Private ruling: Undeducted Purchase Price (UPP)
Published: January 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deductible amount in respect of the UPP of your pension? | A1: Yes.

Relevant facts and circumstances: You are a resident of Australia for income tax purposes. You received a pension from a retirement fund established and managed outside Australia. The international tax agreement between Australia and this country (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. You receive your pension on a monthly basis. You became an Australian resident for income tax purposes before your pension commenced.

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 Assessment Regulations 1997 - Regulation 960-50.01

Reasons for decision: Detailed Reasoning - Explanation: Please note that all references to 'pension' cover both pensions and annuities. | Summary: You have a deductible amount for the 2012-13 financial year. | Detailed Reasoning - How the annual deductible amount is calculated: 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 deductible amount. The deductible amount is calculated based on the undeducted purchase price (UPP). 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. Each year a portion of the UPP can be used to reduce the pension income in your tax return. This is called the deductible amount and is deemed to be a return of part of your contribution towards the purchase of the pension. We have calculated your UPP amount. | 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 (ITR 1997) and Schedule 2 to the ITR 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 ITR 1997 are satisfied. Where the pension is received as a series of payments made over the course of a financial year, and provided the average exchange rate is considered a reasonable approximation of exchange rates, the conditions outlined in Schedule 2 to the ITR 1997 will be satisfied. In your case, as you received your pension payments on a monthly basis, it is accepted that you are entitled to use the average exchange rate for the year. The average exchange rates are available from our superannuation information line on 13 10 20 or visit our website at ato.gov.au/super | 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) or within four years from the date upon which the tax became due and payable under the assessment (for assessments for financial years prior to the 2004-05 financial year). | Detailed Reasoning - ATO view documents:: Taxation Determination 2006/54