Private ruling: Deductible amount of UPP
Published: December 2014
Ruling period: 2013-14 financial year. | 2014-15 financial year.
Date scheme commenced: On or after 1 July 1983.

Ruling: Q1: Are you entitled to a deductible amount in respect of the undeducted purchase price (UPP) of your foreign pension? Ruling Yes, your annual and part year deductible amounts are calculated in accordance with section 27H of the Income Tax Assessment Act 1936 (ITAA 1936). This ruling is binding on the Commissioner for the period outlined in the ruling. You may rely on this ruling for future years where the facts, as stated in the ruling do not change, but the Commissioner will not be bound to the ruling. This means that if your circumstances or the facts relied upon to make the ruling do change, you will be protected from penalties and interest, but liable for any shortfall tax that may apply.




You receive a pension from a retirement fund established and managed outside Australia. | 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 was supported by documentary evidence from the fund. | The residual capital value of the pension is nil. | Your pension is paid on a monthly basis. | ' Your pension was paid for part of a relevant financial year. | Assumptions: This ruling is given on the basis of the facts stated in the description of the scheme as set out above. 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. Examples of such variations include but are not limited to commutation, divorce and re-marriage. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described. | Relevant legislative and regulatory 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 | Relevant ATO views: 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? | Explanation: Please note that all references to 'pension' cover both pensions and annuities. | Summary: Your annual and part year deductible amounts are calculated in accordance with section 27H of the ITAA 1936. | 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. | The definition of 'purchase price' is contained in subsection 27H(4) of the ITAA 1936. It states that purchase price includes the contributions made by a person to any foreign superannuation fund to obtain a pension and so much of contributions considered reasonable by the Commissioner as having been paid by a person to a foreign superannuation fund to obtain superannuation benefits including a pension. | Former subsection 27H(4) 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' includes the contributions made by a person to any foreign superannuation fund to obtain a pension and so much of contributions considered reasonable by the Commissioner as having been paid by a person to a foreign superannuation fund to obtain superannuation benefits including a pension. | 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 = 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, and | 2. your age when the pension commenced. | By substituting the information provided into the formula, the annual deductible amount of your pension is obtained. | How the part year deductible amount is calculated: 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 a financial 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. | 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 (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 financial 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 financial 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 on a monthly basis, you are entitled to use the average exchange rate to translate your pension income and the annual deductible amount of your UPP. | The average exchange rates are available from our superannuation information line on 13 10 20 or visit our website at ato.gov.au/super | 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 in order to claim your annual deductible amount as advised by your private ruling above. | Important information to note: If you choose to rely on this private ruling, when lodging your income tax return for the 2013-14 financial year, you may 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.