Private ruling: Lump sum payment from a foreign fund
Published: April 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Is any part of the lump sum payment transferred from an overseas fund (the Fund), assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 ? 2. Does the foreign annuity include a deductible amount? | A1: 1. Yes. 2. Yes. This review applies for the following period Year ended 30 June 2013

Relevant facts and circumstances: Over 20 years ago, your client became a member of a pension fund with an overseas retirement annuity (the Fund) and made contributions to the Fund under a policy (Policy A) held by the Fund. Over 10 years ago, your client commenced to make contributions to the Fund under another policy (Policy B) held by the Fund. All premiums paid on the policies were funded from your client's after tax personal income. In the overseas country, at maturity, your client would be entitled to take one-third of the benefits in cash and tax free, and the remaining two-thirds would constitute an annuity and include tax. During the 2006-07 income year, your client became an Australian resident for tax purposes (the residency day). In an email, a representative on behalf of the Fund has advised your client's value in the Fund as at a specified date (before the residency date) under Policy A and under Policy B. As at a specified date in the 2012-13 income year, the value of your client's benefits in the Fund under Policy A and Policy B have been provided. The Fund advised the total amount of contributions made by your client under each policy pre residency date and post residency date. At retirement, a compulsory two-thirds of the member's benefits must be used to purchase an annuity to provide income during the member's retirement year. The amount of the member's personal contributions made to the Fund under each policy less one-third of the contributions made since becoming an Australian resident will be used to calculate the member's deductible amount of the annuity. During the 2012-13 income year, your client received one-third cash commutation of benefits from each policy and purchased an annuity with the remaining balance of benefits with pension payments to be made each year to your client. An amount of tax was also paid to the taxation authority of the overseas country. Towards the end of the 2012-13 income year, your client commenced to receive an annuity. In a bank statement, it shows several payments were transferred to your client's bank account during the 2012-13 income year. Under the rules of the Fund a member will not have access to their benefits: • until they reach age 55; • retire before age 55 as a result of the member's permanent ill health; or • upon death. From the information provided withdrawing benefits before retirement is not permitted unless a member is permanently incapable of carrying on their occupation. Therefore the Fund would meet the definition of a superannuation fund. Your client's life expectancy is based on your client's age at the time the annuity commenced. Your client is over the age of 55 years. Assumptions You could not provide the value of your client's total benefits in each policy as at the day before your client became an Australian resident. However, you have provided a transfer value of your client's total benefits for each policy as at a specified date. Therefore, in order to determine the lump sum amount as at the day before your client became an Australian resident, you have been advised and you have agreed with the following assumption being made for each policy in issuing the Notice of Private Ruling: • by using the total transfer value as at a specified date; and • the total lump sum payment as at a specified date in the 2012-13 income year; the estimated annual compound rate of growth of transfer value has been calculated to be a particular percentage. By using these percentage rates, your client's transfer value as at the day before your client became a resident has been calculated. One third of each estimated transfer value will be used to calculate the applicable fund earnings (if any). The Australian Taxation Office accepts, and you have agreed, on the value of the one third of the transfer value in respect of your client's benefits in the Fund as at the residency date.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 27H. | Income Tax Assessment Act 1936 Subsection 27H(2). | Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Subdivision 305-B. | Income Tax Assessment Act 1997 Section 305-70. | Income Tax Assessment Act 1997 Section 305-75. | Income Tax Assessment Act 1997 Subsection 305-75(2). | Income Tax Assessment Act 1997 Subsection 305-75(3). | Income Tax Assessment Act 1997 Division 770. | Income Tax Assessment Act 1997 Subsection 770-5(1). | Income Tax Assessment Act 1997 Subsection 770-10(1). | Income Tax Assessment Act 1997 Section 960-50. | Income Tax Assessment Act 1997 Subsection 960-50(1). | Income Tax Assessment Act 1997 Subsection 960-50(4). | Income Tax Assessment Act 1997 Subsection 960-50(6). | Income Tax Assessment Act 1997 Subsection 995-1(1). | Income Tax Regulations 1936 Regulation 9. | Superannuation Industry (Supervision) Act 1993 Subsection 10(1). | Superannuation Industry (Supervision) Act 1993 Section 19. | Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision: Summary: The amount under Policy A calculated under the formula as the applicable fund earnings is to be included in your client's assessable income for the 2012-13 income year. No amount is assessable under Policy B. Your client may be entitled to a foreign income tax offset in respect of the applicable fund earnings amount that is included in your client's assessable income for the 2012-13 income year. