Edited version of private advice

Authorisation Number: 1051801661962

Date of advice: 3 February 2021

Ruling

Subject: Undeducted purchase price of a foreign pension or annuity

Question

Are you entitled to a UPP deductible amount in respect of your foreign pension?

Answer

Yes. The deductible amount has been calculated in accordance subsection 27H(2) of the Income Tax Assessment Act 1936.

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 UPP deductible amount.

Apportioning contributions where both a lump sum and a 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 IT2272 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.

The present value of the pension is calculated based on the amount of the pension entitlement during the first 12 months after commencement of the pension. The present value is based on Schedule 1B of the Superannuation Industry (Supervision) Regulations 1994, under the following formula:

AV = Annual Value of Pension (i.e. 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.

Where both a lump sum payment and a pension is received on retirement, some of the personal contributions paid would have been allocated to the lump sum benefit and some would have formed part of the 'purchase price' of the 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 apportioning is to be calculated using the previous pro-rata formula.

The proportion of the total personal contributions attributable to the pension is determined as follows:

This percentage is applied to your total contributions paid to determine the purchase price of your pension benefit.

The purchase price of your pension benefit has been calculated using this formula.

The UPP deductible amount 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 UPP 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.

Your UPP deductible amount in respect of your foreign pension has been calculated using this formula.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

16 October 20XX

Relevant facts and circumstances

You are a resident of Australia for income tax purposes

Your pension is paid by the Prudential Assurance Company Limited, a scheme maintained in the Country A.

You have provided a copy of correspondence from the fund stating the amount of your personal contributions

You took a lump sum prior to the pension commencing

You currently receive 100% of the pension and on your death it reverts to your spouse

The residual capital value of the pension is nil.

Your pension is paid on a monthly basis.

Assumptions

No assumptions have been used in this ruling as it is given on the basis of the facts and circumstances stated above.

Relevant legislative provisions

We took these laws into account:

Income Tax Assessment Act 1936 Subsection 27A(1)

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 Subsection 27H(2)

Income Tax Assessment Act 1936 Subsection 27H(4)

Income Tax Regulations 1936 Regulation 9

Superannuation Industry (Supervision) Regulations 1994 Schedule 1B

We followed these ATO view documents:

Taxation Ruling IT 2272

Other references:

Taxation Determination TD 2006/17

Taxation Determination TD 2006/54

Taxation Determination TD 2006/72

Important information to note

For the 20XX-XX and later income years, income tax returns may be amended within two years from the date upon which the Commissioner gives notice of assessment. However, where assessments fall outside this period, you will need to lodge an objection and request an extension of time to lodge the objection.

The UPP deductible amount can only be included in your tax return if you have declared your pension income. When including these amounts, they should be translated to Australian currency using the same exchange rate. More information about exchange rates is available from our website by entering 'QC 16583' in the search box on the top right of the page.