Private ruling: Request for a determination of the deductible amount of UPP of a foreign pension or annuity
Published: April 2015
Ruling period: 2012-13 financial year | 2013-14 financial year | 2014-15 financial year | The schemes commenced on | Pension 1 - 6 January 1998 | Pension 2 - 19 December 1997 | Pension 3 - 19 December 1997

Ruling: Q1: Are you entitled to deductible amounts in respect of the undeducted purchase price (UPP) of your foreign pensions? | A1: Yes.

Relevant facts and circumstances: You receive pensions from retirement funds established and managed outside Australia. The international tax agreement between Australia and the country in which the retirement funds are established and managed provides that the pensions are taxable in Australia. Your assessable income includes your pension income. All the pensions are payable to you. The pensions became payable on or after 1 July 1983. The pensions are payable for life, and on your death revert to your spouse. The residual capital value of the pensions are nil. Your pensions are paid on a monthly basis.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 20 | 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 Regulations 1936 Regulation 9

Reasons for decision: Summary: Your annual deductible amounts have been calculated in accordance with subsection 27H(2) of the ITAA 1936. | Detailed Reasoning - Deductible amount: 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. Subsection 27A(1) of the ITAA 1936 contains the definition of purchase price in relation to a superannuation pension. Subparagraph (a)(ii) of that former subsection stated 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. | Detailed Reasoning - How the annual deductible amount is calculated: 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 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. 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 ITAA 1936. 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: 1. the date when the pension first became payable 2. your age when the pension commenced, and 1. your spouse's age when the pension commenced. In Taxation Determination TD 2006/72 Income tax: does the relevant number determined for the purposes of working out the deductible amount of a superannuation pension or annuity under subsection 27H(2) of the Income Tax Assessment Act 1936 take into account the life expectancy of a reversionary pensioner or annuitant?, the Commissioner states, in paragraph 1, that the relevant number used to calculate the deductible amount of a superannuation pension that is payable to a person (the original pensioner) for life and on the death of that person is payable to another person for their life (the reversionary pensioner) will be the greater of the life expectancies of the original and reversionary pensioners. | Detailed Reasoning - Converting foreign currency to Australian currency: For the 2002-03 and prior financial 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 Income tax: foreign tax credit system: currency translation of foreign income: trading stock and depreciable plant: basis of returning foreign income: capital gains/losses pensions received in foreign currency should be translated to Australian currency on the following basis: 1. where pensions are remitted to Australia - at the exchange rate applicable when each instalment of pension is received, or 2. 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 a financial year, the deductible amount may also be translated to Australian dollars at the average annual exchange rate for the financial 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 - 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. 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. | Detailed Reasoning - Important information to note: If you choose to rely on this private ruling, when lodging your income tax return for the 2013-14 and 2014-15 financial years, you may include the annual 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. | Detailed Reasoning - ATO view documents:: Taxation Ruling IT 2498 | Detailed Reasoning - Other references:: Taxation Determination TD 2006/72