Edited version of your private ruling

Authorisation Number: 1012538623088

Ruling

Subject: Undeducted Purchase Price of your foreign pension

Question

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

Ruling

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

This ruling is binding on the Commissioner for the period outlined in the ruling. You may rely on this ruling for future years where the facts, as stated in the ruling do not change, but the Commissioner will not be bound to the ruling. This means that if your circumstances or the facts relied upon to make the ruling do change, you will be protected from penalties and interest, but liable for any shortfall tax that may apply.

This ruling applies for the following period

2011-12 financial year

2012-13 financial year

2013-14 financial year

2014-15 financial year

2015-16 financial year

2016-17 financial year

The scheme commenced on

On or after 1 July 1983

Relevant facts:

You receive a pension from a retirement fund established and managed outside Australia.

The pension is a contributory pension paid from a superannuation insurance fund (a social security pension, other than government service pension) under a social insurance Act.

Your pension is paid by a scheme.

The international tax agreement between Australia and Austria (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.

All the pension is payable to you.

The pension became payable on or after 1 July 1983.

The pension is payable for life.

You have provided a copy of the contributions schedule from the pension fund to assist the Commissioner in determining the amount of contributions.

The residual capital value of the pension is nil.

Your pension is paid on a quarterly 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 Assessment Act 1997 Section 960-50

Income Tax Regulations 1936 Regulation 9

Income Tax Assessment Regulations 1997 Regulation 960-50.01

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.

Deductible Amount

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 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.

How the annual deductible amount is calculated

Under subsection 27H(2) 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.

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.

The factors for determining the life expectancy are:

1. the date when the pension first became payable, and

2. your age when the pension commenced.

Taxation Ruling TR 2002/17 Income tax: undeducted purchase price of pensions from superannuation insurance funds provides for an alternative method to establish the UPP of the pension based on your contributions for the purposes of section 27H of the ITAA 1936.

TR 2002/17 states that where records of actual contributions are not available but the fund has provided a list of the pensioner's insurance periods, the Commissioner will use his discretion under subsection 27H(3) of the ITAA 1936 and accept contributions calculated in accordance with the tables listed at paragraph 41 of the ruling as an appropriate estimate of the actual contributions made.

The total of the contribution figures calculated in accordance with Paragraph 41 of TR 2002/17 forms the basis for the UPP of the pension and is used in the formula under subsection 27H(2) of the ITAA 1936.

The UPP of your pension paid from the pension fund has been determined by the Commissioner in accordance with the information contained in the 'Calculation of Assessment Basis' statement provided by you.

By substituting the above into the formula, the annual deductible amount is obtained.

Currency change to Euro

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:

3. 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

4. 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 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 ITR 1997 will be satisfied.

In your case, as your pension is paid quarterly you may use the average exchange rate to translate your pension income and the 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 ato.gov.au/super