Annuities and Foreign Pensions Chapter 5 Annuities and Foreign Pensions © National Core Accounting Publications

© National Core Accounting Publications Annuities All non-superannuation annuities and certain foreign source pensions are assessable. © National Core Accounting Publications

© National Core Accounting Publications Annuity Defined Is a fixed sum payable periodically either for a fixed period of time or for the rest of the recipient’s life. An annuity may be: Purchased by the recipient Granted by a living person Granted by a will Combination of purchase and grant © National Core Accounting Publications

© National Core Accounting Publications Deductible amount Where a non-superannuation annuity or certain foreign pension is purchased, the assessable amount of an annuity may be reduced by any deductible amount. The deductible amount represents the undeducted purchase price of an annuity reduced by its residual capital value apportioned over the term of the annuity. © National Core Accounting Publications

Undeducted Purchase Price The undeducted purchase price is essentially the amount paid in purchasing the non-superannuation annuity or to obtain the foreign pension. © National Core Accounting Publications

Residual Capital Value (RCV) The RCV of an annuity is the capital amount payable on termination of the annuity. Not all annuities have a RCV © National Core Accounting Publications

© National Core Accounting Publications The formula to calculate the deductible amount is: Total undeducted purchase price - RCV Life expectancy at beginning of annuity period Alternatively, if an annuity is purchased for a fixed term of years, then the deductible amount is calculated as follows: Total undeducted purchase price - RCV Number of years in fixed term © National Core Accounting Publications

© National Core Accounting Publications Life expectancy A person’s life expectancy is determined in accordance with the prescribed Life Tables prepared by the Australian Government Actuary. These Tables give life expectancies of males and females. © National Core Accounting Publications

Life Expectancy Tables Age Males Females 55 26.95 30.53 73 12.64 15.03 56 26.08 29.61 74 11.96 14.27 57 25.20 28.70 75 11.31 13.51 58 24.34 27.79 76 10.68 12.78 59 23.48 26.89 77 10.07 12.05 60 22.63 26.00 78 9.48 11.35 61 21.79 25.11 79 8.92 10.67 62 20.96 24.23 80 8.38 10.01 63 20.14 23.35 81 7.76 9.37 64 19.34 22.48 82 7.36 8.75 65 18.54 21.62 83 6.89 8.17 66 17.76 20.76 84 6.45 7.61 67 16.99 19.92 85 6.03 7.08 68 16.24 19.08 86 5.64 6.58 69 15.49 18.24 87 5.27 6.11 70 14.76 17.42 88 4.94 5.68 71 14.04 16.61 89 4.63 5.28 72 13.33 15.82 90 4.36 4.91 © National Core Accounting Publications

Illustration: Tax Treatment of an Annuity R.U. Able, aged 53, purchased a non-superannuation annuity on 1 July 2013 that will provide $12,000 p.a. for 12 years. The annuity cost $100,000 and has a residual capital value (RCV) of $5,000.   Required: Calculate the deductible amount and assessable amount. © National Core Accounting Publications

© National Core Accounting Publications Solution: The deductible amount is: = 100,000 – 5,000 12 = $7,917 p.a.   The assessable amount in 2013/14 is: Gross annuity income $ 12,000 less Deductible amount 7,917 Assessable amount 4,083 © National Core Accounting Publications

Illustration: Part year annuity Trixie, aged 59, retired on 1 March 2014. On this date she purchased a non-superannuation annuity at a cost of $40,000 that will provide an annual income of $6,000 for life. The annuity has no residual capital value (RCV). Her life expectancy at the beginning of the annuity was 26.89 years.   Required: Calculate the annual deductible amount and assessable amount for 2013/14 and thereafter. © National Core Accounting Publications

© National Core Accounting Publications Solution: The annual deductible amount is: = 40,000 – 0 26.89 = $1,488 The assessable amount assessable in 2013/14 is: i.e. (Annuity less Deductible amount) x Period applicable Annuity 6,000 x 4/12 $ 2,000 less Deductible amount 1,488 x 4/12 496 Assessable amount 1,504 The amount assessable thereafter is: Annuity $ 6,000 less Deductible amount 1,488 Assessable amount 4,512 Note that if the taxpayer survived beyond their statistical life expectancy, the same calculation is still used (i.e. the annual assessable amount is always $4,512). © National Core Accounting Publications

© National Core Accounting Publications Rebateable annuities Superannuation Annuities All superannuation income stream annuities, paid from taxed superannuation funds (i.e. taxed element) to taxpayers who are aged 55 years or more but less than 60 years are eligible for a tax offset.   The tax offset is a flat 15% of the assessable amount of an annuity. The tax offset is not available for taxpayers aged less than 55 years (unless they retire due to a permanent disability). © National Core Accounting Publications

Illustration: Superannuation annuity tax offset In 2013/14 a taxpayer, aged 57, received an annual amount of $60,000 from a superannuation annuity. The deductible amount is $20,000.   Required: Calculate the superannuation annuity/income stream tax offset. Solution: The superannuation annuity/income stream tax offset is: $40,000 x 15% = $6,000 © National Core Accounting Publications

© National Core Accounting Publications Rebateable annuities Non-superannuation Annuities A tax offset is not available for non-superannuation annuities. © National Core Accounting Publications

© National Core Accounting Publications Foreign Pensions The following overseas pensions are assessable in Australia: Foreign Pensions UK Netherlands Italy Austria Each has a deductible amount. © National Core Accounting Publications