or capital loss from payments under the Challenger Guaranteed Annuity (Floating Rate Fixed Term) disregarded 49. Under subsection 108-5(1) of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of the entities referred to in paragraph 4 of this Ruling under the Annuity are legally-enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. Generally, the discharge or satisfaction of contractual rights give rise to a CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 50. Section 118-300 of the ITAA 1997 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual or an annuity instrument. An annuity instrument is defined broadly in subsection 995-1(1) of the ITAA 1997 to mean an instrument that secures the grant of an annuity (whether dependent on the life of an individual or not). Section 118-300 of the ITAA 1997 - regular payments 51. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to the original owner of the policy or instrument (other than the trustee of a complying superannuation entity). Where 2 or more persons jointly affect a policy of life assurance or an annuity instrument, each person may be an original owner. 52. As an individual to whom the Annuity is first issued, a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument. Pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss a policy owner makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. 53. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy or an annuity instrument is disregarded where that CGT event happens to an entity that acquired the interest in the policy or instrument for no consideration. 54. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling is an entity that acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration. Pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, any capital gain or capital loss such an entity makes under section 104-25 of the ITAA 1997 from the receipt of regular payments by Challenger under the Annuity is therefore disregarded. Section 118-300 of the ITAA 1997 - payment of withdrawal value 55. As a policy owner referred to in subparagraphs 4(a) or (b) of this Ruling is regarded as an original owner of an annuity instrument, pursuant to table item 3 of subsection 118-300(1) of the ITAA 1997, they will disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 56. An entity referred to in subparagraphs 4(c), (d) or (f) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon commutation of the Annuity. 57. An entity referred to in subparagraphs 4(e) or (g) of this Ruling acquires, on the death of a policy owner or reversionary beneficiary, as applicable, an interest in the Annuity for no consideration and will therefore, pursuant to table item 4 of subsection 118-300(1) of the ITAA 1997, disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of the withdrawal value from Challenger upon the relevant death. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Related rulings: IT 2480 TR 2013/5
Legislative references: ITAA 1936 27H ITAA 1936 27H(1) ITAA 1936 27H(1)(a) ITAA 1936 27H(2) ITAA 1936 27H(3) ITAA 1936 27H(3A) ITAA 1936 27H(4) ITAA 1936 95(2) ITAA 1936 101A(1) ITAA 1936 Div 16E ITAA 1936 159GP(1) ITAA 1936 159GP(10) ITAA 1936 Pt IVA ITAA 1997 Div 54 ITAA 1997 104-25 ITAA 1997 104-25(1)(b) ITAA 1997 108-5(1) ITAA 1997 118-300 ITAA 1997 118-300(1) ITAA 1997 Div 230 ITAA 1997 230-15(1) ITAA 1997 230-20(4) ITAA 1997 230-45(1) ITAA 1997 230-45(2) ITAA 1997 Subdiv 230-H ITAA 1997 230-460 ITAA 1997 230-460(1) ITAA 1997 230-460(5) ITAA 1997 306-10 ITAA 1997 307-70(2) ITAA 1997 995-1(1) ITA(1997)R 2021 307-70.02 ITA(1997)R 2021 307-70.02(1) IT(TP)A 1997 SISA 1993 SISR 1994 1.05(1) Life Insurance Act 1995