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a person has become an Australian resident will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund then section 305-70 will not have any application. | Detailed Reasoning - Foreign superannuation fund: A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows: (a) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and (b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year. Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows: A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if: (a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and (b) at that time, the central management and control of the fund is ordinarily in Australia; and (c) at that time either the fund had no member covered by subsection (3) (an active member ) or at least 50% of: (i) the total market value of the fund's assets attributable to superannuation interests held by active members; or (ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members; is attributable to superannuation interests held by active members who are Australian residents. Accordingly, the definitions of a 'foreign superannuation fund' and 'Australian superannuation fund' both incorporate the requirement of being a 'superannuation fund'. The effect of these definitions is that if the overseas fund (the Fund) is not a 'superannuation fund', it will not be an Australian superannuation fund or a foreign superannuation fund. Nor can the amount paid to your client be a 'superannuation lump sum' and subdivision 305-B of the ITAA 1997 will not apply. Therefore, we are first required to determine if the Fund is a superannuation fund under the ITAA 1997. | Detailed Reasoning - Superannuation fund: 'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act). Subsection 10(1) of the SIS Act provides that: superannuation fund means: (a) a fund that: (i) is an indefinitely continuing fund; and (ii) is a provident, benefit, superannuation or retirement fund; or (b) a public sector superannuation scheme. | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 ( Scott ) . In that case, Justice Windeyer stated: …I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description. The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 ( Mahony ). In that case, Justice Kitto held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense…'. This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as the example given by Justice Kitto of a funeral benefit. Furthermore, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement. In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur: • on or after retirement from gainful employment; or • attaining a prescribed age; and • on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative). Notwithstanding the SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and its attendant regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SIS Act. Therefore, in order for the lump sum payment from the Fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2). This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above. | Detailed Reasoning - The purpose of the Fund: It is evident that the payer of the lump sum payment from the Fund is established outside of Australia. Similarly, the central management and control is outside of Australia. Therefore the Fund established in the overseas country is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. You have advised that no benefits can be withdrawn from the Fund prior to retirement age, unless a member is permanently incapable of carrying on in occupation. Furthermore, under the rules of the Fund a member will not have access to their benefits until they reach age 55, retire before age 55 as a result of the member's permanent ill health or upon their death. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment your client received from the Fund is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your client became a resident of Australia for tax purposes in the 2006-07 income year and received, that is, became entitled to, the lump sum payment in respect of the Fund during 2012-13 income year. As this was more than six months after your client became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your client's assessable income. The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 states: If you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows: (a) work out the total of the following amounts: (i) The amount in the fund that was vested in you just before the day (the start day) you first became an Australian resident during the period; (ii) the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period; (iii) the part of the payment (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the period; (b) subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax); (c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; (d) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). In short, your client is assessed only on the income earned (the accretion) in respect of the Fund less any contributions made since your client became a resident of Australia. