1. Annuities and Foreign Pensions
Chapter 5
Annuities and Foreign Pensions
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Annuities
All non-superannuation annuities and certain foreign source pensions are assessable.
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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
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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.
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5. Undeducted Purchase Price
The undeducted purchase price is essentially the amount paid in purchasing the non-superannuation annuity or to obtain the foreign pension.
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6. 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
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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
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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.
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9. 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
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10. 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.
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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
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12. Illustration: Part year annuity
Trixie, aged 59, retired on 1 March 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 years.
Required:
Calculate the annual deductible amount and assessable amount for 2013/14 and thereafter.
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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/
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).
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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).
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15. 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
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Rebateable annuities
Non-superannuation Annuities
A tax offset is not available for non-superannuation annuities.
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Foreign Pensions
The following overseas pensions are assessable in Australia:
Foreign Pensions UK
Netherlands
Italy
Austria
Each has a deductible amount.
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