Private ruling: Undeducted purchase price of foreign pension
Published: September 2012
Ruling period: 2006-07 income year and all subsequent years
Date scheme commenced: 1 July 2006

Ruling: Q1: Are you entitled to a deductible amount in respect of the undeducted purchase price (UPP) of your foreign annuity 1? | A1: Yes, your annual deductible amount has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936.

Relevant facts and circumstances: You receive two pensions 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(3) 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. All the pension is payable to you. The pensions became payable on or after 1 July 1983. The pension is payable for life, and on your death reverts to your spouse. The residual capital value of both the pensions is nil. Your pensions are paid on a monthly basis. Your pension no 2 was not paid for the full year in the 2006-07 income year. You became an Australian resident for income tax purposes after 1 July 2006.

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 960-50.01

Reasons for decision: Detailed Reasoning - 1. Annuity 1: 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 annual 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. Under subsection 27H(2) of the ITAA 1936 and 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. The Commissioner has considered the discretion under subsection 27H(3) of the ITAA 1936, but deems the formula in subsection 27H(2) to be appropriate as the basis for the calculation of your 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: · the date the pension first became payable; · your age when the pension commenced; · your spouse's age when the pension commenced. Your annual deductible amount of the UPP will apply for the 2006-07 income year and all subsequent years where the facts, as stated in the ruling, do not change. Although your pension commenced prior to 30 June 2006 you cannot claim your deductions for the 2005-06 income year as you became an Australian resident after 1 July 2006. The deductible amount is calculated according to the number of days that you were an Australian resident during the income year. Therefore your deductible amount will be calculated only for the 2006-07 income year for the period that you were a resident which is for the full year in 2006-07 income year. | Detailed Reasoning - 2. Annuity 2: 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 annual 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. Under subsection 27H(2) of the ITAA 1936 and 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. The Commissioner has considered the discretion under subsection 27H(3) of the ITAA 1936, but deems the formula in subsection 27H(2) to be appropriate as the basis for the calculation of your 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: · the date the pension first became payable; · your age when the pension commenced; · your spouse's age when the pension commenced. Your annual deductible amount of the UPP will apply for the 2007-08 income year and all subsequent years where the facts, as stated in the ruling, do not change. Paragraph 2 of Taxation Determination TD 2006/17 Income tax: is the deductible amount that is excluded from assessable income when a superannuation pension or annuity is paid reduced when the pension or annuity commences or finishes being paid to a taxpayer part-way through an income year?, states that where a pension has commenced or finished during an income year, the deductible amount should be determined under subsection 27H(3) of the ITAA 1936. The deductible amount in these circumstances is the amount that would be calculated under subsection 27H(2) of the ITAA 1936 apportioned in accordance with the number of days the pension was payable to you in that year. For the 2003-04 and subsequent income 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 income year. This is provided the conditions outlined in Schedule 2 to the ITAR are satisfied. Where the pension is received as a series of payments over the course of the income 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 pensions are paid on a regular monthly basis, you are entitled to use the average exchange rate to translate your pension income and the annual 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 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 income years. Our records show that you did not include pension income in your income tax returns for the 2009-10 and 2010-11 income years. Therefore an amendment cannot be made to your income tax returns to include the deductible amount of your UPP. If you choose to rely on this private ruling, when lodging your income tax return for the 2011-12 income year, you may include the annual 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. In regards to assessments that fall outside the two year period, you will need to lodge an objection request and a request for an extension of time to lodge an objection form. Please complete the objection form and forward to the above address.

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. | Question 2: Are you entitled to a deductible amount in respect of the undeducted purchase price (UPP) of your foreign annuity 2?