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid. | Detailed Reasoning - Foreign currency conversion: Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states when applying section 960-50 to amounts that are elements in the calculation of another amount you need to: (a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and (b) then, calculate the other amounts. | Detailed Reasoning - Amounts to be used in calculation: Your client could not provide the value of your client's total benefits in the Fund as at the day before your client became a resident of Australia. In order to determine the vested amount as at the day before your client became an Australian resident, it is proposed to use information shown in the documentation you have provided as follows: • by using the total transfer value as at a specified date (before the residency date); and • the total lump sum payment as at a specified date during the 2012-13 income year. Based on the above information we have estimated the annual compound rate of growth of transfer value for each policy to be a specified percentage. By using these rates, your client's transfer value as at the day before your client became a resident has been calculated for Policy A and Policy B. It is the Commissioner's view that where an individual commences an annuity from the foreign superannuation fund at the same time as the superannuation lump sum is paid from the fund, subsection 305-75(3) of the ITAA 1997 is applied having regard only to the individual's lump sum entitlement. That is, regard is had only to so much of each of the relevant vested amounts that was, at the relevant times, payable as a lump sum. The part of the vested amount that relates to the annuity must be disregarded. For example, if the rules of the foreign superannuation fund require the individual to be paid an annuity from the fund but allow the individual to choose, as in this case, to receive a superannuation lump sum of one-third of the vested amount, subsection 305-75(3) of the ITAA 1997 is applied on a proportionate basis, that is, to only one-third of the individual's total vested interest in the fund. This approach ensures that the individual is not assessed on earnings that have, in effect, accrued in relation to the annuity that will be paid from the foreign superannuation fund. As your client received one-third of these values as a lump sum, one-third of these amounts will be used to calculate the applicable fund earnings (if any) and is to be converted into Australian dollars (AU$). The Australian Taxation Office (ATO) accepts, and you have agreed, that one-third of the transfer value in respect of your client's benefits in the Fund as at the day before your client became a resident of Australia is converted into Australian dollars (AU$). The ATO website provides a historical list of daily, average monthly and average yearly exchange rates in respect of various foreign currencies, at www.ato.gov.au . Alternatively, they may be obtained by calling our information helpline on 13 10 20. Daily and monthly average exchange rates are listed for the 2003-04 income year onwards. Consequently, the daily exchange rate as at the residency date will be used as a valid daily exchange rate. The information provided by your client shows that, since your client became an Australian resident, your client made contributions to the Fund under Policy A and under Policy B. These contributions comprised of monthly payments which your client made to the Fund after the residency date. One-third of these amounts have been converted to Australian dollars as at the date the payments were made. You have agreed with the post residency date amounts for Policy A and for Policy B to be used in the formula to calculate the applicable fund earnings (if any). No amounts were transferred into the foreign fund from other foreign superannuation funds after your client became a resident of Australia. During the 2012-13 income year, your client was entitled a specified amount under Policy A and Policy B of which one-third under each policy, less tax withheld in the overseas country, was paid as a lump sum to your client's overseas bank account. As required under the legislation of the overseas country at that time, the remaining amount was used to purchase a personal retirement annuity. The amounts representing one-third of Policy A and Policy B are converted into AU$ at the exchange rate that applied on the date the payment was made. The Commissioner's view is that 'the period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In your client's case, that period is from the day your client became and Australian resident to the date the payment was made and your client was a resident for the whole of that period. Therefore, the Australian resident days and the total days are the same. | Detailed Reasoning - Calculation of the assessable amount of the payments from foreign superannuation fund: In accordance with 305-75 (3) of the ITAA 1997 the amounts determined under each policy at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added together. These totals under each policy is then subtracted from the amounts determined under paragraph 305-75(3)(b) of the ITAA 1997. These figures are multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997 for each policy. To this figure for each policy we add the amounts determined under paragraph 305-75(3)(d of the ITAA 1997. The above calculation, in accordance with subsection 305-75 (3) of the ITAA 1997 is the assessable applicable fund earnings relating to your client's benefits in the overseas fund. This amount calculated under the formula for Policy A is to be included in your client's assessable income