Edited version of private ruling

Authorisation Number: 1011572234784

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Ruling

Subject: Deductible amount of Undeducted Purchase Price

Issue 1

Are you entitled to an annual and part year deductible amount in respect of your first overseas pension?

Yes, your annual deductible amount and your part year deductible amount for your first overseas annuity has been calculated in accordance with subsection 27(H) of the Income Tax Assessment Act 1936 (ITAA 1936).

This ruling applies for the following period

2009-10 income year

2010-11 income year

The scheme commenced on

1 July 2002

Issue 2

Are you entitled to an annual and part year deductible amount in respect of your second overseas annuity?

Yes, your annual deductible amount and your part year deductible amount for your second overseas annuity has been calculated in accordance with subsection 27(H) of the ITAA 1936.

This ruling applies for the following period

2009-10 income year

2010-11 income year

The scheme commenced on

1 July 1996

Relevant facts

You receive two pensions 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 ITAA 1936.

The international tax agreement between Australia and the country in which the retirement fund is established provides that the pension is taxable in Australia.

Your assessable income includes your pension income.

At the commencement of your overseas annuities you received lump sums.

The pensions became payable on or after 1 July 1983.

Your overseas annuities are not reversionary.

All the pension and annuity is payable to you.

The residuals capital value of the pension is nil.

Your first overseas annuity is paid on an annually basis. And your second overseas annuity is paid on monthly basis.

You became an Australian resident for income tax purposes part way through the 2009-10 income year.

Relevant legislative and regulatory provisions

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

Reasons for decision

Annuity 1

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 (that is, 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.

Present Value = AV x PVF

= XXXX (rounded)

You received both a lump sum payment and a pension from your overseas pension fund on retirement. You paid personal contributions 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 overseas pension fund is determined as follows:

Purchase of pension:

B = (present value)

(A + B) (lump sum) + (present value)

= XX.XX %

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

Annuity 2

Subsection 27A(1) of the 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.

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;

For the 2003-04 and subsequent income years, subsection 960-50(1) of the Income Tax Assessment Act 1997 (ITAA 1997) requires an amount in a foreign currency to be translated into Australian currency. Subsection 960-50(4) of the ITAA 1997 further requires any foreign currency elements in a calculation to be translated before the final amount is worked out.

In accordance with the currency translation rules contained in section 960-50 of the ITAA 1997 and clarified in Taxation Determination TD 2006/54, pensions received in foreign currency should be translated to Australian currency on the following basis:

(a) if the amount is received at or before the time when it is derived - the amount is to be translated to Australian currency at the exchange rate applicable at the time of receipt; or

(b) in any other case - the amount is to be translated to Australian currency at the exchange rate applicable when it is derived.

As a general rule, the deductible amount is translated to Australian currency using the same exchange rate applying to the pension.

Alternatively, regulation 960-50 of the Income Tax Assessment Regulations 1997 (ITR 1997) and Schedule 2 to the ITR 1997 allow pensions received in foreign currency and the deductible amount to be translated to Australian currency at the average exchange rate for the income year. This is provided the conditions outlined in Schedule 2 to the ITR 1997 are satisfied.

Where the pension is received as a single annual amount (or bi-annual payment) the conditions outlined in Schedule 2 to the ITR 1997 will not be satisfied. Therefore the pension income must be translated at the exchange rate applying when it is received (or derived, if this is earlier).

Similarly, the deductible amount must also be translated at the exchange rate applying when the pension amount is received or derived.

In your case, as your first overseas annuity is paid on an annual or bi-annual basis, you must use the exchange rate applying at the time that your pension income is received or derived.

Where the pension is received as a series of payments over the course of the income year, and provided the average exchange rate is considered a reasonable approximation of the exchange rates, the conditions outlined in Schedule 2 to the ITR 1997 will be satisfied.

As your second overseas annuity is paid on a monthly basis, you may use the average exchange rate to translate your pension income and the deductible amount of your UPP.

The average exchange rates are available from our lnformation line on 13 10 20 or visit our website at www.ato.gov.au/super

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