Product Ruling PR 2024/5
Date of effect: 1 July 2024

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 Lifetime Annuity (Liquid Lifetime) (the Annuity) issued by Challenger Life Company Limited (Challenger) and offered under a Product Disclosure Statement (PDS) dated 5 September 2022. 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 2024 to the entities specified in paragraph 4 of this Ruling in connection with an Annuity purchased from 1 July 2024 until 30 June 2027. 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different from the Scheme described at paragraphs 10 to 30 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified. 8. Subject to paragraph 3 of this Ruling 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 is a 'life policy' for the purposes of the Life Insurance Act 1995 (as per paragraph 9(1)(c) of that Act), 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 who do not: 14. An individual cannot purchase the Annuity jointly with another person. To purchase the Annuity, policy owners are required to execute and lodge the application form with Challenger, together with an initial investment amount of at least $10,000 which may or may not 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 and subject to the payment of a withdrawal value, the Annuity provides regular payments (monthly) for the lifetime of the policy owner and, where applicable, the reversionary life insured. At the time the Annuity is purchased, a policy owner can elect that, on their death, the regular payments continue to be made to their spouse as the reversionary life insured for the duration of the reversionary life insured's life. 17. The amount of the regular payments payable by Challenger is determined at the time the Annuity is purchased and depends on a number of factors, including: 18. A policy owner is able to choose from different variations of the Annuity. These variations are the: 19. The Flexible Income (Immediate payments) option is available for purchase using a roll-over superannuation benefit by anyone 60 years [3] or older with unrestricted access to their superannuation, or otherwise (using non-superannuation money) by anyone 18 years or older. Under this option: 20. There is no withdrawal value [4] under the Enhanced Income (Immediate payments) option. The Enhanced Income (Immediate payments) option is the same as the Flexible Income (Immediate payments) option in all other respects. 21. Both the Flexible Income (Immediate payments) option and the Enhanced Income (Immediate payments) option are, when purchased with the whole or part of a roll-over superannuation benefit within the meaning of section 306-10 of the ITAA 1997, designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 22. The Flexible Income (Deferred payments) option is only available for purchase using a roll-over superannuation benefit by an individual 60 years [5] or older with unrestricted access to their superannuation. Under this option: 23. There is no withdrawal value [6] under the Enhanced Income (Deferred payments) option. The Enhanced Income (Deferred payments) option is the same as the Flexible Income (Deferred payments) option in all other respects. 24. Both the Flexible Income (Deferred payments) option and the Enhanced Income (Deferred payments) option are designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 25. The Flexible Income (Market-linked payments) option is available for purchase using a roll-over superannuation benefit by anyone 60 years [7] or older with unrestricted access to their superannuation, or otherwise (using non-superannuation money) by anyone 18 years or older. Under this option: 26. There is no withdrawal value [9] under the Enhanced Income (Market-linked payments) option. The Enhanced Income (Market-linked payments) option is the same as the Flexible Income (Market-linked payments) option in all other respects. 27. Both the Flexible Income (Market-linked payments) option and the Enhanced Income (Market-linked payments) option are, when purchased with the whole or part of a roll-over superannuation benefit within the meaning of section 306-10 of the ITAA 1997, designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 28. Any withdrawal value payable by Challenger as a death benefit (under any of the variations discussed at paragraphs 19, 22 and 25 of this Ruling) will be paid to the policy owner's nominated beneficiary or beneficiaries, or to the policy owner's deceased estate, as applicable, where the policy owner dies within the withdrawal period and they have: 29. Where the policy owner dies within the withdrawal period and the reversionary life insured in receipt of the policy owner's regular payments then also dies within the withdrawal period, Challenger will pay the withdrawal value to the nominated beneficiary or beneficiaries of the reversionary life insured, or to the deceased estate of the reversionary life insured, as applicable. 30. Anyone nominated as a beneficiary under an Annuity purchased using a roll-over superannuation benefit must be a dependant of the policy owner or reversionary life insured, as applicable. Commissioner of Taxation 15 May 2024 Annuity not purchased using a roll-over superannuation benefit 31. Paragraphs 32 to 68 of this Ruling apply exclusively to Annuities purchased by a policy owner without using the whole or part of a roll-over superannuation benefit. Subsection 27H(4)  annuity 32. Subsection 27H(4) defines an 'annuity' to mean: 33. 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 [10] 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. 34. 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 monthly), either fixed at the time of purchase or variable in a way that is calculable by reference to the CPI, the RBA cash rate or index movements, and (unless commuted earlier for the withdrawal value) continue for the life of the policy owner or reversionary life insured, as the case may be. The policy owner's or reversionary life insured's ability to commute does not of itself result in the Annuity failing to be accepted as an annuity contract (see paragraph 25 of IT 2480). 35. An Annuity purchased by a policy owner therefore constitutes an annuity on ordinary concepts and, subject to the exclusions in paragraphs (a) and (b) of the definition (considered at paragraphs 36 to 41 of this Ruling), constitutes an annuity as defined in subsection 27H(4). Division 16E  qualifying security 36. A 'qualifying security' is defined in subsection 159GP(1). For the purposes of determining whether an arrangement is a qualifying security, that arrangement must be a 'security', also defined in subsection 159GP(1) to mean: 37. The Annuity is not considered to have sufficient debt-like obligations to be a contract to which paragraph (d) of the definition of security in subsection 159GP(1) applies, nor does it fall within paragraphs (a), (b) or (c) of that definition. Therefore, the Annuity does not meet the definition of security under subsection 159GP(1) and, as such, is not a qualifying security for the purposes of Division 16E. 38. Additionally, an annuity will not be a qualifying security for the purposes of subsection 159GP(1) where it is an 'ineligible annuity', a term also defined in subsection 159GP(1) to include 'an annuity that is 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'. An Annuity issued by Challenger to a policy owner or held by a reversionary life insured (that is, a natural person other than in the capacity of trustee of a trust estate) is an ineligible annuity. Superannuation income stream 39. 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: 40. 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. 41. As per subparagraph 9(c) of this Ruling, it is assumed for the purposes of this Ruling that a policy owner will not purchase the Annuity using a directed termination payment within the meaning of the IT(TP)A 1997. Accordingly, where the policy owner does not purchase the Annuity using the whole or part of a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997, the Annuity is not a superannuation income stream for the policy owner. Division 230 of the ITAA 1997  taxation of financial arrangements 42. 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. 43. 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. 44. 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. 45. 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: 46. 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 36 to 38 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. Section 27H  assessability of regular payments 47. 