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Can the gross amount of an account-based pension received during an income year, be reduced by a proportionate amount of the personal superannuation contributions made during the accumulation phase of the pension, when calculating the adjusted taxable income for rebates of a dependant under section 159J of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The gross amount of an account-based pension received during an income year, can be reduced by a proportionate amount of the personal superannuation contributions made during the accumulation phase of the pension, when calculating the adjusted taxable income for rebates of a dependant under section 159J of the ITAA 1936.

On 1 July 2008, the taxpayer's spouse commenced receiving payments from an account-based pension.

During the accumulation phase of the pension, the taxpayer's spouse made personal superannuation contributions of $100,000.

For the 2013-14 income year and earlier income years, a resident taxpayer who contributes to the maintenance of a person who is a dependant may be entitled to a tax offset in accordance with Subdivision A of Division 17 of Part III of the ITAA 1936.

Subsection 159J(1) of the ITAA 1936 provides: [Maintenance of dependant] Where, during the year of income, a taxpayer contributes to the maintenance of a person (in this section referred to as a dependant ) specified in column 2 of the table set out in subsection (2) and that person is a resident, the taxpayer is entitled, in his or her assessment in respect of income of that year of income, to a rebate of tax ascertained in accordance with this section.

A spouse of a taxpayer is a person specified in column 2 of the table set out in subsection 159J(2) of the ITAA 1936.

Subsection 159J(4) of the ITAA 1936 provides: The amount of the rebate otherwise allowable under this section in respect of a dependant shall be reduced by $1 for every $4 by which the dependant's adjusted taxable income for rebates in the year of income exceeds $282.

'Adjusted taxable income for rebates' is defined in subsection 6(1) of the ITAA 1936 to mean adjusted taxable income (within the meaning of the A New Tax System (Family Assistance) Act 1999 , disregarding clauses 3 and 3A of Schedule 3 to that Act).

In Federal Commissioner of Taxation v. Knight 83 ATC 4096; (1983) 14 ATR 1, in the context of the former section 26AA of the ITAA 1936 (which concerned the assessability of annuities), Kelly J held that the pension arising from the contributing scheme in that case was within the ordinary meaning of the word 'annuity'. In deciding whether the annuity was purchased, Kelly J adopted the reasoning of Jacobs J.A. in Wayne v. Commissioner of Stamp Duties (1966) 85 WN (Pt 1) (NSW) 301 at 311-312, where it was said: ...where the scheme is a contributing scheme, even though the contributions are compulsory, I think that the interest created must be regarded as one which is purchased or provided by the employee.

On ordinary accounting principles, something which is purchased and which gives rise to an enduring benefit requires recognition as an asset. Therefore, at the end of the accumulation phase of a contributory pension, there would, under ordinary accounting principles, be an asset representing the sum total of the contributions made by the member during the accumulation phase.

As that asset proportionally dissipates on receipt by the member of payments from the contributory scheme, ordinary accounting principles would require an appropriate allocation of the purchase price as a direct charge against the income received.

The quantum of the direct charge will need to be determined on a case by case basis. This may be done on any reasonable basis in accordance with ordinary accounting principles.

Date of Amendment Part Comment 31 March 2017 Issue Remove superseded reference to separate net income Decision Remove superseded reference to separate net income Reasons for decision Included reference to applicable income years Remove superseded reference to separate net income Include reference to subsection 6(1) of the ITAA 1936 Legislative references Remove reference to subsection 159J(6) Include reference to subsection 6(1) Case references Remove reference to Federal Commissioner of Taxation v Harris Related public rulings Remove reference to Taxation Ruling IT 2391 Keywords Remove superseded reference to separate net income of dependants Include reference to adjusted taxable income for rebates

Date of Amendment | Part | Comment

31 March 2017 | Issue | Remove superseded reference to separate net income

Decision | Remove superseded reference to separate net income

Reasons for decision | Included reference to applicable income years Remove superseded reference to separate net income Include reference to subsection 6(1) of the ITAA 1936

Legislative references | Remove reference to subsection 159J(6) Include reference to subsection 6(1)

Case references | Remove reference to Federal Commissioner of Taxation v Harris

Related public rulings | Remove reference to Taxation Ruling IT 2391

Keywords | Remove superseded reference to separate net income of dependants Include reference to adjusted taxable income for rebates