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Ruling

Subject: Annual deductible amount of the Undeducted Purchase Price (UPP)

Question 1

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

Ruling

Yes, the deductible amount has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936).

Question 2

Are you entitled to a deductible amount in respect of the UPP of your pension?

Ruling

Yes, the deductible amount has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936).

This ruling applies for the following period

Pension Account X

1987-88 to 2005-06 financial years inclusive

Pension Account Y

1989-90 to 2005-06 financial years inclusive

Relevant facts

You are a resident of Australia for income tax purposes.

You received two pensions from a retirement fund established and managed outside Australia.

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.

The pension account X is reversionary but there is no nominated reversionary beneficiary

The pension Account Y is payable for life, and reverted to you on the death of your spouse.

Both pensions are payable to you.

You received a lump sum in arrears payment for the pension Account Y for the years 19XX to 19YY.

The relevant ruling provides for an alternative calculation of the deductible amount under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

You receive your pension on a monthly basis.

You became an Australian resident for income tax purposes prior to the commencement of both pension.

You have provided documentary evidence from your pension provider which outlines the amount of the contributive portion for both pensions in the original currency and $Euro.

Relevant legislative and regulatory 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

Reasons for decision

Explanation

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

Summary

Your annual deductible amount is set out in the table as above and will apply for the relevant financial years where the facts, as stated in the ruling do not change.

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 (financial year) reduced by the deductible amount.

The deductible amount is calculated based on the undeducted purchase price (UPP). 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.

Each year a portion of the UPP can be used to reduce the pension income in your tax return. This is called the deductible amount and is deemed to be a return of part of your contribution towards the purchase of the pension.

The relevant ruling considers the taxation treatment of certain overseas pensions received by Australian residents.

The ruling states that for a part of a foreign pension to be exempt from Australian tax, the pension must be paid by a foreign superannuation or retirement fund and the pension must be purchased by contributions to the fund and identified as such by the fund.

Both the pensions meet this requirements.

Therefore, you are entitled to a deductible amount of the UPP of your pension for the 1987-88 to 2005-06 financial years.

The relevant ruling states that in recognition of the difficulties for pensioners in obtaining information relating to their contributions to the relevant scheme, it has been decided to accept that the portion of the pension identified by the relevant scheme as being derived from the contributions made by the pensioner (reduced by 10% to reflect the interest element in that component of the pension) is the annual exclusion amount.

In working out the contributive amount for a particular financial year, it must be noted that the figures supplied by relevant scheme are based on calendar years and therefore two years' statements are required to calculate the amount for each Australian financial year.

Therefore the formula for calculating the deductible amount of your UPP for any year is:

(amount of contributive portion for one calendar year plus the following calendar year) x 90%

2

In your case, the deductible amount of your UPP for the 1987-88 to 2005-06 financial years has been calculated in accordance with the information supplied by the foreign fund for your contributive amounts for the relevant calendar years in accordance with the above formula.

Note: Please do not use these amounts for earlier or future financial years as the deductible amount varies from year to year based on the contributive amounts for each year. However, you may use the above formula to calculate your deductible amount for each future year based on the information provided by your foreign fund for the two calendar years to cover the relevant Australian financial year.

Conversion to Euro

In a particular year the foreign fund changed their currency to Euro using an exchange rate of 1936.27 to €1.00. Therefore, in order to add the 2001 contributve portion to the 2002 income year contributve portion for the purposes of the UPP calculation, we converted the foreign currency to Euros at the above rate.

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 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 financial 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 is Schedule 2 of the ITR 1997 will not be satisfied. Therefore the pension income must be translated at the exchange rate applying when it is derived, unless the amount is received at or before the time when it is derived. In that case, the pension income must be translated at the exchange rate applying when it is received.

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

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

In your case, as you received your pension payments on a monthly basis, it is accepted that you are entitled to use the average exchange rate for the year.

For the 2002-03 and prior financial years, section 20 of the ITAA 1936 requires all income and expenses to be expressed in Australian currency for the purposes of the Act.

In accordance with the currency translation rules contained in section 20 of the ITAA 1936 and clarified in Taxation Ruling Income Tax 2498 Income tax: foreign tax credit system: currency translation of foreign income: trading stock and depreciating plant: basis of returning income: capital gains/losses, pensions received in foreign currency should be translated to Australian currency on the following basis:

(a) where pensions are remitted to Australia - at the exchange rate applicable when each instalment of pension is received, or

(b) where pensions are not remitted to Australia - at the exchange rate applicable at the end of the year of income.

However, in recognition of the difficulties that a strict application of the law may cause some pensioners, translation of remitted pensions on the basis of the average annual exchange rate for the relevant year of income will be accepted.

Similarly, where the average annual exchange rate is used to translate the foreign pension amount received in a financial year, the deductible amount may also be translated to Australian dollars at the average annual exchange rate for the financial year.

In your case, as you received your pension payments for the pension Account Y for the 1987-88 to 1996-97 income years as a lump sum, you must use the exchange rate applicable at the time the pension was received or derived.

For the Aged pension Account X the foreign fund have expressed the Contributive portions in Euros for the calendar years 1989-90 to 2000-01. Although no exchange rate exists to convert Euros to Australian dollars for those years, the historical fixing rate for Euros to Australian dollars on 1 January 1999 was 1.8437 Euros = AUD$1.

The average exchange rates for the years 2001-02 onwards are available from our superannuation information line on 13 10 20 or visit our website at www.ato.gov.au/super.

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