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 a policy owner or to a reversionary life insured, 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. 48. 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: 49. The relevant share in relation to the Annuity (component A) for a policy owner or reversionary life insured is one, in accordance with the definition of that term in subsection 27H(4). 50. The undeducted purchase price in relation to an Annuity (component B) that is purchased by a policy owner 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(g) of this Ruling, it is assumed for the purposes of this Ruling that no portion of the initial investment amount is deductible. 51. 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'. As the terms of the Annuity do not provide for any residual capital value in relation to the Annuity, it (component C) is nil. 52. Where an annuity is payable during the lifetime of a person and not thereafter, the relevant number in relation to that annuity in relation to a year of income is defined in subsection 27H(4) to include the life expectation factor of the person. The relevant number in relation to the Annuity (component D) is therefore the life expectation factor of the policy owner, or any other life insured under the Annuity (such as the reversionary life insured) who has a greater life expectation factor. [11] The life expectation factor in relation to a person in relation to an annuity is defined in subsection 27H(4) as: Note: The most recently published Australian Life Tables [12] are used. 53. Where the Commissioner considers that the deductible amount ascertained in accordance with the formula in subsection 27H(2) is inappropriate, having regard to the terms and conditions applying to the annuity and to any other relevant matters, the Commissioner may, subject to subsection 27H(3A), determine the deductible amount that applies pursuant to subsection 27H(3). In making a determination pursuant to subsection 27H(3), the Commissioner may have regard to the terms and conditions applying to the annuity, to a certificate supplied by an actuary and to any other matters considered relevant. 54. Paragraphs 16 to 24 of IT 2157 provide some guidelines as to the exercise of the discretion under subsection 27H(3). Applying those guidelines to the Annuity and having regard to other relevant matters, the Commissioner may exercise the discretion under subsection 27H(3) where the: 55. The Commissioner will only alter the deductible amount pursuant to subsection 27H(3) where the deductible amount ascertained in accordance with the formula under subsection 27H(2) for a full year exceeds the minimum annual amount proposed to be paid under the annuity contract. Therefore, where the quantum of the regular payments under the Annuity is impacted by any of the drivers referred to in paragraph 54 of this Ruling and the deductible amount ascertained under subsection 27H(2) for a full year consequently exceeds the regular payments to be paid by Challenger under the Annuity to a policy owner or to a reversionary life insured, as applicable, the Commissioner will alter that deductible amount pursuant to subsection 27H(3). 56. The deductible amount excluded in accordance with subsection 27H(3) under the circumstances set out in paragraph 55 of this Ruling is to be so much of the deductible amount ascertained in accordance with the formula under subsection 27H(2) as does not exceed the annuity payment (in this case, the regular payments for the relevant year). The balance of the deductible amount ascertained in accordance with the formula under subsection 27H(2) is to be carried forward and excluded (along with the following year's deductible amount ascertained in accordance with the formula under subsection 27H(2)) from the following year's annuity payment (see paragraph 21 of IT 2157). As such, this amount will be used to reduce the portion of the regular payments assessable in the following year. 57. As the Annuity cannot be partly commuted, subsection 27H(3A) cannot have any application on the determination of the deductible amount in relation to the Annuity. Assessability of withdrawal value 58. The receipt of the withdrawal value from Challenger by a: 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 nil. 59. Any amount referred to in paragraph 58 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 Annuity disregarded 60. 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). 61. 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 62. 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). 63. As an individual to whom the Annuity is first issued, a policy owner 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. 64. 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. 65. A reversionary life insured is an entity that acquires, on the death of a policy owner, 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 the reversionary life insured 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 66. As a policy owner 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. 67. A reversionary life insured acquires, on the death of a policy owner, 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. 68. A nominated beneficiary referred to in subparagraph 4(c) or (d) of this Ruling or the trustee of a deceased estate referred to in subparagraph 4(e) or (f) of this Ruling acquires, on the death of a policy owner, or the death of a reversionary life insured, 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. Annuity purchased using a roll-over superannuation benefit 69. Paragraphs 70 to 78 of this Ruling apply exclusively to Annuities purchased by a policy owner using the whole or part of a roll-over superannuation benefit. Subsection 27H(4)  annuity 70. As per paragraphs 32 and 33 of this Ruling, subsection 27H(4) defines an annuity to encompass an annuity on ordinary concepts, subject to it not being either a qualifying security for the purposes of Division 16E or a superannuation income stream within the meaning of the ITAA 1997. Superannuation income stream 71. As per paragraph 39 of this Ruling, a superannuation income stream is defined for the purposes of the ITAA 1997 in subsection 307-70.02(1) of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 72. Of the 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 in accordance with subregulation 1.05(1) of the SISR, the relevant ones in respect of the Annuity are that: 73. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR, and therefore constitute a superannuation income stream as defined in subsection 307-70.02(1) of the ITAR (1997 Act) 2021. As a superannuation income stream, each Annuity will not be an annuity as defined in subsection 27H(4). Division 230 of the ITAA 1997  taxation of financial arrangements 74. Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner using the whole or part of a roll-over superannuation benefit for the same reasons it does not apply to any gains or losses derived from an Annuity purchased by a policy owner without using the whole or part of a roll-over superannuation benefit, as set out at paragraphs 42 to 46 of this Ruling. Division 301 of the ITAA 1997  assessability of regular payments and withdrawal value upon commutation 75. A 'superannuation benefit' is defined in subsection 307-5(1) of the ITAA 1997 to include a payment to an annuitant either from a superannuation annuity or arising from the commutation of a superannuation annuity, because they are the annuitant. 76. A 'superannuation annuity' is defined for the purposes of the ITAA 1997 in section 995-1.05 of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 77. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR and therefore constitute a superannuation annuity as defined in section 995-1.05 of the ITAR (1997 Act) 2021. Regular payments and the payment of a withdrawal value from Challenger to a policy owner or a reversionary life insured upon commutation of the Annuity will constitute a superannuation benefit as defined in subsection 307-5(1) of the ITAA 1997. 