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Ruling

Subject: Deductible amount of an undeducted purchase price (UPP) of a 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 amount for the 2011-12 income year has been calculated in accordance with section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

This ruling applies for the following periods:

30 June 2012

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 reverted to you on the death of your spouse.

All the pension is payable to you.

You receive your pensions 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

Reasons for decision

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 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 foreign pension meets these requirements. Therefore, you are entitled to a deductible amount of the UPP of your pension.

This 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 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 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 2011 and 2012 calendar years) ÷2 x X%

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.

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

Accordingly, your income tax return for the 2011-12 income year will be amended to include the annual deductible amount of the UPP as advised by your private ruling. A notice of amended assessment will issue to you in due course. Please note that for 2011-12 income year, the annual amount of the deductible amount of an UPP in Australian dollars was greater than your foreign pension declared in the tax return due to the exchange rate. The deduction is allowed only up to the amount of the foreign pension declared. Therefore, the total deduction applied in 2011-12 is $X which is equal to your foreign pension declared in the tax return.

ATO view documents

Taxation Determination 2006/54