Annuity & superannuation pensions: Undeducted purchase price

What proportion of the taxpayer's contributions in relation to the taxpayer's overseas pension, is to be allocated between the pension and lump sum benefit for calculating the 'deductible amount' under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936)?

The proportion of the taxpayer's contributions in relation to the taxpayer's overseas pension is calculated based on the appropriate valuation factor as per the Taxation Ruling IT2620.

Under section 27H of the ITAA 1936 an annuity is included in the assessable income of a taxpayer. The amount that is assessable is reduced by the 'deductible amount'. The 'deductible amount' represents the 'undeducted purchase price' of the pension reduced by its residual capital value, if any, and apportioned over the term for which the pension will be paid. This calculation is based on the formula in subsection 27H(2) of the ITAA 1936. The 'undeducted purchase price' (definition in subsection 27A(1) of the ITAA 1936) for a non-rebateable pension is generally the amount of the 'purchase price' paid that has not been allowed as a deduction. The 'purchase price' generally means contributions made by any person to obtain benefits consisting only of the pension (definition in subsection 27A(1) of the ITAA 1936).

Where a superannuation benefit, therefore, consists of a lump sum and a pension, the 'purchase price' in relation to the pension has to be ascertained. Taxation Ruling IT 2272 provides a basis for this apportionment. The apportionment is based on the present value of the pension entitlement at the time when the lump sum payment is received.

In this particular case, the amount of the lump sum was provided, as well as the annual value of the pension on commencement. However, the taxpayer was unable to ascertain from the fund the present value of the pension entitlement. Taxation Ruling IT 2620 provides for a calculation of the present value using a 'pension valuation factor' (see appendix to Taxation Ruling IT 2620).

Using the appropriate table and based on the information provided, a valuation factor was determined. Using this factor, the present value of the pension was determined and this was used to apportion the 'purchase price' between the lump sum and the pension. This allowed a calculation of the 'undeducted purchase price' to be made and consequently the annual 'deductible amount' available under subsection 27H(2) of the ITAA 1936.