78. Section 301-10 of the ITAA 1997 provides that a superannuation benefit received by an individual 60 years or over is not assessable income and is not exempt income. It follows that regular payments and the payment of a withdrawal value upon commutation of the Annuity to a policy owner or a reversionary life insured, as applicable, will not be assessable income or exempt income where they are 60 years or over at the time of receipt of such payments. © 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 is a 'life policy' for the purposes of the Life Insurance Act 1995 (as per paragraph 9(1)(c) of that Act), 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 who do not: 14. An individual cannot purchase the Annuity jointly with another person. To purchase the Annuity, policy owners are required to execute and lodge the application form with Challenger, together with an initial investment amount of at least $10,000 which may or may not 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 and subject to the payment of a withdrawal value, the Annuity provides regular payments (monthly) for the lifetime of the policy owner and, where applicable, the reversionary life insured. At the time the Annuity is purchased, a policy owner can elect that, on their death, the regular payments continue to be made to their spouse as the reversionary life insured for the duration of the reversionary life insured's life. 17. The amount of the regular payments payable by Challenger is determined at the time the Annuity is purchased and depends on a number of factors, including: 18. A policy owner is able to choose from different variations of the Annuity. These variations are the: 19. The Flexible Income (Immediate payments) option is available for purchase using a roll-over superannuation benefit by anyone 60 years [3] or older with unrestricted access to their superannuation, or otherwise (using non-superannuation money) by anyone 18 years or older. Under this option: 20. There is no withdrawal value [4] under the Enhanced Income (Immediate payments) option. The Enhanced Income (Immediate payments) option is the same as the Flexible Income (Immediate payments) option in all other respects. 21. Both the Flexible Income (Immediate payments) option and the Enhanced Income (Immediate payments) option are, when purchased with the whole or part of a roll-over superannuation benefit within the meaning of section 306-10 of the ITAA 1997, designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 22. The Flexible Income (Deferred payments) option is only available for purchase using a roll-over superannuation benefit by an individual 60 years [5] or older with unrestricted access to their superannuation. Under this option: 23. There is no withdrawal value [6] under the Enhanced Income (Deferred payments) option. The Enhanced Income (Deferred payments) option is the same as the Flexible Income (Deferred payments) option in all other respects. 24. Both the Flexible Income (Deferred payments) option and the Enhanced Income (Deferred payments) option are designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 25. The Flexible Income (Market-linked payments) option is available for purchase using a roll-over superannuation benefit by anyone 60 years [7] or older with unrestricted access to their superannuation, or otherwise (using non-superannuation money) by anyone 18 years or older. Under this option: 26. There is no withdrawal value [9] under the Enhanced Income (Market-linked payments) option. The Enhanced Income (Market-linked payments) option is the same as the Flexible Income (Market-linked payments) option in all other respects. 27. Both the Flexible Income (Market-linked payments) option and the Enhanced Income (Market-linked payments) option are, when purchased with the whole or part of a roll-over superannuation benefit within the meaning of section 306-10 of the ITAA 1997, designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 28. Any withdrawal value payable by Challenger as a death benefit (under any of the variations discussed at paragraphs 19, 22 and 25 of this Ruling) will be paid to the policy owner's nominated beneficiary or beneficiaries, or to the policy owner's deceased estate, as applicable, where the policy owner dies within the withdrawal period and they have: 29. Where the policy owner dies within the withdrawal period and the reversionary life insured in receipt of the policy owner's regular payments then also dies within the withdrawal period, Challenger will pay the withdrawal value to the nominated beneficiary or beneficiaries of the reversionary life insured, or to the deceased estate of the reversionary life insured, as applicable. 30. Anyone nominated as a beneficiary under an Annuity purchased using a roll-over superannuation benefit must be a dependant of the policy owner or reversionary life insured, as applicable. Commissioner of Taxation 15 May 2024 | Annuity not purchased using a roll-over superannuation benefit: 31. Paragraphs 32 to 68 of this Ruling apply exclusively to Annuities purchased by a policy owner without using the whole or part of a roll-over superannuation benefit. | Subsection 27H(4)  annuity: 32. Subsection 27H(4) defines an 'annuity' to mean: 33. 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 [10] 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. 34. 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 monthly), either fixed at the time of purchase or variable in a way that is calculable by reference to the CPI, the RBA cash rate or index movements, and (unless commuted earlier for the withdrawal value) continue for the life of the policy owner or reversionary life insured, as the case may be. The policy owner's or reversionary life insured's ability to commute does not of itself result in the Annuity failing to be accepted as an annuity contract (see paragraph 25 of IT 2480). 35. An Annuity purchased by a policy owner therefore constitutes an annuity on ordinary concepts and, subject to the exclusions in paragraphs (a) and (b) of the definition (considered at paragraphs 36 to 41 of this Ruling), constitutes an annuity as defined in subsection 27H(4). Division 16E  qualifying security 36. A 'qualifying security' is defined in subsection 159GP(1). For the purposes of determining whether an arrangement is a qualifying security, that arrangement must be a 'security', also defined in subsection 159GP(1) to mean: 37. The Annuity is not considered to have sufficient debt-like obligations to be a contract to which paragraph (d) of the definition of security in subsection 159GP(1) applies, nor does it fall within paragraphs (a), (b) or (c) of that definition. Therefore, the Annuity does not meet the definition of security under subsection 159GP(1) and, as such, is not a qualifying security for the purposes of Division 16E. 38. Additionally, an annuity will not be a qualifying security for the purposes of subsection 159GP(1) where it is an 'ineligible annuity', a term also defined in subsection 159GP(1) to include 'an annuity that is 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'. An Annuity issued by Challenger to a policy owner or held by a reversionary life insured (that is, a natural person other than in the capacity of trustee of a trust estate) is an ineligible annuity. Superannuation income stream 39. 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: 40. 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. 41. As per subparagraph 9(c) of this Ruling, it is assumed for the purposes of this Ruling that a policy owner will not purchase the Annuity using a directed termination payment within the meaning of the IT(TP)A 1997. Accordingly, where the policy owner does not purchase the Annuity using the whole or part of a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997, the Annuity is not a superannuation income stream for the policy owner. | Division 230 of the ITAA 1997  taxation of financial arrangements: 42. 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. 43. 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. 44. 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. 45. 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: 46. 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 36 to 38 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. | Section 27H  assessability of regular payments: 47. 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 a policy owner or to a reversionary life insured, 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. 48. 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: 49. The relevant share in relation to the Annuity (component A) for a policy owner or reversionary life insured is one, in accordance with the definition of that term in subsection 27H(4). 50. The undeducted purchase price in relation to an Annuity (component B) that is purchased by a policy owner 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(g) of this Ruling, it is assumed for the purposes of this Ruling that no portion of the initial investment amount is deductible. 