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Edited version of private advice
Authorisation Number: 1051862223080
Date of advice: 6 July 2021
Ruling
Subject: Undeducted purchase price of a foreign pension annuity
Question
Are you entitled to an undeducted purchase price (UPP) deductible amount in respect of your foreign pension?
Answer
Yes.
This ruling applies for the following period:
Income year ended 30 June 2020.
The scheme commenced on:
1 July 2019.
Relevant facts and circumstances
• The taxpayer is a resident of Australia for income tax purposes
• The taxpayer's pension is paid by a scheme maintained in the foreign country.
• The taxpayer has provided a letter from their pension scheme stating the amount of their personal contributions.
• The taxpayer's pension commenced in the 2019-20 income year and it is payable for life.
• At the commencement of your pension the taxpayer took a tax-free lump sum.
• The taxpayer receives 100% of the pension and on their death it reverts to their spouse.
• The residual capital value of the pension is nil.
• The taxpayer's pension is paid on a monthly basis.
Reasons for Decision
The part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. The tax-free portion is called the UPP deductible amount.
Apportioning contributions where both a lump sum and a pension is paid
The definition of purchase price is contained in subsection 27H(4) of the ITAA 1936. It states that 'purchase price' includes the contributions made by a person to any foreign superannuation fund to obtain a pension and so much of contributions considered reasonable by the Commissioner as having been paid by a person to a foreign superannuation fund to obtain superannuation benefits including a pension.
Where a person is entitled to both a pension and a lump sum payment, it must be determined whether part of the personal contributions made to the fund are 'undeducted contributions' relating to the lump sum payment; or, form part of the 'purchase price' relating to the superannuation pension.
Taxation Ruling IT2272 Income tax: Eligible termination payments and superannuation pensions - determination of undeducted contributions and undeducted purchase price states that where there is no apparent basis for allocating the contributions, the apportioning of the contributions made to obtain both a pension and lump sum is to be calculated on a pro-rata basis as follows:
|
Purchase of pension |
= |
B |
|
(A + B) |
|
Purchase of lump sum |
= |
A |
|
(A + B) |
Where:
A = is the amount of the lump sum benefit received, and
B = is the net present value of the pension entitlement at the time when the lump sum benefit is received.
You received both a lump sum payment and a pension from a foreign superannuation fund on retirement. You paid personal contributions into the fund to obtain your retirement benefits. Therefore, some of the personal contributions would have been allocated to the lump sum benefit and some would have formed part of the 'purchase price' of your pension.
It is necessary to determine what proportion of the total personal contributions, have been made to obtain your pension. As there is no alternative basis for allocating the personal contributions made to obtain both the pension and lump sum benefit, the apportioning is to be calculated using the previous pro-rata formula.
The proportion of the total personal contributions attributable to the pension from the foreign superannuation fund is determined as follows:
|
Purchase of pension |
= |
<(present value all in foreign currency> |
= |
<0.XXXX> (or <XX.XX>%) |
|
(lump sum) + (present value) |
This percentage is applied to your total contributions paid to determine the purchase price of your pension benefit.
Therefore, the amount of personal contributions (UPP) as being made by you to obtain your pension from the foreign superannuation fund is determined by multiplying the amount of your personal contributions (in foreign currency) by the determined percentage of the pensions purchase price.
Your annual deductible amount is then calculated by dividing the UPP of your pension by either the term of the pension (if fixed), or a life expectancy factor - that applies to you or your spouse if they have a greater life expectancy - according to life expectancy statistics.
The Australian life tables are published by the Australian Government Actuary, and the life expectancy is taken from when the pension first became payable.
The annual UPP deductible amount is calculated using the following formula:
|
A (B - C) |
|
D |
A = relevant share of the pension payable to you
(if all the pension is payable to you then A = 1)
B = is the amount of the UPP of the pension
C = is the residual capital value (if any)
D = is the relevant number, life expectancy/term of the pension.
Part year calculation
As your pension was paid part year days in the 2019-20 income year, a pro-rated amount applies for that year.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 27H
Income Tax Assessment Act 1936 Subsection 27H(2)
Income Tax Assessment Act 1936 Subsection 27H(4)
Income Tax Assessment Act 1997 Section 960-50 - currency translation
Income Tax Regulations 1936 Regulation 9