Edited version of your private ruling

Authorisation Number: 1012521523406

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?

Ruling

Yes, your annual deductible amount for the 2012-13 financial year is calculated in accordance with section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

This ruling applies for the following period

2012-13 financial year

The scheme commenced

On or after 1 July 1983

Relevant facts:

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 payable for life and on your death reverts to your spouse.

The contributive portion of your pension for the 2012 calendar year was provided by your fund.

The contributive portion of your pension for the 2013 calendar year was provided by your fund.

You receive your pension on a monthly basis.

Assumptions

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. Examples of such variations include but are not limited to commutation, divorce and re-marriage. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

Relevant legislative and regulatory 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 Regulations 1936 Regulation 9

Income Tax Assessment Regulations 1997 Regulation 960-50.01

Reasons for decision

Explanation

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

Summary

Your annual deductible amount is calculated in accordance with section 27H of the ITAA 1936 and will apply for the 2012-13 financial year.

How the annual deductible amount is calculated

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 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.

Taxation Ruling IT 2554 considers the taxation treatment of certain foreign pensions received by Australian residents. It also provides for an alternative calculation of the deductible amount under section 27H of the ITAA 1936.

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 2012-13 financial year.

The 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 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 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:

In your case, the deductible amount of your UPP for the 2012-13 financial year has been calculated in accordance with the information supplied by the 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 financial 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 fund for the two calendar years to cover the relevant Australian financial year.

Converting foreign currency to Australian currency

For the 2003-04 and subsequent financial 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 currency?, pensions received in foreign currency should be translated to Australian currency on the following basis:

1. 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

2. 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 (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 financial 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 a financial 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 superannuation information line on 13 10 20 or visit our website at 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 financial years) or within four years from the date upon which the tax became due and payable under the assessment (for assessments for financial years prior to the 2004-05 financial year).