Edited version of private advice

Authorisation Number: 1051945202052

Date of advice: 8 February 2022

Ruling

Subject: Undeducted purchase price determination

Question

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

Answer

Yes, your annual UPP deductible amount for the 20XX-XX income year is xx.xx. Your part year UPP deductible amount for the 20XX-YY income year and subsequent years is xx.xx

This ruling applies for the following period:

Year ending 30 June 20XX and subsequent years

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for income tax purposes.

Your pension is paid by the XXX, a scheme maintained in XXX.

You have provided a letter from XXX stating your personal contributions are xxx.xx.

Your pension commenced on 1 July 20XX and is payable for life.

You currently receive xx% of the pension

The pension is reversionary but there is no nominated reversionary beneficiary.

The residual capital value of the pension is x.

When the pension commenced you were xx years of age and your life expectancy factor was xx.x.

Your pension is paid on a xxx basis.

Relevant legislative provisions

Income Tax Assessment Act 1936 Former 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(3)

Income Tax Assessment Act 1936 Subsection 27H(4)

Income Tax Assessment Act 1997 Section 960-50

Income Tax Assessment (1936 Act) Regulation 2015 Section 9

Income Tax Assessment (1997 Act) Regulations 2021 Section 960-50.01

Superannuation Industry (Supervision) Regulations 1994 Schedule 1B

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 Income Tax Assessment Act 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.

You received both a lump sum payment and a pension from XXX on retirement. You paid personal contributions of XXX into the fund to obtain your retirement benefits. 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 apportioning is to be calculated using the previous pro-rata formula.

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

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

Therefore, the amount of personal contributions (UPP) as being made by you to obtain your pension from XXX is determined to be xx x xx% = xx.

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 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, which in your case is xx

C = is the residual capital value (if any), which in your case is xx

D = is the relevant number, which in your case is xx.

By putting your information into the above formula, your annual UPP deductible amount is xx

Conclusion

Based on the reasons above, you are entitled to a deduction for the purchase price of your pension based on these calculations.