Issue
How is the 'relevant number' determined in relation to a market linked income stream (MLIS)?
Decision
The 'relevant number' in relation to a MLIS is determined by reference to paragraph (a) of the definition in subsection 27H(4) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is a member of a regulated superannuation fund.
The taxpayer is seriously contemplating the commencement of a MLIS.
Reasons for Decision
Section 27H of the ITAA 1936 sets out how to calculate the annual deductible amount of an income stream. The deductible amount is calculated in the usual manner under section 27H. In order to calculate this amount the 'relevant number' must be determined.
In subsection 27H(4) of the ITAA 1936, 'relevant number' means (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.
A MLIS must be for 'a term of years certain' and so paragraph 27H(4)(a) of the ITAA 1936 must be applied in determining the 'relevant number'. There are a number of options in relation to the choice of term, but the number of years in the term must be chosen prior to the commencement of the MLIS.
If the term of the income stream is based on the primary beneficiary's life expectancy, the term is equal to the primary beneficiary's life expectancy on the commencement day of the income stream, rounded up to the next whole number.
The term may also be based on the primary beneficiary's life expectancy on the commencement day calculated as if they were one, two, three, four or five years younger, rounded up to the next whole number.
If the term of the income stream is based on the reversionary beneficiary's life expectancy, the term is equal to the reversionary beneficiary's life expectancy on the commencement day of the income stream, rounded up to the next whole number.
The term may also be based on the reversionary beneficiary's life expectancy on the commencement day calculated as if they were one, two, three, four or five years younger, rounded up to the next whole number.
Once the term of the income stream is chosen, that term expressed as a number of years becomes the 'term of years certain'. The relevant number for a MLIS is therefore determined by reference to paragraph (a) of the definition in subsection 27H(4) of the ITAA 1936.