Edited version of your written advice

Authorisation Number: 1012837029522

Date of advice: 12 August 2015

Ruling

Subject: Undeducted purchase price

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 is calculated in accordance with subsection 27(H)(2) of the Income Tax Assessment Act 1936 (ITAA 1936).

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

You receive a pension from a retirement fund established and managed outside Australia.

The international tax agreement between Australia and the foreign country provides that the pension is taxable in Australia.

Your assessable income includes your pension income.

At the commencement of the pension you also received a lump sum.

The pension became payable to you on or after 1 July 1983.

The pension is payable for life on a monthly basis.

On your death the pension reverts to your spouse and the residual capital value of the pension is nil.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 Subsection 27H(2)

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

ATO view documents:

Taxation Ruling IT 2498

Taxation Ruling IT 2498A - Addendum

Taxation Ruling IT 2272 Income tax: Eligible termination payments and superannuation pensions - determination of un deducted contributions and un deducted purchase price

Other references:

Taxation Determination TD 2006/54

Taxation Determination TD 2006/72

Reasons for decision

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

Summary

Your annual deductible amount has been calculated in accordance with subsection 27H(2) of the ITAA 1936.

Apportioning contributions where both a lump sum and pension is paid

The definition of purchase price is contained in subsection 27H(4) of the ITAA 1936. It states that 'purchase price' includes the contributions made by a person to any foreign superannuation fund to obtain a pension and so much of contributions considered reasonable by the Commissioner as having been paid by a person to a foreign superannuation fund to obtain superannuation benefits including a pension.

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 'un deducted contributions' relating to the lump sum payment, or form part of the 'purchase price' relating to the superannuation pension.

Taxation Ruling IT 2272 Income tax: Eligible termination payments and superannuation pensions - determination of un deducted contributions and un deducted purchase price 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:

where:

A = is the amount of the lump sum benefit received, and

B = is the net present value of the pension entitlement at the time when the lump sum benefit is received.

Present value calculation

The present value of the pension is calculated using the following formula, and is based on the amount of the pension entitlement during the first 12 months.

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.

Deductible amount

Under subsection 27H(2) of the ITAA 1936, the annual deductible amount of a superannuation pension is ascertained in accordance with the formula:

A = relevant share of the pension payable to you (if all the pension is payable to you then A = 1)

B = is the amount of the UPP of the pension

C = is the residual capital value (if any)

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) for the ITAA 1936, when a pension is payable during the lifetime of a person, the 'life expectations 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.

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 your superannuation information line on 13 10 20 or visit our website at ato.gov.au/super and entering 'QC 16583' in the search box.

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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