51. 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'. As the terms of the Annuity do not provide for any residual capital value in relation to the Annuity, it (component C) is nil. 52. Where an annuity is payable during the lifetime of a person and not thereafter, the relevant number in relation to that annuity in relation to a year of income is defined in subsection 27H(4) to include the life expectation factor of the person. The relevant number in relation to the Annuity (component D) is therefore the life expectation factor of the policy owner, or any other life insured under the Annuity (such as the reversionary life insured) who has a greater life expectation factor. [11] The life expectation factor in relation to a person in relation to an annuity is defined in subsection 27H(4) as: Note: The most recently published Australian Life Tables [12] are used. 53. Where the Commissioner considers that the deductible amount ascertained in accordance with the formula in subsection 27H(2) is inappropriate, having regard to the terms and conditions applying to the annuity and to any other relevant matters, the Commissioner may, subject to subsection 27H(3A), determine the deductible amount that applies pursuant to subsection 27H(3). In making a determination pursuant to subsection 27H(3), the Commissioner may have regard to the terms and conditions applying to the annuity, to a certificate supplied by an actuary and to any other matters considered relevant. 54. Paragraphs 16 to 24 of IT 2157 provide some guidelines as to the exercise of the discretion under subsection 27H(3). Applying those guidelines to the Annuity and having regard to other relevant matters, the Commissioner may exercise the discretion under subsection 27H(3) where the: 55. The Commissioner will only alter the deductible amount pursuant to subsection 27H(3) where the deductible amount ascertained in accordance with the formula under subsection 27H(2) for a full year exceeds the minimum annual amount proposed to be paid under the annuity contract. Therefore, where the quantum of the regular payments under the Annuity is impacted by any of the drivers referred to in paragraph 54 of this Ruling and the deductible amount ascertained under subsection 27H(2) for a full year consequently exceeds the regular payments to be paid by Challenger under the Annuity to a policy owner or to a reversionary life insured, as applicable, the Commissioner will alter that deductible amount pursuant to subsection 27H(3). 56. The deductible amount excluded in accordance with subsection 27H(3) under the circumstances set out in paragraph 55 of this Ruling is to be so much of the deductible amount ascertained in accordance with the formula under subsection 27H(2) as does not exceed the annuity payment (in this case, the regular payments for the relevant year). The balance of the deductible amount ascertained in accordance with the formula under subsection 27H(2) is to be carried forward and excluded (along with the following year's deductible amount ascertained in accordance with the formula under subsection 27H(2)) from the following year's annuity payment (see paragraph 21 of IT 2157). As such, this amount will be used to reduce the portion of the regular payments assessable in the following year. 57. As the Annuity cannot be partly commuted, subsection 27H(3A) cannot have any application on the determination of the deductible amount in relation to the Annuity. | Assessability of withdrawal value: 58. The receipt of the withdrawal value from Challenger by a: 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 nil. 59. Any amount referred to in paragraph 58 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 Annuity disregarded: 60. 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). 61. 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 62. 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). 63. As an individual to whom the Annuity is first issued, a policy owner 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. 64. 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. 65. A reversionary life insured is an entity that acquires, on the death of a policy owner, 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 the reversionary life insured 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 66. As a policy owner 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. 67. A reversionary life insured acquires, on the death of a policy owner, 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. 68. A nominated beneficiary referred to in subparagraph 4(c) or (d) of this Ruling or the trustee of a deceased estate referred to in subparagraph 4(e) or (f) of this Ruling acquires, on the death of a policy owner, or the death of a reversionary life insured, 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. | Annuity purchased using a roll-over superannuation benefit: 69. Paragraphs 70 to 78 of this Ruling apply exclusively to Annuities purchased by a policy owner using the whole or part of a roll-over superannuation benefit. | Subsection 27H(4)  annuity: 70. As per paragraphs 32 and 33 of this Ruling, subsection 27H(4) defines an annuity to encompass an annuity on ordinary concepts, subject to it not being either a qualifying security for the purposes of Division 16E or a superannuation income stream within the meaning of the ITAA 1997. Superannuation income stream 71. As per paragraph 39 of this Ruling, a superannuation income stream is defined for the purposes of the ITAA 1997 in subsection 307-70.02(1) of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 72. Of the 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 in accordance with subregulation 1.05(1) of the SISR, the relevant ones in respect of the Annuity are that: 73. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR, and therefore constitute a superannuation income stream as defined in subsection 307-70.02(1) of the ITAR (1997 Act) 2021. As a superannuation income stream, each Annuity will not be an annuity as defined in subsection 27H(4). | Division 230 of the ITAA 1997  taxation of financial arrangements: 74. Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner using the whole or part of a roll-over superannuation benefit for the same reasons it does not apply to any gains or losses derived from an Annuity purchased by a policy owner without using the whole or part of a roll-over superannuation benefit, as set out at paragraphs 42 to 46 of this Ruling. | Division 301 of the ITAA 1997  assessability of regular payments and withdrawal value upon commutation: 75. A 'superannuation benefit' is defined in subsection 307-5(1) of the ITAA 1997 to include a payment to an annuitant either from a superannuation annuity or arising from the commutation of a superannuation annuity, because they are the annuitant. 76. A 'superannuation annuity' is defined for the purposes of the ITAA 1997 in section 995-1.05 of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 77. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR and therefore constitute a superannuation annuity as defined in section 995-1.05 of the ITAR (1997 Act) 2021. Regular payments and the payment of a withdrawal value from Challenger to a policy owner or a reversionary life insured upon commutation of the Annuity will constitute a superannuation benefit as defined in subsection 307-5(1) of the ITAA 1997. 78. Section 301-10 of the ITAA 1997 provides that a superannuation benefit received by an individual 60 years or over is not assessable income and is not exempt income. It follows that regular payments and the payment of a withdrawal value upon commutation of the Annuity to a policy owner or a reversionary life insured, as applicable, will not be assessable income or exempt income where they are 60 years or over at the time of receipt of such payments. © 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 Lifetime Annuity (Liquid Lifetime) (the Annuity) issued by Challenger Life Company Limited (Challenger) and offered under a Product Disclosure Statement (PDS) dated 5 September 2022. 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 2024 to the entities specified in paragraph 4 of this Ruling in connection with an Annuity purchased from 1 July 2024 until 30 June 2027. 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 30 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified. 