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Ruling

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

Question 1

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 amounts have been calculated in accordance with subsection 27H(3) of the Income Tax Assessment Act (ITAA 1936).

Question 2

Are you entitled to a rebate in respect of the lump sum payment in arrears of your foreign pension?

Answer

Yes, you are entitled to a rebate for the relevant income year.

This ruling applies for the following periods:

2006-07 income year

2007-08 income year

2008-09 income year

2009-10 income year

2010-11 income year

2011-12 income year

The scheme commences 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 and 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 a retirement fund.

The pension reverted to you on the death of your spouse.

All the pension is payable to you.

There is a Taxation Ruling that 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 monthly basis.

You received a lump sum payment in arrears.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H

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 Assessment Act 1936 Section 159ZRA

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.

Question 1

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.

There is a Taxation Ruling that considers the taxation treatment of certain foreign 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 foreign pension meets these requirements.

Therefore, you are entitled to a deductible amount of the UPP of your pension for the 2006-07, 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12 income years.

The Taxation Ruling states that in recognition of the difficulties for pensioners in obtaining information relating to their contributions, it has been decided to accept that the portion of the pension identified by the foreign 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 foreign 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%

In your case, the deductible amount of your UPP the income years has been calculated in accordance with the information supplied by the foreign fund and in accordance with the above formula.

Note: Please do not use these amounts 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 the foreign 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 series of payments made over the course of an income year, and provided the average exchange rate is considered a reasonable approximation of exchange rates, the conditions outlined in Schedule 2 to the ITR 1997 will be satisfied.

In your case, as you received your pension payments on a monthly basis, it is accepted that you are entitled to use the average exchange rate for the year.

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

Question 2

Section 159ZRA of the ITAA 1936 operates to allow a rebate of tax for lump sum payment in arrears in respect of certain income received on or after 1 July 1986. The rebate provided is available for foreign pensions. The rebate is designed to address the problem of more tax being payable in the year of receipt of the lump sum payment in arrears than would have been payable if the lump sum had been taxed in each of the years in which it accrued.

Broadly, the rebate is calculated as the difference between the extra amount of tax payable in the year of receipt because of the lump sum and the amount of tax that would have been payable if the lump sum had been taxed as it accrued.

To be eligible for the rebate, the amount of income in arrears must not be less than 10% of your taxable income in the year of receipt after deducting the income in arrears.

In your case, you are eligible for the arrears rebate as you received a total net lump sum in the relevant income year from the foreign fund which is greater than 10% of your taxable income.

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) or within four years from the date upon which the tax became due and payable under the assessment (for assessments for income years prior to the 2004-05 income year).

In regards to assessments that fall outside the two/four year period, you will need to lodge an objection request and a request for an extension of time to lodge an objection form. Please complete the attached form and forward to the above address.