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Ruling

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

Question

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

Answer

Yes, your annual deductible amount is has been calculated in accordance with subsection 27H(3) of the Income tax Assessment Act 1936 (ITAA).

This ruling applies for the following periods:

2007-08 financial year and subsequent years where the facts, as stated in the ruling, do not change

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.

The international tax agreement between Australia and the other country provides that the pension is taxable in 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 residual capital value of the pension is nil.

Your pension is paid on a monthly basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 Subsection 27H(2)

International Tax Agreements Act 1953

Income Tax Assessment Regulations 1997 Regulation 960-50.01

Reasons for decision

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

Summary

The state pension that you receive from the other country will have to be included in your assessable income; however, as you have contributed to this pension, you are entitled to a deductible amount for the Undeducted Purchase Price (UPP) of your pension. This will reduce the taxable amount of your pension.

Your annual deductible amount is 8% of the pension you receive from the other country and will apply for the 2007-08 financial year and all subsequent years/for the term of the pension where the facts, as stated in the ruling do not change.

Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of an Australian resident includes their ordinary and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Pensions received under the other country Insurance Scheme are included in assessable income under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

In determining the liability of an Australian resident to Australian tax on foreign sourced income, it is necessary to consider not only the Australian tax laws but also any applicable tax treaty.

Tax treaties are given the force of law domestically by the International Tax Agreements Act 1953 (the Agreements Act). The Agreements Act states that where there are inconsistencies with an Act imposing Australian tax, the Agreements Act will prevail (except in relation to tax avoidance schemes).

Article 17(1) of the tax treaty between Australia and the other country provides that pensions (including government pensions) and annuities paid to a resident of Australia shall be taxable only in Australia.

Accordingly, as you are a resident of Australia, the state pension that you receive from the other country is required to be included in your assessable income.

Undeducted Purchase Price

The UPP is the amount that you have contributed towards the purchase price of your pension.

Subsection 27H(2) of the ITAA 1936 operates to reduce the taxable amount of a pension received by the personal contributions made by a taxpayer for which no income tax deduction was allowed. This applies regardless of whether the fund paying the pension is located in Australia or overseas.

As such, the part of your annual pension which represents a return to you of your personal contributions is free from tax. This tax-free portion is called the deductible amount of the UPP.

Taxation Ruling TR 93/13 provides guidelines on the method for calculating the deductible amount under subsection 27H(2) of the ITAA 1936. However, if the pension recipient chooses not to perform this calculation then the Commissioner will accept an alternate method, being 8% of the annual amount of the other country state pension.

This ruling also points out that the strict application of subsection 27H(2) of the ITAA 1936 rarely leads to a UPP of more than 8% of the annual pension derived.

In your case, if you have chosen to use the 8% method described in TR 93/13.

Converting foreign currency to Australian currency

For the 2003-04 and subsequent financial years, subsection 960-50(1) of the 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:

· 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

· 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 financial 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 financial 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 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.

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.