Private ruling: Deductible amounts and foreign pensions
Date of advice: 10 November 2017
Published: April 2018

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

Relevant facts and circumstances: This ruling is based on the facts stated below. 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. Where there is no variation, the ruling can apply for more than just the period/s mentioned above. ● You are resident of Australia for income tax purposes. ● You have provided a copy of a letter from your fund to assist the Commissioner in determining the amount of your personal contributions. ● You currently receive 100% of the pension and on your death it reverts to your spouse. ● The residual capital value of the pension is nil. ● Your pension is paid on a monthly basis.

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) Other references: | Taxation Determination TD 2006/17 | Taxation Determination TD 2006/54 | Taxation Determination TD 2006/72 | Important information to note | For the 2004-05 and later financial years, income tax returns may be amended within two years from the date upon which the Commissioner gives notice of assessment. However, where assessments fall outside this period, you will need to lodge an objection and request an extension of time to lodge the objection. | The deductible amount can only be included in your tax return if you have declared your pension income. When including these amounts, they should be translated to Australian currency using the same exchange rate. More information about exchange rates is available from our website by entering ‘QC 16583’ in the search box on the top right of the page.

Reasons for decision: Summary: The part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. The tax-free portion is called the deductible amount. It is calculated by dividing the UPP of your pension by either the term of the pension (if fixed), or a life expectancy factor - that applies to you or your spouse if they have a greater life expectancy - according to life expectancy statistics. The Australian life tables are published by the Australian Government Actuary, and the life expectancy is taken from when the pension first became payable. The annual deductible amount is calculated using the following formula: A (B – C) D A = relevant share of the pension payable to you (if all the pension is payable to you then A = 1) B = is the amount of the UPP of the pension C = is the residual capital value (if any) D = is the relevant number 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 Income tax: Eligible termination payments and superannuation pensions – determination of undeducted contributions and undeducted purchase price 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 (A + B) Purchase of lump sum = A (A + B) where: 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 Income tax: Assessment of eligible termination payments – determination of forgone benefit part of approved early retirement scheme payments and bona fide redundancy payments made to members of pension funds and is based on Schedule 1B of the Superannuation Industry (Supervision) Regulations 1994 , under the following formula: AV = Annual Value of Pension (i.e. 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 from your fund on retirement. You paid personal contributions into the fund to obtain your total retirement benefits. 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 from the retirement fund is determined as follows: Purchase of pension = (present value) - all in foreign currency = 0.XXXX (or XX.XX%) (lump sum) + (present value) This percentage is applied to your total contributions paid to determine the purchase price of your pension benefit. Therefore, the amount of personal contributions determined as being made by you to obtain your pension from name of retirement fund is XXXX.XX (insert in foreign currency the personal contributions) x XX.XX % = XXXX. | Detailed Reasoning - Relevant facts and circumstances: This ruling is based on the facts stated below. 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. Where there is no variation, the ruling can apply for more than just the period/s mentioned above. ● You are resident of Australia for income tax purposes. ● You have provided a copy of a letter from your fund to assist the Commissioner in determining the amount of your personal contributions. ● You currently receive 100% of the pension and on your death it reverts to your spouse. ● The residual capital value of the pension is nil. ● Your pension is paid on a monthly basis. | Detailed Reasoning - 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) | Detailed Reasoning - Other references:: Taxation Determination TD 2006/17 Taxation Determination TD 2006/54 Taxation Determination TD 2006/72 | Detailed Reasoning - Important information to note: For the 2004-05 and later financial years, income tax returns may be amended within two years from the date upon which the Commissioner gives notice of assessment. However, where assessments fall outside this period, you will need to lodge an objection and request an extension of time to lodge the objection. The deductible amount can only be included in your tax return if you have declared your pension income. When including these amounts, they should be translated to Australian currency using the same exchange rate. More information about exchange rates is available from our website by entering ‘QC 16583’ in the search box on the top right of the page.