Edited version of private ruling

Authorisation Number: 1011777697158

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Ruling

Subject: The Undeducted Purchase Price (UPP) of your foreign pension

Question

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

Answer

Yes, your annual deductible amount for the 2009-10 income year has been calculated in accordance with the relevant Taxation Ruling.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on:

On or after 1 July 1983

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 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 payable for life and is reversionary but there is no nominated reversionary beneficiary

All the pension is payable to you.

The Taxation Ruling provides for an alternative calculation of the deductible amount under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

You receive your pension on a bi-annual basis.

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 Assessment Act 1997 Section 960-50

Income Tax Regulations 1936 Regulation 9

Income Tax Assessment Regulations 1997 Regulation 960-50

Reasons for decision

EXPLANATION

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 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.

The Taxation Ruling considers the taxation treatment of certain 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 pension meets these requirements.

Therefore, you are entitled to a deductible amount of the UPP of your pension for the 2009-10 income year.

The Taxation Ruling states that in recognition of the difficulties for pensioners in obtaining information relating to their contributions to the fund it has been decided to accept that the portion of the pension identified by the fund as being derived from the contributions made by the pensioner (reduced by X% 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 retirement 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 2009 and 2010 calendar years) ÷Y x X%

In your case, the deductible amount of your UPP for the 2009-10 income year has been calculated in accordance with the information supplied by the retirement fund for your contributive amounts for the relevant calendar years in accordance with the above formula.

Note: Please do not use this amount for earlier or future income years as the deductible amount varies from year to year based on the contributive amounts for each year. However, you may use the above formula to calculate your deductible amount for each future year based on the information provided by retirement fund for the two calendar years to cover the relevant Australian income year.

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 of the Income Tax Assessment Regulations 1997 (ITR 1997) and Schedule 2 to the ITR 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 ITR 1997 are satisfied.

Where the pension is received as a single annual amount (or bi-annual payment) the conditions is Schedule 2 of the ITR 1997 will not be satisfied. Therefore the pension income must be translated at the exchange rate applying when it is derived, unless the amount is received at or before the time when it is derived. In that case, the pension income must be translated at the exchange rate applying when it is received.

Similarly, the deductible amount must also be translated at the exchange rate applying when the pension is received or derived.

In your case, as you received your pension payments on an annual or bi-annual basis, you must use the exchange rate applicable at the time the pension was received or derived.