Edited version of your written advice

Authorisation Number: 1012713841288

Ruling

Subject: Undeducted purchase price of your foreign pension

Question 1

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

Answer

Yes.

This ruling applies for the following period

Part year 2013-14

Full year 2014-15

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

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.

At the commencement of the pension you also received a lump sum payment.

All the pension is payable to you.

The pension became payable on or after 1 July 1983.

The pension is payable for life, and on your death reverts to your spouse.

You have provided documents to assist the Commissioner in determining the total amount of contributions.

Your pension is paid on a monthly basis.

You became an Australian resident for income tax purposes during the relevant financial year.

Your pension was paid for 199 days the 2013-14 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 20 ,

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 and

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 subsection 27H(2) of the ITAA 1936.

Your part year deductible amount is apportioned according to the number of days that you were an Australian resident during the relevant financial year.

Apportioning contributions where both a lump sum and pension is paid

The definition of purchase price is contained in subsection 27H(4) of the ITAA 1936. It states that 'purchase price' includes the contributions made by a person to any foreign superannuation fund to obtain a pension and so much of contributions considered reasonable by the Commissioner as having been paid by a person to a foreign superannuation fund to obtain superannuation benefits including a pension.

Where a person is entitled to both a pension and a lump sum payment, it must be determined whether part of the personal contributions made to the fund are 'undeducted contributions' relating to the lump sum payment, or form part of the 'purchase price' relating to the superannuation pension.

Taxation Ruling IT 2272 Income tax: Eligible termination payments and superannuation pensions - determination of undeducted contributions and undeducted purchase price states that where there is no apparent basis for allocating the contributions, the apportioning of the contributions made to obtain both a pension and lump sum is to be calculated on a pro-rata basis as follows:

where:

A = is the amount of the lump sum benefit received, and

B = is the net present value of the pension entitlement at the time when the lump sum benefit is received.

You received both a lump sum payment and a pension. Therefore, some of the personal contributions would have been allocated to the lump sum benefit and some would have formed part of the 'purchase price' of your pension.

It is necessary to determine what proportion of the total personal contributions, have been made to obtain your pension. As there is no alternative basis for allocating the personal contributions made to obtain both the pension and lump sum benefit, the above formula will be used.

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:

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.

There is no Taxation Ruling or Taxation Determination published which provides for an alternative calculation or Commissioner's discretion under section 27H(3) of the ITAA 1936.

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:

• the date when the pension first became payable

• your age when the pension commenced

• your spouse's age when the pension commenced.

In Taxation Determination TD 2006/72 Income tax: does the relevant number determined for the purposes of working out the deductible amount of a superannuation pension or annuity under subsection 27H(2) of the Income Tax Assessment Act 1936 take into account the life expectancy of a reversionary pensioner or annuitant?, the Commissioner states, in paragraph 1, that the relevant number used to calculate the deductible amount of a superannuation pension that is payable to a person (the original pensioner) for life and on the death of that person is payable to another person for their life (the reversionary pensioner) will be the greater of the life expectancies of the original and reversionary pensioners.

How the part year deductible amount is calculated

As you became an Australian resident during the relevant financial year, you are not entitled to claim the full deductible amount of the UPP for that year. Therefore, the deductible amount needs to be apportioned according to the number of days that you were an Australian resident during that 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:

• 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 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 ato.gov.au/super