for the 2012-13 income year. No amount is assessable under Policy B as the amount calculated is less than zero. | Detailed Reasoning - Foreign income tax offset: Subsection 770-10(1) of the ITAA 1997 provides the basic entitlement rule for a foreign income tax offset (FITO) and states: You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. Subsection 770-10(1) of the ITAA 1997 uses the phrase 'in respect of' to link the foreign income tax with an amount included in the taxpayer's assessable income. The phrase 'in respect of' was considered by the High Court in Workers' Compensation Board of Queensland v. Technical Products Pty Ltd (1988) 165 CLR 642; (1988) 62 ALJR 561; (1988) 81 ALR 260; [1988] HCA 49. In a joint judgement Justices Deane, Dawson and Toohey said the following about this phrase: The phrase gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends. Subsection 770-5(1) of the ITAA 1997 provides relevant context by explaining the object of Division 770 as follows: The object of this Division is to relieve double taxation where: (a) you have paid foreign tax on amounts included in your assessable income; and (b) you would, apart from this Division, pay Australian tax on the same amounts. The references in the objects provision to relieving 'double taxation' and 'amounts included in your assessable income' demonstrate that, where a taxpayer pays foreign tax on the whole of a lump sum but only a portion of that lump sum is assessable in Australia, the purpose of Division 770 of the ITAA 1997 is to only provide a FITO for the portion of the gain that is included in assessable income and thus subject to taxation in both Australia and the foreign country (that is, double taxation). This can be described as an 'apportionment approach' to the allowance of a FITO. Such an approach is also consistent with the approach explained in Note 2 to subsection 770-10(1) of the ITAA 1997 which states: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)). While Note 2 is non-operative material, it is relevant context as it is provided to help understand provisions (see sections 2-35 and 2-45 of the ITAA 1997). Accordingly, Note 2 is further contextual support for the view that the words used in subsection 770-10(1) were intended to require apportionment of the foreign income tax paid when only part of an amount that is subject to foreign income tax is included in Australian assessable income. The FITO provisions in the ITAA 1997 were introduced by the Tax Laws Amendment (2007 Measures No. 4) Bill 2007. Paragraph 1.18 of the Explanatory Memorandum (EM) accompanying the Bill summarises the new law, in part, as follows: Taxpayers will be entitled to a non-refundable tax offset for foreign income tax paid on an amount included in assessable income (a 'double-taxed amount'). This offset effectively reduces the potential Australian tax that would be payable on double-taxed amounts. This statement also confirms that a foreign income tax offset will only be allowed on an amount that is included in assessable income in Australia and subject to double taxation. The EM also makes many other references to a foreign income tax offset being limited to amounts included in assessable income and subject to double taxation. The portion of foreign tax available for credit for each policy will be calculated as follows: Foreign tax paid X amount of lump sum in Australian assessable income/amount of lump sum Therefore your client may be entitled to a foreign income tax offset in respect of part or all of the applicable fund earnings amount that is included in your client's assessable income for the 2012-13 income year. Further information regarding calculating a FITO can be obtained from the booklet ' Guide to foreign income tax offset rules 2012-13 ' which can be obtained from the ATO website www.ato.gov.au | Summary: The annual deductible amount determined in the overseas currency will need to be converted to Australian dollars at the average yearly exchange rates in respect of the income year the pension payments are being made to your client. In the income year in which your client was in receipt of the annuity for only part of the income year, a pro rata annual deductible amount will apply. | Detailed Reasoning - The deductible amount: Subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936) allows a deduction in respect of the undeducted purchase price (UPP) of a foreign pension or annuity. The deduction, or deductible amount as it is referred to in subsection 27H(2), represents the UPP of the pension apportioned over the term that the pension or annuity is paid, or expected to be paid. In the case of a pension or annuity that is payable over the life of the pensioner or annuitant this will be the life expectation factor of the pensioner or annuitant (or, where applicable, the reversionary pensioner or annuitant, if greater) as at the commencement of the income stream. The life expectation factor to be used is set out in the relevant Australian Life Tables published by the Australian Government Actuary (regulation 9 of the Income Tax Regulations 1936). The UPP of a pension or annuity payable from a foreign superannuation fund is the total amount of the personal contributions made by the member to secure entitlement to the pension or annuity. It does not , however, include contributions made by an employer (subsection 27H(5) of the ITAA 1936). The deductible amount is calculated in accordance with the formula set out under subsection 27(2) of the ITAA 1936 which is as