Undeducted Purchase Price - Relevant Number

Should the annual deductible amount of the undeducted purchase price (UPP) of a superannuation pension be recalculated using the taxpayer's life expectancy upon the taxpayer's divorce?

Yes. The annual deductible amount of the UPP of a superannuation pension should be recalculated using the taxpayer's life expectancy upon the taxpayer's divorce.

The taxpayer receives a superannuation pension from an unfunded defined benefit scheme.

The annual deductible amount of the superannuation pension was originally determined based on the ex-spouse's life expectancy.

Subsequent to the pension commencing the taxpayer became divorced.

According to the governing rules of the fund, the pensioner must be legally married at the time of death for the pension to revert to the spouse.

Subsection 27H(2) of the Income Tax Assessment Act 1936 (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 of the pension payable to the taxpayer in relation to the year of income (in this case all of the pension is payable to the taxpayer, so A = 1) • B = the amount of the UPP of the pension • C = the residual capital value • D = the relevant number in relation to the pension.

Subsection 27H(4) of the ITAA 1936 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.'

The Commissioner will not exercise his discretion under paragraph 27H(4)(c) of the ITAA 1936 to determine the relevant number unless he considers it appropriate to do so.

In Administrative Appeals Tribunal Case Z19 92 ATC 204; AAT Case 7904 (1992) 23 ATR 1143, Member Fayle stated that: 'The deduction is to be calculated by reference to ascertainable criteria with a general application and not by some administrative decision based on individual preferences unrelated to the tests laid down in the legislation. To replace the statutory tests in subs (2) with some other test or opinion where the statutory test clearly applies would be to make the taxing measure arbitrary. There can be no scope to overlook the statutory test where its application cannot give rise to a harsh or an unreasonable incidence with regard to the object of the provision.'

In circumstances, where a taxpayer's superannuation pension becomes non-reversionary following a divorce, or subsequently becomes reversionary upon remarriage, it is considered appropriate to redetermine the relevant number.

In Case U89 87 ATC 513; AAT Case 67 (1987) 18 ATR 3484, Senior Member P M Roach stated that: 'when there is no prospect of any person becoming entitled to an annuity following the death of the contributor-annuitant the 'undeducted purchase price' is appropriately related by the Commissioner to the period of his life expectancy.'

As there is no longer the prospect of any other person becoming entitled to the taxpayer's superannuation pension following the taxpayer's death, it is considered appropriate to recalculate the deductible amount of the pension using the taxpayer's life expectancy as the relevant number. Note: Due to amendments made to the definition of 'annuity' in subsection 27H(4) of the 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.