Edited version of private ruling

Authorisation Number: 1011539584698

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deductible amount of the Undeducted Purchase Price of your foreign pension

Question

Are you entitled to annual and part year deductible amount in respect of the Undeducted Purchase Price (UPP) of your foreign pension?

Yes, your annual deductible amount is has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment act 1936 (ITAA 1936 )and your part year deductible for the 2007-08 year of income has been calculated in accordance with subsection 27H(3) of the ITAA 1936.

This ruling applies for the following period

2007-08 year of income

2008-09 year of income

2009-10 Year of income

The scheme commenced on

On or after 1 July 1983

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You receive a pension from a retirement fund established and managed outside Australia.

The international tax agreement between Australia and the country in which your pension is managed provides that the pension is taxable in Australia.

Your assessable income includes your pension income.

At the commencement of the pension you also received a lump sum

The pension became payable on or after 1 July 1983.

The pension is payable for life and is not reversionary.

All the pension is payable to you.

You have provided evidence confirming the total amount of your contributions, other than employer contributions paid to the retirement fund and used towards your retirement benefits (pension and lump sum)

You have provided confirmation of your pension entitlement in the first 12 months of commencement of your pension

The residual capital value of the pension is nil.

Your pension is paid on a monthly basis.

Your pension is indexed in accordance with cost of living increases.

Relevant legislative provisions

Income Tax Assessment act 1936 Section 20

Income Tax Assessment Act 1936 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 1936 Subsection 960-50

Income Tax Regulations 1936 Regulation 9

Income Tax Assessment Regulation 1997 Regulation 960-50

Superannuation Industry (Supervision) Regulations 1994

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

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 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 IT 2272 discusses the apportioning of the contributions made to obtain both a pension and lump sum. The Ruling 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 ; and

(A+B)

Purchase of lump sum = A , where:

(A+B)

A is the amount of the lump sum benefit received, and

B is the 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 determined in accordance with Taxation Ruling IT 2620 and 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 your superannuation fund on retirement. You paid personal contributions of into the fund to obtain your total 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 immediately apparent basis for allocating the personal contributions made to obtain both the pension and lump sum benefit, the proportion of the total personal contributions attributable to the pension from your fund is determined as follows:

Purchase of pension:

B

(A + B)

This percentage is applied to your total contributions paid to determine the purchase price of your pension benefit.

Section 27H of the ITAA 1936 operates to include in assessable income the amount of any pension derived by a taxpayer during a year of income reduced by the deductible amount.

The deductible amount is deemed to be a return of part of your contribution towards the purchase of the pension.

The calculation of the deductible amount is based on the UPP of your pension.

The UPP is the amount you contributed towards the purchase price of your pension for which you did not claim, and were not eligible to claim, a tax deduction in Australia. Contributions made by an employer or by another person under an agreement to which the employer was a party, cannot form part of the UPP of the pension.

Under subsection 27H(2) of the ITAA 1936, the annual deductible amount of a superannuation pension is ascertained in accordance with the formula:

where:

A = is the relevant share of the pension payable to the taxpayer in relation to the year of income (if all of the pension is payable to the taxpayer, A = 1)

B = is the amount of the UPP of the pension as calculated under IT 2272

C = is the residual capital value, and

D = is the relevant number in relation to the pension.

Under subsection 27H(4) of the ITAA 1936, when a pension is payable during the lifetime of a person, the 'life expectation factor' is to be used as the relevant number.

Regulation 9 of the Income Tax Regulations 1936 states that for the purposes of the definition of life expectation factor in subsection 27H(4) of the ITAA 1936, the Australian Life Tables published by the Australian Government Actuary are to be used.

The factors for determining the life expectancy are:

(1) the date when the pension first became payable

(2) your age when the pension commenced.

As you became an Australian resident during the 2007-08 income year, you are not entitled to claim the full deductible amount of the UPP for that year. The deductible amount therefore needs to be apportioned according to the number of days that you were an Australian resident during the income year.

Your annual deductible amount has been calculated in accordance with subsection 27H(2) ITAA 1936 and your part year deductible amount for the 2007-2008 year of income has been calculated in accordance with subsection 27H(3) ITAA 1936.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).