Assessability of Reversionary Annuity

Is the full amount of an annuity payment made after the death of the first annuitant assessable to the reversionary annuitant under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The full amount of an annuity payment made after the death of the first annuitant is assessable to the reversionary annuitant under section 27H of the ITAA 1936.

The taxpayer's spouse was the policy owner and first annuitant for two fixed term annuities.

One policy is paid yearly.

The other policy is paid quarterly.

The taxpayer was named as the reversionary policy owner and reversionary annuitant under both policies.

Both policies provide that they will immediately vest in the reversionary policy owner upon the death of the policy owner. Upon the death of the taxpayer's spouse the taxpayer became entitled to receive the annuity payments.

Subsection 27H(1) of the ITAA 1936 includes in the assessable income of a taxpayer the amount of any annuity derived by the taxpayer during the year of income excluding, where the annuity has been purchased, the 'deductible amount'.

When income is derived depends on the nature of the income and in some cases the circumstances in which it is derived.

In Woodhouse v. IR Comrs (1936) 20 TC 673 it was held that only the amount of annuity received was assessable. Therefore income from an annuity is derived when it is received by the taxpayer rather than progressively over the period that it relates to.

The policy stated that the policies vested immediately in the taxpayer on the death of their spouse and the annuities were then paid to the taxpayer, as the reversionary annuitant. As the annuities were received by the taxpayer the taxpayer's spouse derived no part of the annuities.

The full amount of the annuities received by the taxpayer after the death of their spouse is therefore assessable to the taxpayer under subsection 27H(1) of the ITAA 1936.