8. Subject to paragraph 3 of this Ruling 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 is a 'life policy' for the purposes of the Life Insurance Act 1995 (as per paragraph 9(1)(c) of that Act), 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 who do not: 14. An individual cannot purchase the Annuity jointly with another person. To purchase the Annuity, policy owners are required to execute and lodge the application form with Challenger, together with an initial investment amount of at least $10,000 which may or may not 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 and subject to the payment of a withdrawal value, the Annuity provides regular payments (monthly) for the lifetime of the policy owner and, where applicable, the reversionary life insured. At the time the Annuity is purchased, a policy owner can elect that, on their death, the regular payments continue to be made to their spouse as the reversionary life insured for the duration of the reversionary life insured's life. 17. The amount of the regular payments payable by Challenger is determined at the time the Annuity is purchased and depends on a number of factors, including: 18. A policy owner is able to choose from different variations of the Annuity. These variations are the: 19. The Flexible Income (Immediate payments) option is available for purchase using a roll-over superannuation benefit by anyone 60 years [3] or older with unrestricted access to their superannuation, or otherwise (using non-superannuation money) by anyone 18 years or older. Under this option: 20. There is no withdrawal value [4] under the Enhanced Income (Immediate payments) option. The Enhanced Income (Immediate payments) option is the same as the Flexible Income (Immediate payments) option in all other respects. 21. Both the Flexible Income (Immediate payments) option and the Enhanced Income (Immediate payments) option are, when purchased with the whole or part of a roll-over superannuation benefit within the meaning of section 306-10 of the ITAA 1997, designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 22. The Flexible Income (Deferred payments) option is only available for purchase using a roll-over superannuation benefit by an individual 60 years [5] or older with unrestricted access to their superannuation. Under this option: 23. There is no withdrawal value [6] under the Enhanced Income (Deferred payments) option. The Enhanced Income (Deferred payments) option is the same as the Flexible Income (Deferred payments) option in all other respects. 24. Both the Flexible Income (Deferred payments) option and the Enhanced Income (Deferred payments) option are designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 25. The Flexible Income (Market-linked payments) option is available for purchase using a roll-over superannuation benefit by anyone 60 years [7] or older with unrestricted access to their superannuation, or otherwise (using non-superannuation money) by anyone 18 years or older. Under this option: 26. There is no withdrawal value [9] under the Enhanced Income (Market-linked payments) option. The Enhanced Income (Market-linked payments) option is the same as the Flexible Income (Market-linked payments) option in all other respects. 27. Both the Flexible Income (Market-linked payments) option and the Enhanced Income (Market-linked payments) option are, when purchased with the whole or part of a roll-over superannuation benefit within the meaning of section 306-10 of the ITAA 1997, designed to be an annuity for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR by meeting all of the standards of subregulation 1.06A(2) of the SISR. 28. Any withdrawal value payable by Challenger as a death benefit (under any of the variations discussed at paragraphs 19, 22 and 25 of this Ruling) will be paid to the policy owner's nominated beneficiary or beneficiaries, or to the policy owner's deceased estate, as applicable, where the policy owner dies within the withdrawal period and they have: 29. Where the policy owner dies within the withdrawal period and the reversionary life insured in receipt of the policy owner's regular payments then also dies within the withdrawal period, Challenger will pay the withdrawal value to the nominated beneficiary or beneficiaries of the reversionary life insured, or to the deceased estate of the reversionary life insured, as applicable. 30. Anyone nominated as a beneficiary under an Annuity purchased using a roll-over superannuation benefit must be a dependant of the policy owner or reversionary life insured, as applicable. Commissioner of Taxation 15 May 2024 | Annuity not purchased using a roll-over superannuation benefit: 31. Paragraphs 32 to 68 of this Ruling apply exclusively to Annuities purchased by a policy owner without using the whole or part of a roll-over superannuation benefit. | Subsection 27H(4)  annuity: 32. Subsection 27H(4) defines an 'annuity' to mean: 33. 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 [10] 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. 34. 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 monthly), either fixed at the time of purchase or variable in a way that is calculable by reference to the CPI, the RBA cash rate or index movements, and (unless commuted earlier for the withdrawal value) continue for the life of the policy owner or reversionary life insured, as the case may be. The policy owner's or reversionary life insured's ability to commute does not of itself result in the Annuity failing to be accepted as an annuity contract (see paragraph 25 of IT 2480). 35. An Annuity purchased by a policy owner therefore constitutes an annuity on ordinary concepts and, subject to the exclusions in paragraphs (a) and (b) of the definition (considered at paragraphs 36 to 41 of this Ruling), constitutes an annuity as defined in subsection 27H(4). Division 16E  qualifying security 36. A 'qualifying security' is defined in subsection 159GP(1). For the purposes of determining whether an arrangement is a qualifying security, that arrangement must be a 'security', also defined in subsection 159GP(1) to mean: 37. The Annuity is not considered to have sufficient debt-like obligations to be a contract to which paragraph (d) of the definition of security in subsection 159GP(1) applies, nor does it fall within paragraphs (a), (b) or (c) of that definition. Therefore, the Annuity does not meet the definition of security under subsection 159GP(1) and, as such, is not a qualifying security for the purposes of Division 16E. 38. Additionally, an annuity will not be a qualifying security for the purposes of subsection 159GP(1) where it is an 'ineligible annuity', a term also defined in subsection 159GP(1) to include 'an annuity that is 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'. An Annuity issued by Challenger to a policy owner or held by a reversionary life insured (that is, a natural person other than in the capacity of trustee of a trust estate) is an ineligible annuity. Superannuation income stream 39. 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: 40. 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. 41. As per subparagraph 9(c) of this Ruling, it is assumed for the purposes of this Ruling that a policy owner will not purchase the Annuity using a directed termination payment within the meaning of the IT(TP)A 1997. Accordingly, where the policy owner does not purchase the Annuity using the whole or part of a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997, the Annuity is not a superannuation income stream for the policy owner. | Division 230 of the ITAA 1997  taxation of financial arrangements: 42. 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. 43. 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. 44. 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. 45. 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: 46. 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 36 to 38 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. | Section 27H  assessability of regular payments: 47. 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 a policy owner or to a reversionary life insured, 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. 48. 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: 49. The relevant share in relation to the Annuity (component A) for a policy owner or reversionary life insured is one, in accordance with the definition of that term in subsection 27H(4). 50. The undeducted purchase price in relation to an Annuity (component B) that is purchased by a policy owner 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(g) of this Ruling, it is assumed for the purposes of this Ruling that no portion of the initial investment amount is deductible. 