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Edited version of your written advice
Authorisation Number: 1012840744361
Date of advice: 5 August 2015
Ruling
Subject: Undeducted purchase price of your foreign pension
Question 1
Are you entitled to a deductible amount in respect of the UPP of your foreign pension?
Answer
Yes, your annual deductible amount is calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936)
This ruling applies for the following periods:
Year ended 30 June 2013
The scheme commenced on:
On or after 1 July 1983
Relevant facts and circumstances
• 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.
• You are resident of Australia for income tax purposes.
• Your assessable income includes your pension income.
• All the pension is payable to you monthly for life.
• The pension became payable on or after 1 July 1983.
• The total amount of contributions, other than employer contributions, paid to the retirement fund count towards the purchase of the pension.
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 - currency translation
Income Tax Regulations 1936 Regulation 9
Income Tax Assessment Regulations 1997 Regulation 960-50.01 - currency translation
ATO view documents:
Taxation Ruling IT 2498
Taxation Ruling IT 2498A - Addendum
Other references:
Taxation Determination TD 2006/54
Taxation Determination TD 2006/72
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.
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:
Purchase of pension |
= |
B |
(A + B) | ||
Purchase of lump sum |
= |
A |
(A + B) |
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.
Present value calculation
The present value of the pension is calculated based on the amount of the pension entitlement during the first 12 months.
Present Value |
= |
AV x PVF |
AV = Annual Value of Pension (ie the amount of pension payable during the first 12 months)
PVF = Pension Valuation Factor which is based on the indexation rate of your pension and your age at the commencement of the pension and whether the pension is reversionary or not and the level of reversion.
Deductible amount
Under subsection 27H (2) of the ITAA 1936, 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.
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) for the ITAA 1936, when a pension is payable during the lifetime of a person, the 'life expectations 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.
Other relevant comments
As a general rule, the deductible amount is translated to Australian currency using the same exchange rate applying to the pension. The average exchange rates are available from your superannuation information line on 13 10 20 or visit our website at ato.gov.au/super
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.