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Edited version of private advice
Authorisation Number: 1051940294949
Date of advice: 18 January 2022
Ruling
Subject: Undeducted purchase price deductible amount in respect of your foreign pension
Question
Are you entitled to an undeducted purchase price (UPP) deductible amount in respect of your foreign pension?
Answer
Yes, your annual UPP deductible amount for the 20XX-20XX income year is X.
Your part year UPP deductible amount for the 20XX-20XX income year is X.
This ruling applies for the following periods:
20XX-20XX
The scheme commences on:
1 September 2020
Relevant facts and circumstances
You became a resident of Australia for income tax purposes during the 20XX-20XX income year.
Your pension is paid by XX, a scheme maintained in the United States of America.
You have provided a copy of an extract of your plan from the fund to assist the Commissioner in determining the amount of your personal contributions.
You have provided a letter from XX stating your personal contributions are XX.
Your pension commenced on X and is payable for life.
You currently receive 100% of the pension and on your death it reverts to your spouse.
The residual capital value of the pension is nil.
When the pension commenced you were XX years of age and your life expectancy factor was XX.
When the pension commenced your spouse was XX years of age and their life expectancy factor was XX.
Your pension is paid on a quarterly basis.
Relevant legislative provisions
Income Tax Assessment Act 1936 Former subsection 27A(1)
Income Tax Assessment Act 1936 Section 27H
Income Tax Assessment Act 1936 Subsection 27H(2)
Income Tax Assessment Act 1936 Subsection 27H(3)
Income Tax Assessment Act 1936 Subsection 27H(4)
Income Tax Assessment Act 1997 Section 960-50
Income Tax Assessment (1936 Act) Regulation 2015 Section 9
Income Tax Assessment (1997 Act) Regulations 2021 Section 960-50.01
Superannuation Industry (Supervision) Regulations 1994 Schedule 1B
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.
The definition of purchase price is contained in subsection 27H(4) of the Income Tax Assessment Act 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.
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.
It is 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, which in your case is (foreign currency value)
C = is the residual capital value (if any), which in your case is X
D = is the relevant number, which in your case is XX
By putting your information into the above formula, your annual UPP deductible amount is X.
Part year calculation
As you were a resident of Australia for income tax purposes for X days in the 20XX-XX income year, a pro-rated amount of (foreign currency value) applies for that year.
Conclusion
You are entitled to a UPP deductible amount for the 20XX-XX and 20XX-XX income years.