51. 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'. As the terms of the Annuity do not provide for any residual capital value in relation to the Annuity, it (component C) is nil. 52. Where an annuity is payable during the lifetime of a person and not thereafter, the relevant number in relation to that annuity in relation to a year of income is defined in subsection 27H(4) to include the life expectation factor of the person. The relevant number in relation to the Annuity (component D) is therefore the life expectation factor of the policy owner, or any other life insured under the Annuity (such as the reversionary life insured) who has a greater life expectation factor. [11] The life expectation factor in relation to a person in relation to an annuity is defined in subsection 27H(4) as: Note: The most recently published Australian Life Tables [12] are used. 53. Where the Commissioner considers that the deductible amount ascertained in accordance with the formula in subsection 27H(2) is inappropriate, having regard to the terms and conditions applying to the annuity and to any other relevant matters, the Commissioner may, subject to subsection 27H(3A), determine the deductible amount that applies pursuant to subsection 27H(3). In making a determination pursuant to subsection 27H(3), the Commissioner may have regard to the terms and conditions applying to the annuity, to a certificate supplied by an actuary and to any other matters considered relevant. 54. Paragraphs 16 to 24 of IT 2157 provide some guidelines as to the exercise of the discretion under subsection 27H(3). Applying those guidelines to the Annuity and having regard to other relevant matters, the Commissioner may exercise the discretion under subsection 27H(3) where the: 55. The Commissioner will only alter the deductible amount pursuant to subsection 27H(3) where the deductible amount ascertained in accordance with the formula under subsection 27H(2) for a full year exceeds the minimum annual amount proposed to be paid under the annuity contract. Therefore, where the quantum of the regular payments under the Annuity is impacted by any of the drivers referred to in paragraph 54 of this Ruling and the deductible amount ascertained under subsection 27H(2) for a full year consequently exceeds the regular payments to be paid by Challenger under the Annuity to a policy owner or to a reversionary life insured, as applicable, the Commissioner will alter that deductible amount pursuant to subsection 27H(3). 56. The deductible amount excluded in accordance with subsection 27H(3) under the circumstances set out in paragraph 55 of this Ruling is to be so much of the deductible amount ascertained in accordance with the formula under subsection 27H(2) as does not exceed the annuity payment (in this case, the regular payments for the relevant year). The balance of the deductible amount ascertained in accordance with the formula under subsection 27H(2) is to be carried forward and excluded (along with the following year's deductible amount ascertained in accordance with the formula under subsection 27H(2)) from the following year's annuity payment (see paragraph 21 of IT 2157). As such, this amount will be used to reduce the portion of the regular payments assessable in the following year. 57. As the Annuity cannot be partly commuted, subsection 27H(3A) cannot have any application on the determination of the deductible amount in relation to the Annuity. | Assessability of withdrawal value: 58. The receipt of the withdrawal value from Challenger by a: 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 nil. 59. Any amount referred to in paragraph 58 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 Annuity disregarded: 60. 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). 61. 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 62. 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). 63. As an individual to whom the Annuity is first issued, a policy owner 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. 64. 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. 65. A reversionary life insured is an entity that acquires, on the death of a policy owner, 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 the reversionary life insured 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 66. As a policy owner 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. 67. A reversionary life insured acquires, on the death of a policy owner, 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. 68. A nominated beneficiary referred to in subparagraph 4(c) or (d) of this Ruling or the trustee of a deceased estate referred to in subparagraph 4(e) or (f) of this Ruling acquires, on the death of a policy owner, or the death of a reversionary life insured, 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. | Annuity purchased using a roll-over superannuation benefit: 69. Paragraphs 70 to 78 of this Ruling apply exclusively to Annuities purchased by a policy owner using the whole or part of a roll-over superannuation benefit. | Subsection 27H(4)  annuity: 70. As per paragraphs 32 and 33 of this Ruling, subsection 27H(4) defines an annuity to encompass an annuity on ordinary concepts, subject to it not being either a qualifying security for the purposes of Division 16E or a superannuation income stream within the meaning of the ITAA 1997. Superannuation income stream 71. As per paragraph 39 of this Ruling, a superannuation income stream is defined for the purposes of the ITAA 1997 in subsection 307-70.02(1) of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 72. Of the 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 in accordance with subregulation 1.05(1) of the SISR, the relevant ones in respect of the Annuity are that: 73. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR, and therefore constitute a superannuation income stream as defined in subsection 307-70.02(1) of the ITAR (1997 Act) 2021. As a superannuation income stream, each Annuity will not be an annuity as defined in subsection 27H(4). | Division 230 of the ITAA 1997  taxation of financial arrangements: 74. Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner using the whole or part of a roll-over superannuation benefit for the same reasons it does not apply to any gains or losses derived from an Annuity purchased by a policy owner without using the whole or part of a roll-over superannuation benefit, as set out at paragraphs 42 to 46 of this Ruling. | Division 301 of the ITAA 1997  assessability of regular payments and withdrawal value upon commutation: 75. A 'superannuation benefit' is defined in subsection 307-5(1) of the ITAA 1997 to include a payment to an annuitant either from a superannuation annuity or arising from the commutation of a superannuation annuity, because they are the annuitant. 76. A 'superannuation annuity' is defined for the purposes of the ITAA 1997 in section 995-1.05 of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 77. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR and therefore constitute a superannuation annuity as defined in section 995-1.05 of the ITAR (1997 Act) 2021. Regular payments and the payment of a withdrawal value from Challenger to a policy owner or a reversionary life insured upon commutation of the Annuity will constitute a superannuation benefit as defined in subsection 307-5(1) of the ITAA 1997. 78. Section 301-10 of the ITAA 1997 provides that a superannuation benefit received by an individual 60 years or over is not assessable income and is not exempt income. It follows that regular payments and the payment of a withdrawal value upon commutation of the Annuity to a policy owner or a reversionary life insured, as applicable, will not be assessable income or exempt income where they are 60 years or over at the time of receipt of such payments. © 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: Annuity not purchased using a roll-over superannuation benefit: 31. Paragraphs 32 to 68 of this Ruling apply exclusively to Annuities purchased by a policy owner without using the whole or part of a roll-over superannuation benefit. | Subsection 27H(4)  annuity: 32. Subsection 27H(4) defines an 'annuity' to mean: 33. 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 [10] 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. 34. 