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Edited version of private advice
Authorisation Number: 1051557343984
Date of advice: 12 August 2019
Ruling
Subject: Taxation of foreign annuity
Question
Will your client's foreign annuity be taxable in Australia under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
Yes
Question
Is your client entitled to an undeducted purchase price (UPP) deductible amount in respect of their foreign annuity?
Answer
Yes
This ruling applies for the following period:
Income year ended 30 June 2020
The scheme commences on:
1 July 2019
Relevant facts and circumstances
Your client is a resident of Australia for income tax purposes.
The annuity will be paid by a retirement product in a foreign country.
The annuity has yet to commence.
Your client will receive 100% of the annuity.
Relevant legislative provisions
Income Act Assessment Act 1936 Section 27H
International Tax Agreements Act 1953
Reasons for decision
Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) provides that income from annuities is included in your assessable income.
The effect of the double tax agreement ensures that your client's annuity will be taxable in Australia.
The part of your client's annual pension or annuity income which represents a return to your client of their personal contributions is free from tax. The tax-free portion is called the UPP deductible amount.
It is calculated by dividing the UPP of your client's pension by either the term of the pension (if fixed), or a life expectancy factor - that applies to your client or their spouse if they have a greater life expectancy - according to life expectancy statistics.
The Australian life tables are published by the Australian Government Actuary, and the life expectancy is taken from when the pension first became payable.
The annual UPP deductible amount is calculated using the following formula:
|
A (B - C) |
|
D |
A = relevant share of the pension payable to your client (if all of the pension is payable to your client 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, which in this case is available from the Australian Government Actuary website (type QC18123 into the search bar at the Australian Taxation Office website)
By putting your client's information into the above formula, their annual UPP deductible amount can be calculated
Please note the UPP deductible amount can only be included in your client's tax return if they have declared their pension income. When including these amounts, they should be translated to Australian currency using the same exchange rate. More information about exchange rates is available from our website by entering 'QC 16583' in the search box on the top right of the page.
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