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Edited version of your written advice
Authorisation Number: 1012793501074
Ruling
Subject: Undeducted purchased price of a foreign pension
Question
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 period
Year ended 30 June 2014
The scheme commenced on
After 1 July 1983
Relevant facts:
You receive a pension 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.
All the pension is payable to you.
The pension became payable on or after 1 July 1983.
The pension is payable for life.
You have an amount of contributions, other than employer contributions, paid to the retirement fund towards the purchase of the pension.
The residual capital value of the pension is nil.
Your pension is paid on a regular basis.
Relevant legislative and regulatory provisions:
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
Other references:
Taxation Determination TD 2006/17
Reasons for decision
Explanation
Please note that all references to 'pension' cover both pensions and annuities
Summary
You have an annual deductible amount.
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
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:
A (B - C) |
D |
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.
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 ITAA 1936.
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, and
2. your age when the pension commenced.
How the part year deductible amount is calculated
Paragraph 2 of Taxation Determination TD 2006/17 Income tax: is the deductible amount that is excluded from assessable income when a superannuation pension or annuity is paid reduced when the pension or annuity commences or finishes being paid to a taxpayer part-way through an income year? states that where a pension has commenced or finished during a financial 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.
Other relevant comments
As a general rule, the deductible amount is translated to Australian currency using the same exchange rate applying to the pension. The average exchange rates are available from our superannuation information line on 13 10 20 or visit our website at ato.gov.au/super
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.
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