Edited version of private advice

Authorisation Number: 1012637336442

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 foreign pension?

Ruling

Yes.

The scheme commenced on

1 July 2011

Relevant facts:

You receive 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.

All the pension is payable to you.

The pension became payable on or after 1 July 1983.

The pension commenced in 2011

You have provided a copy of a letter from your pension provider stating you receive a certain amount of pension income.

The residual capital value of the pension is nil.

Your pension is paid on a regular basis.

Relevant legislative and regulatory provisions:

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1997 Section 960-50

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

You have a deductible amount for your pension.

Deductible amount

We have calculated a deductible amount for your pension based on the information you provided us.

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 (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 regular basis, you are entitled to use the average exchange rate to translate your pension income and the annual deductible amount of your UPP.