Private ruling: Undeducted purchase price of foreign Pension
Published: August 2012
Ruling period: 1997-98 Income year
Date scheme commenced: 1 July 1997

Ruling: Q1: Are you entitled to a deductible amount in respect of the undeducted purchase price (UPP) of your foreign pension under subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes.

Relevant facts and circumstances: 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 ITAA 1936. The international tax agreement between Australia and the foreign country 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 is not reversionary. All the pension is payable to you. The residual capital value of the pension is nil. Your pension is paid on a monthly basis. Your pension is indexed in accordance with cost of living increases or 10%, whichever is lower.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 20 | Income Tax Assessment Act 1936 Subsection 27A(1) | Income Tax Assessment Act 1936 Section 27H | Income Tax Assessment Act 1936 Subsection 27H(2) | 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 | Superannuation Industry (Supervision) Regulations 1994

Reasons for decision: Summary: Subsection 27A(1) of the 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 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 IT 2272 discusses the apportioning of the contributions made to obtain both a pension and lump sum. The Ruling 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. The present value of the pension is calculated based on the amount of the pension entitlement during the first 12 months after commencement of the pension. The present value is determined in accordance with Taxation Ruling IT 2620 and is based on Schedule 1B of the Superannuation Industry (Supervision) Regulations 1994, under the following formula: Present Value = AV X PVF AV = Annual Value of Pension (ie the amount of pension payable during the first 12 months) PVF Pension Valuation Factor which is based on the indexation rate of your pension and your age at the commencement of the pension and whether the pension is reversionary or not and the level of reversion. You received both a lump sum payment and a pension on retirement. 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 immediately apparent basis for allocating the personal contributions made to obtain both the pension and lump sum benefit, the proportion of the total personal contributions attributable to the pension is determined as per the formula in IT 2272. 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. 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 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 as calculated under IT 2272 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: · the date when the pension first became payable; · your age when the pension commenced. Your annual deductible amount of the UPP will apply for the 1997-98 income year and all subsequent years where the facts, as stated in the ruling, do not change. 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, 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 1997 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 pension is paid monthly, you may use the average exchange rate to translate your pension income and the deductible amount of your UPP. For the 2002-03 and prior income years, section 20 of the ITAA 1936 requires all income and expenses to be expressed in Australian currency for the purposes of the Act. In accordance with the currency translation rules contained in section 20 of the ITAA 1936 and clarified in Taxation Ruling IT 2498, pensions received in foreign currency should be translated to Australian currency on the following basis: (a) where pensions are remitted to Australia - at the exchange rate applicable when each instalment of pension is received, or (b) where pensions are not remitted to Australia - at the exchange rate applicable at the end of the year of income. However, in recognition of the difficulties that a strict application of the law may cause some pensioners, translation of remitted pensions on the basis of the average annual exchange rate for the relevant year of income will be accepted. Similarly, where the average annual exchange rate is used to translate the foreign pension amount received in an income year, the annual/part year deductible amount may also be translated to Australian dollars at the average annual exchange rate for the income year. The average exchange rates are available from our 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. ATO view documents Taxation Ruling IT 2272 Taxation Ruling IT 2498 Taxation Ruling IT 2620 Taxation Determination TD 2006/54

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