Edited version of private ruling

Authorisation Number: 1011551094102

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Ruling

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

Question

Are you entitled to an annual and part year deductible amount in respect of the undeducted purchase price (UPP) of your foreign pension?

Answer

Yes, your annual deductible amount has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA1936) and your part year deductible amount for the 2002-03 year of income has been calculated in accordance with subsection 27H(3) of (ITAA1936 .

This ruling applies for the following periods

Year ended 30 June 2003

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

On or after 1 July 1983

Relevant facts and circumstances

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

· There is no Taxation Ruling or Taxation Determination published which provides for an alternative calculation or Commissioner's discretion under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

· The international tax agreement between Australia and the country in which your fund is established and 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 payment

· The pension became payable on or after 1 July 1983.

· The pension is payable for life and is non 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 funding your total retirement benefits

· You have also provided evidence confirming the transfer value of the pension entitlement at the time when the lump sum benefit was received

· The residual capital value of the pension is nil.

· Your pension is paid on a monthly basis.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 20

Income Tax Assessment Act 1936 Section 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 Regulations 1936 Regulation 9

Income Tax Assessment Regulation 1997 Regulation 960-50.01

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.

EXPLANATION

Please note that all references to 'pension' cover both pensions and annuities

Subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) contains the definition of purchase price in relation to a superannuation pension. Subparagraph (a)(ii) of that subsection states that purchase price means the total amount of contributions to a superannuation fund made to obtain superannuation benefits consisting of a pension and other benefits such as a lump sum.

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 IT 2272 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

You received both a lump sum payment and a pension from your provider 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 above formula will be used.

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

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;

The annual deductible amount is calculated in accordance with subsection 27H(2) of the Income Tax assessment Act 1936 (ITAA 1936

Your annual deductible amount of the UPP will apply for the 2003-04 income year and all subsequent years where the facts, as stated in the ruling, do not change.

Paragraph 2 of Taxation Determination TD 2006/17 states that where a pension has commenced or finished during an income year, the deductible amount should be determined under subsection 27H(3) of the ITAA 1936. The deductible amount in these circumstances is the amount that would be calculated under subsection 27H(2) of the ITAA 1936 apportioned in accordance with the number of days the pension was payable to you in that year.

Therefore, for the 2002-03 income year the part year deductible amount has been calculated in accordance with subsection 27H(3) ITAA 1936

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