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 monthly), either fixed at the time of purchase or variable in a way that is calculable by reference to the CPI, the RBA cash rate or index movements, and (unless commuted earlier for the withdrawal value) continue for the life of the policy owner or reversionary life insured, as the case may be. The policy owner's or reversionary life insured's ability to commute does not of itself result in the Annuity failing to be accepted as an annuity contract (see paragraph 25 of IT 2480). 35. An Annuity purchased by a policy owner therefore constitutes an annuity on ordinary concepts and, subject to the exclusions in paragraphs (a) and (b) of the definition (considered at paragraphs 36 to 41 of this Ruling), constitutes an annuity as defined in subsection 27H(4). Division 16E  qualifying security 36. A 'qualifying security' is defined in subsection 159GP(1). For the purposes of determining whether an arrangement is a qualifying security, that arrangement must be a 'security', also defined in subsection 159GP(1) to mean: 37. The Annuity is not considered to have sufficient debt-like obligations to be a contract to which paragraph (d) of the definition of security in subsection 159GP(1) applies, nor does it fall within paragraphs (a), (b) or (c) of that definition. Therefore, the Annuity does not meet the definition of security under subsection 159GP(1) and, as such, is not a qualifying security for the purposes of Division 16E. 38. Additionally, an annuity will not be a qualifying security for the purposes of subsection 159GP(1) where it is an 'ineligible annuity', a term also defined in subsection 159GP(1) to include 'an annuity that is 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'. An Annuity issued by Challenger to a policy owner or held by a reversionary life insured (that is, a natural person other than in the capacity of trustee of a trust estate) is an ineligible annuity. Superannuation income stream 39. 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: 40. 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. 41. As per subparagraph 9(c) of this Ruling, it is assumed for the purposes of this Ruling that a policy owner will not purchase the Annuity using a directed termination payment within the meaning of the IT(TP)A 1997. Accordingly, where the policy owner does not purchase the Annuity using the whole or part of a roll-over superannuation benefit as defined in section 306-10 of the ITAA 1997, the Annuity is not a superannuation income stream for the policy owner. | Division 230 of the ITAA 1997  taxation of financial arrangements: 42. 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. 43. 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. 44. 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. 45. 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: 46. 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 36 to 38 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. | Section 27H  assessability of regular payments: 47. 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 a policy owner or to a reversionary life insured, 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. 48. 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: 49. The relevant share in relation to the Annuity (component A) for a policy owner or reversionary life insured is one, in accordance with the definition of that term in subsection 27H(4). 50. The undeducted purchase price in relation to an Annuity (component B) that is purchased by a policy owner 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(g) of this Ruling, it is assumed for the purposes of this Ruling that no portion of the initial investment amount is deductible. 51. 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'. As the terms of the Annuity do not provide for any residual capital value in relation to the Annuity, it (component C) is nil. 52. Where an annuity is payable during the lifetime of a person and not thereafter, the relevant number in relation to that annuity in relation to a year of income is defined in subsection 27H(4) to include the life expectation factor of the person. The relevant number in relation to the Annuity (component D) is therefore the life expectation factor of the policy owner, or any other life insured under the Annuity (such as the reversionary life insured) who has a greater life expectation factor. [11] The life expectation factor in relation to a person in relation to an annuity is defined in subsection 27H(4) as: Note: The most recently published Australian Life Tables [12] are used. 53. Where the Commissioner considers that the deductible amount ascertained in accordance with the formula in subsection 27H(2) is inappropriate, having regard to the terms and conditions applying to the annuity and to any other relevant matters, the Commissioner may, subject to subsection 27H(3A), determine the deductible amount that applies pursuant to subsection 27H(3). In making a determination pursuant to subsection 27H(3), the Commissioner may have regard to the terms and conditions applying to the annuity, to a certificate supplied by an actuary and to any other matters considered relevant. 54. Paragraphs 16 to 24 of IT 2157 provide some guidelines as to the exercise of the discretion under subsection 27H(3). Applying those guidelines to the Annuity and having regard to other relevant matters, the Commissioner may exercise the discretion under subsection 27H(3) where the: 55. The Commissioner will only alter the deductible amount pursuant to subsection 27H(3) where the deductible amount ascertained in accordance with the formula under subsection 27H(2) for a full year exceeds the minimum annual amount proposed to be paid under the annuity contract. Therefore, where the quantum of the regular payments under the Annuity is impacted by any of the drivers referred to in paragraph 54 of this Ruling and the deductible amount ascertained under subsection 27H(2) for a full year consequently exceeds the regular payments to be paid by Challenger under the Annuity to a policy owner or to a reversionary life insured, as applicable, the Commissioner will alter that deductible amount pursuant to subsection 27H(3). 56. The deductible amount excluded in accordance with subsection 27H(3) under the circumstances set out in paragraph 55 of this Ruling is to be so much of the deductible amount ascertained in accordance with the formula under subsection 27H(2) as does not exceed the annuity payment (in this case, the regular payments for the relevant year). The balance of the deductible amount ascertained in accordance with the formula under subsection 27H(2) is to be carried forward and excluded (along with the following year's deductible amount ascertained in accordance with the formula under subsection 27H(2)) from the following year's annuity payment (see paragraph 21 of IT 2157). As such, this amount will be used to reduce the portion of the regular payments assessable in the following year. 57. As the Annuity cannot be partly commuted, subsection 27H(3A) cannot have any application on the determination of the deductible amount in relation to the Annuity. | Assessability of withdrawal value: 58. The receipt of the withdrawal value from Challenger by a: 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 nil. 59. Any amount referred to in paragraph 58 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 Annuity disregarded: 60. 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). 61. 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 62. 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). 63. As an individual to whom the Annuity is first issued, a policy owner 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. 64. 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. 65. A reversionary life insured is an entity that acquires, on the death of a policy owner, 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 the reversionary life insured 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 66. As a policy owner 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. 67. A reversionary life insured acquires, on the death of a policy owner, 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. 