Edited version of private ruling

Authorisation Number: 1011494511688

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Ruling

Subject: Deductible amount of undeducted purchase price

Question

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

Answer

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

This ruling applies for the following periods:

Income year ended 30 June 1999

Income year ended 30 June 2000

Income year ended 30 June 2001

Income year ended 30 June 2002

Income year ended 30 June 2003

Income year ended 30 June 2004

Income year ended 30 June 2005

Income year ended 30 June 2006

Income year ended 30 June 2007

Income year ended 30 June 2008

The scheme commences on:

On or after 1 July 1983

The scheme commences on:

1998

Relevant facts and circumstances

You are a resident of Australia for income tax purposes.

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

The international tax agreement between Australia and country X (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 is paid by an overseas fund.

All the pension is payable to you.

There is a Taxation Ruling IT which provides for an alternative calculation of the deductible amount under section 27H of the ITAA 1936.

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 Regulations 1936 Regulation 9

EXPLANATION

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

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 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.

There is a Taxation Ruling which 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.

Your overseas pension meets these requirements.

Therefore, you are entitled to a deductible amount of the UPP of your pension.

The Ruling states that in recognition of the difficulties for pensioners in obtaining information relating to their contributions to the overseas fund, it has been decided to accept that the portion of the pension identified by the overseas fund 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 year, it must be noted that the figures supplied by the overseas fund 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 YYYY and YYYY calendar years) ÷2 x 90%

The deductible amounts for your pension has been calculated in accordance with the above formula.

For the 2002-03 and prior income 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 IT 2498, 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 an income year, the deductible amount may also be translated to Australian dollars at the average annual exchange rate for the income year.

The average exchange rates are available from our lnformation line on 13 10 20 or visit our website at www.ato.gov.au/super.