Private ruling: The Undeducted Purchase Price (UPP) of your foreign pensions and annuity
Published: May 2013
Ruling period: 2004-05 financial year | 2005-06 financial year | 2006-07 financial year | 2007-08 financial year | 2008-09 financial year | 2009-10 financial year | 2010-11 financial year | 2011-12 financial year
Date scheme commenced: On and after 1 July 1983.

Ruling: Q1: Are you entitled to a deductible amount of the undeducted purchase price (UPP) of your foreign pensions and annuity? | A1: No, in respect of your foreign pensions. Yes, in respect of your foreign annuity. Your annual and part year deductible amount has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936). This ruling is binding on the Commissioner for the period outlined in the ruling. You may rely on this ruling for future years where the facts, as stated in the ruling do not change, but the Commissioner will not be bound to the ruling. This means that if your circumstances or the facts relied upon to make the ruling do change, you will be protected from penalties and interest, but liable for any shortfall tax that may apply.



Reasons for decision: Summary: You are not entitled to a deductible amount for your foreign pensions because you have not personally contributed to the fund. Your annual and part year deductible amount for your foreign annuity has been calculated in accordance with subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - 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 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. 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. | 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 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. 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 ITAA 1936. 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, 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. By substituting the information you provided into the formula, the annual deductible amount is obtained. | Detailed Reasoning - How the part year deductible amount is calculated: 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 a financial 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. Therefore, for the 20XX financial year the part year deductible amount has been calculated. | Detailed Reasoning - Converting foreign currency to Australian currency: 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 currency? , pensions received in foreign currency should be translated to Australian currency on the following basis: 1. 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 2. 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 are satisfied. Where the pension is received as a single annual amount (or bi-annual payment) the conditions outlined in Schedule 2 to the ITAR 1997 will not be satisfied. Therefore the pension income must be translated at the exchange rate applying when it is received (or derived, if this is earlier). Similarly, the deductible amount must also be translated at the exchange rate applying when the pension amount is received or derived. In your case as your pension is paid on a bi-annual basis, you must use the exchange rate applying at the time the pension is received. | 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. 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: If you choose to rely on this private ruling, when lodging your income tax return for the relevant financial year and future financial years, 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 approved objection form (NAT 13471 for taxpayers and NAT 13044 for tax professionals) which can be found on our website at www.ato.gov.au and forward to the reply address provided on the Notice of private ruling.

Relevant facts: · You receive pensions and annuity from retirement funds established and managed outside Australia. | · There is no international tax agreement between Australia and the country in which the retirement fund is established and managed. Therefore, as a resident of Australia, your pension income is taxable in Australia under the domestic laws of Australia. | · Your assessable income includes your pension and annuity income. | · All the pensions and annuity are payable to you or shared with you. | · The pensions and annuity became payable on or after 1 July 1983. | · Your pensions are payable for life, and on your death reverts to your spouse. | · Your annuity is payable for life, and on your death reverts to your spouse. | · Nil personal contribution was made to the funds towards the purchase of the pensions. | · You have provided evidence from the fund to assist the Commissioner in determining the amount of contributions towards the purchase of your annuity. | · The residual capital value of the pension is nil. | · Your pensions are paid on a monthly basis. | · Your annuity is paid on a bi-annually basis. | Assumptions: This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. Examples of such variations include but are not limited to commutation, divorce and re-marriage. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described. | Relevant legislative and regulatory 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.