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Ruling

Subject: Undeducted purchase price (UPP) of your foreign pension

Question

Are you entitled to a 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(3) of the Income Tax Assessment Act (ITAA 1936).

This ruling applies for the following periods:

2011-12 income year and subsequent years where the facts, as stated in the ruling, do not change.

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(3) of the Income Tax Assessment Act 1936 (ITAA 1936).

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

· Your assessable income includes your pension income.

· Your pension is paid by as superannuation fund.

· All the pension is payable to you.

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

· You have provided documentary evidence of the personal contributions paid to your fund.

· The residual capital value of the pension is nil.

· Your pension is paid annually.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 20

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 Regulations 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

Deductible amount

Section 27H of the Income Tax Assessment Act 1936 (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 annual deductible amount. The deductible amount is deemed to be a return of part of your contribution towards the purchase of the pension.

The deductible amount is calculated 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.

Subsection 27A(1) of the ITAA 1936 contains the definition of purchase price in relation to a superannuation pension. Subparagraph (a)(ii) of that former subsection stated 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.

How the annual deductible amount is calculated

Under subsection 27H(2) of the ITAA 1936 and subject to subsection 27H(3) or (3A) 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.

The Commissioner has considered the discretion under subsection 27H(3) of the ITAA 1936, but deems the formula in subsection 27H(2) to be appropriate as the basis for the calculation of your 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 the pension first became payable

2) your age when the pension commenced

The relevant number was determined in accordance with TD 2006/72.

Converting foreign currency to Australian currency

For the 2003-04 and subsequent financial 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 Income tax: how does a taxpayer work out the amount to be included in assessable income under section 27H of the Income Tax Assessment Act 1936 for a superannuation pension or annuity that is payable in a foreign country?, 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 financial year. This is provided the conditions outlined in Schedule 2 to the ITAR are satisfied.

Where the pension is received as a single annual amount (or bi-annual payment) the conditions outlined in Schedule 2 to the ITAR 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.

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