68. A nominated beneficiary referred to in subparagraph 4(c) or (d) of this Ruling or the trustee of a deceased estate referred to in subparagraph 4(e) or (f) of this Ruling acquires, on the death of a policy owner, or the death of a reversionary life insured, 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. | Annuity purchased using a roll-over superannuation benefit: 69. Paragraphs 70 to 78 of this Ruling apply exclusively to Annuities purchased by a policy owner using the whole or part of a roll-over superannuation benefit. | Subsection 27H(4)  annuity: 70. As per paragraphs 32 and 33 of this Ruling, subsection 27H(4) defines an annuity to encompass an annuity on ordinary concepts, subject to it not being either a qualifying security for the purposes of Division 16E or a superannuation income stream within the meaning of the ITAA 1997. Superannuation income stream 71. As per paragraph 39 of this Ruling, a superannuation income stream is defined for the purposes of the ITAA 1997 in subsection 307-70.02(1) of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 72. Of the 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 in accordance with subregulation 1.05(1) of the SISR, the relevant ones in respect of the Annuity are that: 73. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR, and therefore constitute a superannuation income stream as defined in subsection 307-70.02(1) of the ITAR (1997 Act) 2021. As a superannuation income stream, each Annuity will not be an annuity as defined in subsection 27H(4). | Division 230 of the ITAA 1997  taxation of financial arrangements: 74. Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner using the whole or part of a roll-over superannuation benefit for the same reasons it does not apply to any gains or losses derived from an Annuity purchased by a policy owner without using the whole or part of a roll-over superannuation benefit, as set out at paragraphs 42 to 46 of this Ruling. | Division 301 of the ITAA 1997  assessability of regular payments and withdrawal value upon commutation: 75. A 'superannuation benefit' is defined in subsection 307-5(1) of the ITAA 1997 to include a payment to an annuitant either from a superannuation annuity or arising from the commutation of a superannuation annuity, because they are the annuitant. 76. A 'superannuation annuity' is defined for the purposes of the ITAA 1997 in section 995-1.05 of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 77. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR and therefore constitute a superannuation annuity as defined in section 995-1.05 of the ITAR (1997 Act) 2021. Regular payments and the payment of a withdrawal value from Challenger to a policy owner or a reversionary life insured upon commutation of the Annuity will constitute a superannuation benefit as defined in subsection 307-5(1) of the ITAA 1997. 78. Section 301-10 of the ITAA 1997 provides that a superannuation benefit received by an individual 60 years or over is not assessable income and is not exempt income. It follows that regular payments and the payment of a withdrawal value upon commutation of the Annuity to a policy owner or a reversionary life insured, as applicable, will not be assessable income or exempt income where they are 60 years or over at the time of receipt of such payments. © 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 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. | D is the relevant number in relation to the annuity. | ... the number of years in the complete expectation of life of the person as ascertained by reference to the prescribed Life Tables at the time at the beginning of the period to which the first payment of the annuity relates.

Withdrawal notice: 58. The receipt of the withdrawal value from Challenger by a: 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 nil. 59. Any amount referred to in paragraph 58 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 Annuity disregarded 60. 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). 61. 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 62. 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). 63. As an individual to whom the Annuity is first issued, a policy owner 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. 64. 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. 65. A reversionary life insured is an entity that acquires, on the death of a policy owner, 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 the reversionary life insured 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 66. As a policy owner 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. 67. A reversionary life insured acquires, on the death of a policy owner, 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. 68. A nominated beneficiary referred to in subparagraph 4(c) or (d) of this Ruling or the trustee of a deceased estate referred to in subparagraph 4(e) or (f) of this Ruling acquires, on the death of a policy owner, or the death of a reversionary life insured, 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. Annuity purchased using a roll-over superannuation benefit 69. Paragraphs 70 to 78 of this Ruling apply exclusively to Annuities purchased by a policy owner using the whole or part of a roll-over superannuation benefit. Subsection 27H(4)  annuity 70. As per paragraphs 32 and 33 of this Ruling, subsection 27H(4) defines an annuity to encompass an annuity on ordinary concepts, subject to it not being either a qualifying security for the purposes of Division 16E or a superannuation income stream within the meaning of the ITAA 1997. Superannuation income stream 71. As per paragraph 39 of this Ruling, a superannuation income stream is defined for the purposes of the ITAA 1997 in subsection 307-70.02(1) of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 72. Of the 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 in accordance with subregulation 1.05(1) of the SISR, the relevant ones in respect of the Annuity are that: 73. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR, and therefore constitute a superannuation income stream as defined in subsection 307-70.02(1) of the ITAR (1997 Act) 2021. As a superannuation income stream, each Annuity will not be an annuity as defined in subsection 27H(4). Division 230 of the ITAA 1997  taxation of financial arrangements 74. Division 230 of the ITAA 1997 does not apply to any gains or losses derived from an Annuity purchased by a policy owner using the whole or part of a roll-over superannuation benefit for the same reasons it does not apply to any gains or losses derived from an Annuity purchased by a policy owner without using the whole or part of a roll-over superannuation benefit, as set out at paragraphs 42 to 46 of this Ruling. Division 301 of the ITAA 1997  assessability of regular payments and withdrawal value upon commutation 75. A 'superannuation benefit' is defined in subsection 307-5(1) of the ITAA 1997 to include a payment to an annuitant either from a superannuation annuity or arising from the commutation of a superannuation annuity, because they are the annuitant. 76. A 'superannuation annuity' is defined for the purposes of the ITAA 1997 in section 995-1.05 of the ITAR (1997 Act) 2021 to mean, in relation to an annuity commenced after 19 September 2007, either: 77. As each Annuity purchased with the whole or part of a roll-over superannuation benefit is assumed (at subparagraph 9(e) of this Ruling) to be an annuity that meets the standards of subregulation 1.06A(2) of the SISR, and a policy owner is unable to add to the initial investment amount once it has commenced, such Annuities will be annuities for the purposes of the SISA in accordance with subregulation 1.05(1) of the SISR and therefore constitute a superannuation annuity as defined in section 995-1.05 of the ITAR (1997 Act) 2021. Regular payments and the payment of a withdrawal value from Challenger to a policy owner or a reversionary life insured upon commutation of the Annuity will constitute a superannuation benefit as defined in subsection 307-5(1) of the ITAA 1997. 78. Section 301-10 of the ITAA 1997 provides that a superannuation benefit received by an individual 60 years or over is not assessable income and is not exempt income. It follows that regular payments and the payment of a withdrawal value upon commutation of the Annuity to a policy owner or a reversionary life insured, as applicable, will not be assessable income or exempt income where they are 60 years or over at the time of receipt of such payments. © 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 2157 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 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 Div 301 ITAA 1997 301-10 ITAA 1997 306-10 ITAA 1997 307-5(1) 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) ITA(1997)R 2021 995-1.05 ITA(1936)R 2015 7 IT(TP)A 1997 SISA 1993 SISR 1994 1.05(1) SISR 1994 1.06A(2) SISR 1994 Sch 1 Life Insurance Act 1995 9(1)(c)