Private ruling: Undeducted purchase price (UPP) of your foreign pension
Published: March 2014
Ruling period: 2002-03 financial year | 2003-04 financial year | 2004-05 financial year | 2005-06 financial year | 2006-07 financial year | 2007-08 financial year | 2008-09 financial year | 2009-10 financial year | 2010-11 financial year | 2011-12 financial year | 2012-13 financial year | 2013-14 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 deductible amount is 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.



Reasons for decision: Summary: Please note that all references to 'pension' cover both pensions and annuities Your annual deductible amount is calculated in accordance with section 27H 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 subsection 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, and 3. your spouse's age when the pension commenced. Your annual deductible amount is obtained by substituting the information provided into the formula. | Detailed Reasoning - 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. | Detailed Reasoning - 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 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.

Relevant facts: • 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 pension is payable for life, and on your death reverts to your spouse. | • The total amount of your contributions, other than employer contributions, paid to the retirement fund towards your total retirement benefits (pension and lump sum) was provided by you and supported by evidence from the fund. | • The residual capital value of the pension is nil. | • The pension was paid for part of a relevant financial year covered by the ruling. | 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 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 Assessment Act 1997 Section 960-50 | Income Tax Regulations 1936 Regulation 9 | Income Tax Assessment Regulations 1997 Regulation 960-50.01 | 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?