Private ruling: Deductible amount of your undeducted purchase price of your foreign pension
Published: August 2012
Ruling period: 2010-11 income year | 2011-12 income year
Date scheme commenced: On or after 1 July 1983

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

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(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 pension became payable on or after 1 July 1983. The total amount of contributions, other than employer contributions, paid to the retirement fund towards the purchase of the pension has been supplied in the form of documentary evidence from your pension provider. The residual capital value of the pension is nil. Your pension is paid on an annual basis. Your pension was paid for 242 days in the 2010-11 income year.

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 - Explanation: Please note that all references to 'pension' cover both pensions and annuities 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. 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 | Detailed Reasoning - 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. The factors for determining the life expectancy are: · the date the pension first became payable; · your age when the pension commenced. By substituting your information into the formula, the annual deductible amount is obtained. Your annual deductible amount of the UPP will apply for the 2011-12 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. Therefore, for the 2010-11 income year the part year deductible amount is calculated as follows: Annual deductible amount x 242 365 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 or annuity. Alternatively, regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) and Schedule 2 to the ITAR 1997 allow pensions and annuities 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 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 an annual or bi-annual basis, you must use the exchange rate applying at the time the pension is received. 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 has changed in relation to superannuation pensions and benefits paid from complying superannuation funds. However, these changes do not affect any pensions or annuities 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. In accordance to the evidence from the pension fund, the insured beneficiaries of the pension after your death are your spouse and your child. You had mentioned that on your death your child would receive the pension up until a certain age (i.e., 25 or 30 years) however the pension is payable to your spouse for life. The calculation to determine the deductible amount of a UPP under subsection 27H(2) of the ITAA 1936 requires the relevant number to be used. Relevant number under subsection 27H(4) of the ITAA 1936 means the number of years if the annuity is payable for a term of years or the life expectation factor of the person if the annuity is payable during the lifetime of a person. In this case, on your death the pension is payable to your spouse for life and is payable only for a specified number of years for your child. In accordance with TD 2006/72 paragraph 1, the relevant number used to calculate the deductible amount of a superannuation pension is the greater of the life expectancies of the original and reversionary pensioners. Therefore, the relevant number used in your case is that of your spouse who has the greater relevant number between you, your spouse and your child. On the date of commencement of the pension, your child was under 30 years of age and if you were to die before she/he reaches 30 years old, the deductible amount of a UPP we have provided in the ruling may not be fully deductible to your spouse as a portion of the pension will be payable to your child. Hence, a new ruling should be lodged by your beneficiaries in the case where your child would be eligible for a portion of the pension after your death. | Detailed Reasoning - Important information to note: If you choose to rely on this private ruling, when lodging your income tax return for the 2010-11 income year, please include the part year 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.

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