Edited version of private advice

Authorisation Number: 1051946609017

Date of advice: 14 February 2022

Ruling

Subject: Undeducted purchase price of a foreign pension

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:

30 June 20XX

The scheme commences on:

XX Month 20XX

Relevant facts and circumstances

You are a resident of Australia for income tax purposes.

Your pension is paid by a scheme maintained in foreign country.

You have provided a letter from the foreign fund stating the amount of your personal contributions.

You provided the value of your lump sum your received at commencement of your pension.

Your net present value was calculated by ATO in accordance with taxation ruling IT 2272.

Your Pension Valuation Factor is X

Your pension commenced on the provided date 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.XX.

When the pension commenced your spouse was XX years of age and their life expectancy factor was XX.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

We followed these ATO view documents

Taxation Ruling IT 2272

Taxation Ruling IT 2498

Taxation Ruling IT 2498A - Addendum

Taxation Ruling TR 2002/17

Other references

Taxation Determination TD 2006/17

Taxation Determination TD 2006/54

Taxation Determination TD 2006/72

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 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.

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.

The present value of the pension is calculated based on the amount of the pension entitlement during the first 12 months after commencement of the pension.

The present value is based on Schedule 1B of the Superannuation Industry (Supervision) Regulations 1994, under the following formula:

Present Value = AV x PVF

AV = Annual Value of Pension (ie the amount of pension payable during the first 12 months)

PVF = Pension Valuation Factor which is based on the indexation rate of your pension and your age at the commencement of the pension and whether the pension is reversionary or not and the level of reversion.

You received both a lump sum payment and a pension from a scheme maintained in foreign country 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 a scheme maintained in foreign country is determined as follows:

Purchase of pension = (present value all in foreign currency) / (lump sum) + (present value) = 0.XXXX (or XX.XX%)

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 a scheme maintained in foreign country had been determined in accordance with the above formula.

Your 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), which in your case is nil

D = is the relevant number, which in your case is XX.XX.

By putting your information into the above formula, your part year and annual UPP deductible amounts had been determined.