Edited version of your written advice

Authorisation Number: 1012807676077

Date of advice: 25 May 2015

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?

Answer

Yes.

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.

Reasons for Decision

The part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. The tax-free portion is called the deductible amount.

It is calculated by dividing the UPP of your pension by either the term of the pension (if fixed), or a life expectancy factor - that applies to you or your spouse if they have a greater life expectancy - according to life expectancy statistics.

The Australian life tables are published by the Australian Government Actuary, and the life expectancy is taken from when the pension first became payable.

The annual deductible amount is calculated using the following formula:

A = relevant share of the pension payable to you (if all the pension is payable to you then A = 1)

B = is the amount of the UPP of the pension.

C = is the residual capital value (if any).

D = is the relevant number.

Part year calculation

Paragraph 2 of Taxation Determination TD 2006/17 Income tax: is the deductible amount that is excluded from assessable income when a superannuation pension or annuity is paid reduced when the pension or annuity commences or finishes being paid to a taxpayer part-way through an income year? states that where a pension has commenced or finished during a financial year, the deductible amount should be determined under subsection 27H(3) of the ITAA 1936. The deductible amount in these circumstances is the amount that would be calculated under subsection 27H(2) of the ITAA 1936 apportioned in accordance with the number of days the pension was payable to you in that 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 (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 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 ITAR 1997 will be satisfied.

In your case, as your pension is paid on a monthly basis, 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

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.

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.

This ruling applies for the following periods

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on

After 1 July 1983

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 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 became payable on or after 1 July 1983.

● The pension is payable for life and is not reversionary.

● The pension became payable on or after 1 July 1983.

● All the pension is payable to you.

● You have an amount of contributions, other than employer contributions, paid to the retirement fund towards the purchase of the pension.

● The residual capital value of the pension is nil.

● Your pension is paid on a regular basis.

● Your pension will be paid for part of the 2014-15 financial year.

Relevant legislative 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

ATO view documents

Taxation Ruling IT 2272

Taxation Ruling IT 2620

Other references

Taxation Determination TD 2006/54

Taxation Determination TD 2006/72