Income tax: status of an allocated annuity paid by an Australian life insurance company to a resident of a country with which Australia has a Double Tax Agreement

Is an allocated annuity paid by an Australian life insurance company to a resident of a country with which Australia has a Double Tax Agreement (DTA) an 'annuity' for the purposes of the Pensions and Annuities Article in Australia's DTAs (as incorporated into Australian law by the International Tax Agreements Act 1953 )?

Yes.

The taxpayer is a non-resident of Australia and is a resident of a country which has a DTA with Australia. The taxpayer purchased an allocated annuity from an Australian life insurance company. The annuity was purchased with the rolled-over amount of an ETP, and met the standards set out in subregulation 1.05(4) of the Superannuation Industry (Supervision) Regulations.

In dealing with an allocated annuity paid by an Australian life insurance company to a resident of a treaty partner country, the relevant DTA must be considered as it will allocate the taxing rights over those classes of income which fall within the treaty. Each Australian DTA is given the force of law domestically under the International Tax Agreements Act 1953 (the 'Agreements Act') and is incorporated as a schedule to that Act. Subsection 4(1) of the Agreements Act stipulates that the DTAs are to be interpreted and read as one with the Income Tax Assessment Act 1936 (the ITAA 1936) and the Income Tax Assessment Act 1997 (the ITAA 1997). Subsection 4(2) of the Agreements Act provides that the terms of the DTAs prevail over those of the ITAA 1936 and the ITAA 1997 (except section 160AO and Part IVA of the ITAA 1936) in the case of any inconsistency.

For the Pensions and Annuities Article in Australia's DTAs to apply to an allocated annuity, it is necessary for the allocated annuity to fall within the treaty meaning of 'annuity'. 'Annuity' is often defined in Australia's DTAs (usually in Article 18(2)) as: ' ... a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth.' (emphasis added)

Even though this definition appears in Australia's DTAs and in the DTAs of many other countries, there appears to be no international guidance as to its interpretation.

As an allocated annuity is purchased with rollover monies and is payable for an ascertainable period of time, the latter part of the treaty definition is satisfied. The key issue is whether the requirement for at least one annual payment within a prescribed range is sufficient to constitute 'a stated sum payable periodically at stated times'. 'Annuity' is not defined in the Interpretation section of ITAA 1936 (section 6(1)). However, it is defined in Part III, Division 2, Subdivision AA, section 27A(1), which says that the term has the same meaning as in section 10 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act).

Section 10 of the SIS Act states that 'annuity' includes a benefit provided by a life insurance company or a registered organisation, if the benefit is taken, under the regulations, to be an annuity for the purposes of the SIS Act. Subregulation 1.05(4) of the SIS Regulations establishes the standards which an allocated annuity must meet if it is to be taken to be an annuity for the purposes of the SIS Act. Therefore, an allocated pension which meets the standards of subregulation 1.05(4) will be an 'annuity' within the meaning of section 27A of the ITAA 1936.

Given that two of the statutory elements of an allocated annuity as specified in subregulation 1.05(4) of the SIS Act are that: • the payments must be made at least annually; and • the total amount of the annual payments must fall within an approved range (i.e., minimum and maximum thresholds) based on statutory formulas; it is considered that allocated annuities which meet this statutory definition broadly satisfy the requirement in the treaty meaning of 'annuity' that there be 'a stated sum payable periodically at stated times'.

Accordingly, subject to the context and terms of the particular DTA, an allocated annuity paid by an Australian life insurance company or a registered organisation to a non-resident who resides in a treaty partner country is an 'annuity' for the purposes of the Pensions and Annuities Article in Australia's DTAs. [Note: In general, an allocated annuity paid by an Australian life insurance company or a registered organisation to a resident of a treaty partner country will be an 'annuity' for the purposes of the Pensions and Annuities Article (usually Article 18) in Australia's DTAs. However, given that Australia's DTAs vary, the terms of the relevant DTA must be considered in each individual case.]