Superannuation, retirement & employment termination - Reduced Life Expectancy

Can a taxpayer, suffering from a medical condition, use a reduced life expectancy factor to calculate the deductible amount of an allocated pension under subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. Regulation 9 of the Income Tax Regulations 1936 (ITR 1936) specifies the Australian Life Tables (as published by the Australian Government Actuary) are to be used for the purposes of subsection 27H(2) of the ITAA 1936.

The taxpayer: • was seriously injured in a motor vehicle accident resulting in a medical condition, • is totally and permanently incapacitated and requires full time carers, • was awarded damages as a result of the accident, • life expectancy was assessed to be less than that which would normally remain in a judgement handed down by a court, • intends to purchase an allocated pension and is seeking permission to apply a reduced life expectancy factor to the allocated pension for the calculation of the deductible amount.

Subsection 27H(2) of the ITAA 1936 provides the formula for calculating the deductible amount to be applied against the gross pension or annuity payments received during a year of income. The formula under subsection 27H(2) is as follows: (A (B - C)) / D Where: • A = the relevant share in relation to the annuity in relation to the taxpayer in relation to the year of income • B = the amount of the UPP of the annuity • C =: (a) if there is a residual capital value in relation to the annuity and that residual capital value is specified in the agreement by virtue of which the annuity is payable or is capable of being ascertained from the terms of that agreement at the time when the annuity is first derived - that residual capital value; or (b) in any other case - nil; and • D = the relevant number in relation to the annuity.

Subsection 27H(4) of the ITAA defines 'relevant number', as meaning: ' (a) where the annuity is payable for a term of years certain - the number of years in the term; (b) where the annuity is payable during the lifetime of a person and not thereafter - the life expectation factor of the person; and (c) in any other case - the number that the Commissioner considers appropriate having regard to the number of years in the total period during which the annuity will be, or may reasonably be, expected to be payable.'

Regulation 9 of the ITR 1936 states that for the purposes of the definition of 'life expectation factor' in subsection 27H(4) of the ITAA 1936, the Australian Life Tables published by the Australian Government Actuary are to be used.

There can be no change to life expectation factors for a person suffering from a medical condition.

Due to amendments made to the definition of 'annuity' in subsection 27H(4) of the Income Tax Assessment Act 1936 (ITAA 1936) for the 2007-08 and later income years, the above analysis will only apply to a pension paid from a foreign superannuation fund or scheme or an annuity. The views in this ATO ID are relevant to decisions involving superannuation income streams that commenced being paid before 1 July 2007 and to which section 307-125 of the Income Tax (Transitional Provisions) Act 1997 applies.