Private ruling: Undeducted Purchase Price (UPP) of your foreign pension
Published: November 2012
Ruling period: 2010-11 financial year | 2011-12 financial year
Date scheme commenced: On or after 1 July 1983

Ruling: Q1: Are you entitled to a deductible amount in respect of the undeducted purchase price (UPP) of your foreign pension? | A1: Yes, your deductible amount has been calculated in accordance with subsection 27H(3) of the Income Tax Assessment Act 1936 (ITAA 1936).

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. Your assessable income includes your pension income. 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 There is a Taxation Ruling that provides for an alternative method to establish the UPP of the pension based on your contributions for the purposes of section 27H of the ITAA 1936. You have provided information from your fund to assist the Commissioner in determining the amount of contributions. The residual capital value of the pension is nil. Your pension is paid on a monthly basis.

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

Reasons for decision: Detailed Reasoning - Explanation: Please note that all references to 'pension' cover both pensions and annuities | Summary: Your annual deductible amount has been calculated in accordance with subsection 27H(3) of the Income Tax Assessment Act 1936 (ITAA 1936) and will apply for the 2010-11 financial year and all subsequent years where the facts, as stated in the ruling, do not change. Deductible Amount Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) operates to include in assessable income the amount of any pension derived by a taxpayer during a year of income reduced by the deductible amount. The deductible amount is deemed to be a return of part of your contribution towards the purchase of the pension. The deductible amount is calculated based on the UPP of your pension. The UPP is the amount you contributed towards the purchase price of your pension for which you did not claim, and were not eligible to claim, a tax deduction in Australia. Contributions made by an employer or by another person under an agreement to which the employer was a party, cannot form part of the UPP of the pension. How the annual deductible amount is calculated Under subsection 27H(2) of the ITAA 1936, subject to subsection 27H(3) or (3A) of the ITAA 1936, the annual deductible amount of a superannuation pension is ascertained in accordance with the formula: A (B - C) D where: 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. 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. 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. The factors for determining the life expectancy are: (1) the date the pension first become payable; (2) your age when the pension commenced; (3) your spouse's age when the pension commenced. Where details of the actual contributions are not available from the superannuation insurance fund, other information provided by the fund, may be used to determine the UPP of the pension. There is a Taxation Ruling that states where records of actual contributions are not available but the foreign fund has provided a list of the pensioner's insurance periods, the Commissioner will use his discretion under subsection 27H(3) of the ITAA 1936 and accept contributions calculated in accordance with the ruling as an appropriate estimate of the actual contributions made. The total of the contribution figures calculated in accordance with the Taxation Ruling forms the basis for the UPP of the pension and is used in the formula under subsection 27H(2) of the ITAA 1936. The UPP of your pension paid from your fund has been determined by the Commissioner in accordance with the information provided by you. By substituting the information provided by you into the formula, the annual deductible amount is obtained. 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 country?, pensions received in foreign currency should be translated to Australian currency on the following basis: (a) 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 (b) 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 of the Income Tax Assessment Regulations 1997 (ITR 1997) and Schedule 2 to the ITR 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 ITR 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 ITR 1997 will be satisfied. In your case, as your pension is paid monthly 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 www.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. Therefore, your ruling will still apply in subsequent years in relation to the annual deductible amount of your pension if the material facts do not change. 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. Important information to note Income tax returns may be amended within two years from the date upon which the Commissioner gives notice of the assessment to the individual for assessments for the 2004-05 and later financial years.

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