Edited version of private ruling

Authorisation Number: 1011600653644

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Ruling

Subject: Deductible amount of the undeducted purchase price of a foreign pension.

Question

Was the deceased entitled to an annual and part year deductible amount in respect of the undeducted purchase price (UPP) of their foreign pension?

Answer

Yes the deceased's annual deductible amount has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment act 1936 (ITAA 1936) and the part year deductible amounts for the 2004-05 and 2009-10 income years have been calculated in accordance with subsection 27H(3) of the ITAA 1936.

This ruling applies for the following periods:

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on:

On or after 1 July 1983

Relevant facts and circumstances

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

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.

The international tax agreement between Australia and the country where the retirement fund is established and managed provides that the pension is taxable in Australia.

The deceased's assessable income included their pension income.

All the pension is payable to the deceased's surviving spouse

The pension became payable on or after 1 July 1983.

The pension was payable for life, and was reversionary.

A copy of the deceased's Insurance resume from Deutche Rentenversicherung Bund has been provided to assist the Commissioner in determining the amount of deceased's personal contributions.

The residual capital value of the pension is nil.

The deceased's pension was paid on a monthly basis.

The deceased became an Australian resident for income tax purposes on 23 March 2005

The deceased died during the 2009-10 income year.

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(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 960-50.01

Reasons for decision

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

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 the member's contribution towards the purchase of the pension.

The deductible amount is calculated based on the UPP of the pension.

The UPP is the amount contributed towards the purchase price of the pension for which a tax deduction was not claimed nor was the recipient 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 and subject to subsection 27H(3) or (3A) of the ITAA 1936, the annual deductible amount of a superannuation pension is ascertained in accordance with the formula:

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

C = is the residual capital value, and

D = is the relevant number in relation to the pension.

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:

the date the pension first became payable;

the deceased' age when the pension commenced

the deceased's spouse's age when the pension commenced

The deceased's annual deductible amount year has been calculated in accordance with subsection 27H(2) of the ITAA 1936.

As the deceased became an Australian resident during the 2004-05 income year, a full UPP entitlement is unable to be claimed for that year. The deductible amount therefore needs to be apportioned according to the number of days that the deceased was an Australian resident during the income year.

Therefore the deceased's deductible amount will be apportioned for the 2004-05 income year for the period they were a resident in accordance with subsection 27H(3) of ITAA 1936

As the deceased's date of death was part way through the 2009-10 year of income, a full UPP entitlement is unable to be claimed for that year. The deductible amount therefore needs to be apportioned according to the number of days prior to the deceased's date of death in accordance with subsection 27H(3) of ITAA 1936

For the 2003-04 and subsequent income 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, 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 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) and Schedule 2 to the ITAR 1997 allow pensions received in foreign currency and the deductible amount to be translated to Australian currency at the average exchange rate for the income year. This is provided the conditions outlined in Schedule 2 to the ITAR are satisfied.

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

In the deceased's case, as the pension was paid on a regular monthly basis, the average exchange rate can be used to translate pension income and the annual deductible amount of the UPP.

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