Private ruling: Deductible amount of undeducted purchase price
Published: November 2012
Ruling period: 2011-12 income year

Ruling: Q1: Are you entitled to an annual deductible amount in respect of the undeducted purchase price (UPP) of your foreign pension? | A1: Yes, you are entitled to an annual deductible amount.

Relevant facts and circumstances: You are a resident of Australia for income tax purposes. You received a reversionary 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. There is a Taxation Ruling which provides for an alternative calculation of the deductible amount under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936). You have provided documentary evidence from the fund of your personal contributions towards your pension. You receive your pension on a regular 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) | 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

Reasons for decision: Summary: Please note that all references to 'pension' cover both pensions and annuities. Section 27H of the 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 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. The relevant Taxation Ruling considers the taxation treatment of certain foreign pensions received by Australian residents. The ruling states that for a part of a foreign pension to be exempt from Australian tax, the pension must be paid by a foreign superannuation or retirement fund and the pension must be purchased by contributions to the fund and identified as such by the fund. Your foreign pension meets these requirements. Therefore, you are entitled to an annual deductible amount of the UPP of your foreign pension. 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, 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. Alternatively, regulation 960-50 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 income 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 an income 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 payment on a regular 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 lnformation line on 13 10 20 or visit our website at www.ato.gov.au/super .

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