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Ruling

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

Question 1

Are you entitled to a deductible amount in respect of the undeducted purchase price (UPP) of your foreign pension?

Answer

Yes

This ruling applies for the following periods:

2011-12 income year

2010-11 income year

2009-10 income year

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).

There is no international tax agreement between Australia and the country in which the retirement fund is established and managed. Therefore, as a resident of Australia, your pension income is taxable in Australia under the domestic laws of 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 on your death reverts to your spouse.

All the pension is payable to you.

You have provided a copy/an extract of a letter from the fund to assist the Commissioner in determining the amount of contributions.

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 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 Section 960-50

Income Tax Regulations 1936 Regulation 9

Income Tax Assessment Regulations 1997 Regulation 960-50.01

Superannuation Industry (Supervision) Regulations 1994

Reasons for decision

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 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.

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 is determined as follows:

Purchase of pension:

B = (present value)

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

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:

· the date when the pension first became payable;

· your age when the pension commenced;

· your spouse's age when the pension commenced.

In Taxation Determination TD 2006/72 the Commissioner states, in paragraph 1, that the relevant number used to calculate the deductible amount of a superannuation pension that is payable to a person (the original pensioner) for life and on the death of that person is payable to another person for their life (the reversionary pensioner) will be the greater of the life expectancies of the original and reversionary pensioners.

The amount of your total contributions has been determined by the Commissioner in accordance with the information provided by you.

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 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) and Schedule 2 to the ITAR 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 ITAR 1997 are satisfied.

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.

In your case, as your pension is paid monthly, 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 information line on 13 10 20 or visit our website at www.ato.gov.au/super.

Other relevant comments

Please note that from 1 July 2007, the legislation changed in relation to superannuation pensions and benefits paid from complying superannuation funds. However, these changes do not affect any pensions paid from overseas funds which are not considered complying superannuation funds under section 42 of the Superannuation Industry (Supervision) Act 1993 as they are not resident funds.

Therefore, your ruling will still apply in subsequent years in relation to the annual deductible amount of your pension if the material facts do not change. You will need to include your total foreign pension income in your income tax return and claim your annual deductible amount as advised by your private ruling above.

Important information to note

Income tax returns may be amended within two years from the date upon which the Commissioner gives notice of the assessment to the individual for assessments for the 2004-05 and later income years

Accordingly, your income tax returns will be amended to include the annual deductible amount of the UPP as advised by your private ruling. Notices of amended assessments will issue to you in due course.

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