follows: A(B-C)/D where: A is the relevant share in relation to the annuity in relation to the taxpayer in relation to the year of income. B is the amount of the undeducted purchase price of the annuity. C is: (a) if there is a residual capital value in relation to the annuity and that residual capital value is specified in the agreement by virtue of which the annuity is payable or is capable of being ascertained from the terms of that agreement at the time when the annuity is first derived - that residual capital value; or (b) in any other case - nil; and D is the relevant number in relation to the annuity. The 'relevant number', in the case of pension or annuity payable for life, is, as noted earlier, the life expectation factor of the pensioner or annuitant (or, where applicable, the reversionary pensioner or annuitant, if greater) as at the commencement of the income stream. The 'relevant share' will usually be '1', unless the pension or annuity is being paid at the same time to more than one person. In that case it will be a fraction representing the number of persons to whom the pension or annuity is currently being paid. The result of the formula under subsection 27H(2) of the ITAA 1936 represents the amount that a taxpayer may claim each year as a deduction against his or her pension or annuity. The figure is determined in the foreign currency and then converted to Australian dollars (AU$) each year using the average exchange rate for that particular year. It should also be noted that, in cases where both a tax free lump sum and a pension or annuity is paid from a fund, the amount of the personal contributions is pro-rated between the lump sum and the pension or annuity in accordance with the method set out in Taxation Ruling IT 2272. The amount attributable to the lump sum payment does not form part of the UPP of the pension or annuity. | Detailed Reasoning - Undeducted contributions applicable to the annuity: In this case your client made contributed amounts under the two policies to the Fund in the period before becoming an Australian resident and since becoming an Australian resident. As noted in the facts, your client received one third of the total retirement benefit paid as a lump sum under each policy with an amount paid to the revenue service of the overseas country. The remaining balance of was used to commence an annual annuity with the Fund for your client. IT 2272 states that where both a pension (or annuity) and a lump sum is payable, undeducted contributions should be apportioned between those two payments. The ruling states at paragraph 8: Where there is no immediately apparent basis for allocating the contributions made by a person to obtain both a pension and a lump sum, the contributions should be allocated by applying the relevant proportion ascertained in accordance with the following formulae - _ Purchase of pension - B/A+B and _ Purchase of lump sum - A/A+B where - A is the amount of the lump sum benefit received; and B is the present value of the pension entitlement at the time when the lump sum benefit is received. Therefore, following this formula, your client will be entitled to apply a portion of their undeducted contributions to reduce the amount payable on the annuity in accordance with section 27H of the ITAA 1936. | Detailed Reasoning - The deductible amount: As mentioned earlier, to calculate the deductible amount applicable to your client's annuity payment, the formula in subsection 27H(2) of the ITAA 1936 must be applied. The relevant number to be used in the formula will be your client's life expectancy factor at the date the annuity commenced. The Australian Life Tables prescribed under regulation 9 of the Income Tax Regulations 1936 for pensions or annuities that commenced to be payable on or after 1 January 2005 are the Australian Life Tables 2005-07. Consequently, your client's life expectation factor has been determined as per the Australian Life Tables 2005-07. Accordingly, where the annuity has been received by your client for a full year , the annual deductible amount will be determined as per the formula under subsection 27H(2) of the ITAA 1936. The annual deductible amount will need to be converted to Australian dollars at the average yearly exchange rates in respect of the income year the pension payments are made for your client. For the 2012-13 income year, your client was in receipt of the annuity for part of the year. Accordingly, for that year only the pro rata annual deductible amount will apply for this year. A similar pro rata will apply in the final year the annuity is payable to your client. | Detailed Reasoning - Exchange Rates: According to paragraph (a) of Item 7 in subsection 960-50(6) of the ITAA 1997, an amount in a foreign currency is to be translated into Australian currency at the exchange rate at the time of receipt of the payment. In the present case, the records you have provided show that the annuity payments are made annually and that the payments have been made so far in the last quarter of the 2012-13 income year. The ATO website provides a historical list of daily, monthly and average yearly exchange rates in respect of various foreign currencies, at www.ato.gov.au . Alternatively, they may be obtained by calling our information helpline on 13 10 20. Consequently, the pro rata annual deductible amount will need to be converted to Australian dollars using the average yearly exchange rates in respect of the pension payments made for your client in the 2012-13 income year.