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Ruling

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

Question 1

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

Answer

Yes, the deductible amount has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936).

This ruling applies for the following periods:

2001-02 income tax year

2002-03 income tax year

2003-04 income tax year

2004-05 income tax year

2005-06 income tax year

2006-07 income tax year

2007-08 income tax year

2008-09 income tax year

2009-10 income tax year

2010-11 income tax year

2011-12 income tax year

The scheme commences on:

On or after 1 July 1983

Relevant facts and circumstances

You receive 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 Income Tax Assessment Act 1936 (ITAA 1936).

There is no international tax agreement between Australia and the country in which the retirement fund is established and managed. Therefore, as a resident of Australia, your pension income is taxable in Australia under the domestic laws of Australia.

Your assessable income includes your pension income.

All the pension is payable to you.

The pension became payable on or after 1 July 1983.

The total amount of your contributions, other than employer contributions, paid to the retirement fund towards the purchase of the pension has been supplied in the form of documentary evidence from your pension provider.

The residual capital value of the pension is nil.

Your pension is paid on a monthly basis.

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 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 your contribution towards the purchase of the pension.

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

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.

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:

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.

The Commissioner has considered the discretion under subsection 27H(3) of the ITAA 1936, but deems the formula in subsection 27H(2) to be appropriate as the basis for the calculation of your 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.

Paragraph 2 of Taxation Determination TD 2006/17 Income tax: is the deductible amount that is excluded from assessable income when a superannuation pension or annuity is paid reduced when the pension or annuity commences or finishes being paid to a taxpayer part-way through an income year?, states that where a pension has commenced or finished during an income year, the deductible amount should be determined under subsection 27H(3) of the ITAA 1936. The deductible amount in these circumstances is the amount that would be calculated under subsection 27H(2) of the ITAA 1936 apportioned in accordance with the number of days the pension was payable to you in that year.

Therefore, for the 2001-02 income year the part year deductible amount is calculated as follows:

Annual deductible amount x number of days received

365

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 Income tax: how does a taxpayer work out the amount to be included in assessable income under section 27H of the Income Tax Assessment Act 1936 for a superannuation pension or annuity that is payable in a foreign country?, 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 your case, as your pension is paid on a regular monthly basis, you are entitled to use the average exchange rate to translate your pension income and the annual deductible amount of your UPP.

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

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 Income tax: foreign tax credit system: currency translation of foreign income: trading stock and depreciating plant: basis of returning income: capital gains/losses, 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 superannuation information line on 13 10 20 or visit our website at www.ato.gov.au/super.

Other relevant comments

Please note that from 1 July 2007, the legislation changed in relation to superannuation pensions and benefits paid from complying superannuation funds. However, these changes do not affect any pensions paid from overseas funds which are not considered complying superannuation funds under section 42 of the Superannuation Industry (Supervision) Act 1993 as they are not resident funds.

Therefore, your ruling will still apply in subsequent years in relation to the annual deductible amount of your pension if the material facts do not change. 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.

Important information to note

Income tax returns may be amended within two years from the date upon which the Commissioner gives notice of the assessment to the individual for assessments for the 2004-05 and later income years

ATO view documents

TD 2006/72

TD 2006/17

TD 2006/54