Private ruling: Undedicated purchase price (UPP) of your foreign pension
Published: January 2013
Ruling period: 2010-11 income year and subsequent years where the facts, as stated in the ruling, do not change.
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, the deductable amount has been calculated in accordance with subsection 27H (2) of the Income Tax Assessment Act 1936 (ITAA 1936).

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. There is no Taxation Ruling or Taxation Determination published which provides for an alternative calculation or Commissioner's discretion under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936). 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. · At the commencement of the pension you also received a lump sum. · The pension became payable on or after 1 July 1983. · The pension is payable for life, and on your death reverts to your spouse. · Your pension is paid by a superannuation fund. · All the pension is payable to you. · The total amount of your contributions, other than employer contributions, paid to the retirement fund towards your total retirement benefits (pension and lump sum) has been supplied in the form of documentary evidence from the fund. · The residual capital value of the pension is nil. · Your age when the pension commenced was 60 · Your spouse's age when the pension commenced was 58. · Your pension is paid on a monthly basis. · You became an Australian resident for income tax purposes in the relevant year.


Reasons for decision: Summary: Please note that all references to 'pension' cover both pensions and annuities Subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) contains the definition of purchase price in relation to a superannuation pension. Subparagraph (a)(ii) of that subsection states that purchase price means the total amount of contributions to a superannuation fund made to obtain superannuation benefits consisting of a pension and other benefits such as a lump sum. 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 Income Tax 2272 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 ; and (A+B) Purchase of lump sum = A , where: (A+B) 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 your superannuation fund on retirement. You paid personal contributions 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 above formula will be used. The proportion of the total personal contributions attributable to the pension from your superannuation fund is determined as follows: Purchase of pension: B = (Total benefit) (A + B) (Lump sum) + (Total benefit) = Percentage % This percentage is applied to your total contributions paid to determine the purchase price of your pension benefit. | Detailed Reasoning - Deductible amount: Section 27H of the 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 calculation of the deductible amount is 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. | Detailed Reasoning - How the annual deductible amount is calculated: Under subsection 27H(2) of the ITAA 1936, the annual deductible amount of a superannuation pension is ascertained in accordance with the formula: A (B - C) D | Detailed Reasoning - 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. 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, and (3) your spouse's age when the pension commenced. 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. | Detailed Reasoning - How the part year deductible amount is calculated: As you became an Australian resident during the relevant year, you are not entitled to claim the full deductible amount of the UPP for that year. The deductible amount therefore needs to be apportioned according to the number of days that you were an Australian resident during the financial year. Therefore your deductible amount will be apportioned for the relevant year for the period that you were a resident as follows: Annual deductible amount X number of days as resident of Australia 365 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 960-50.01 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 www.ato.gov.au/super. | Detailed Reasoning - Other relevant comments: Please note that from 1 July 2007, the legislation has 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. | Detailed Reasoning - 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). If you choose to rely on this private ruling, when lodging your income tax return for the 2011-12 financial year, you may include the part year deductible amount of the UPP as advised by your private ruling. Please note that the deductible amount should only be included if you have declared your pension income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant legislative and regulatory provisions: Income Tax Assessment Act 1936 Section 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 Regulations 1936 Regulation 9 | Income Tax Assessment Regulations 1997 Regulation 960-50.01