Private ruling: The Undeducted Purchase Price of your foreign pension
Published: November 2013
Ruling period: 1 July 2012 to 30 June 2013.
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 deductible amount for the relevant financial year is calculated in accordance with section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. · You are a resident of Australia for income tax purposes. · You received 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. · Based on the evidence provided, the Commissioner has determined the contributive portion of your pension for the relevant financial year. · You receive your pension on a twice yearly basis. 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.


Reasons for decision: Summary: Your deductible amount is calculated in accordance with section 27H of the ITAA 1936 and will apply for the 2012-13 financial year. | Detailed Reasoning - How the annual deductible amount is calculated: 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 deductible amount. The deductible amount is calculated based on the undeducted purchase price (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. Taxation Ruling IT 2554 Income tax: Australia/Italy double taxation agreement: Italian pensions derived by Australian residents considers the taxation treatment of certain Italian pensions received by Australian residents. It also provides for an alternative calculation of the deductible amount under section 27H of the ITAA 1936. 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 a deductible amount of the UPP of your pension for the relevant financial year. Taxation Ruling IT 2554 states that in recognition of the difficulties for pensioners in obtaining information relating to their contributions to the INPS, it has been decided to accept that the portion of the pension identified by the INPS as being derived from the contributions made by the pensioner (reduced by 10% to reflect the interest element in that component of the pension) is the annual exclusion amount. In working out the contributive amount for a particular year, you have provided evidence showing the amount of contributive portion for the relevant financial year. Therefore the formula for calculating the deductible amount of your UPP for the relevant year is: (amount of contributive portion for relevant financial year) X 90% In your case, the deductible amount of your UPP for the rlevant financial year has been calculated in accordance with the information supplied by your fund to determine your contributive amounts for the relevant financial year in accordance with the above formula. By substituting the information provided into the formula the deductible amount is obtained. Note: Please do not use this amount for earlier or future financial years as the deductible amount varies from year to year based on the contributive amounts for each 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 (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 financial year. This is provided the conditions outlined in Schedule 2 to the ITR 1997 are satisfied. Where the pension is received as a single annual amount (or bi-annual payment) the conditions is Schedule 2 of the ITR 1997 will not be satisfied. Therefore the pension income must be translated at the exchange rate applying when it is derived, unless the amount is received at or before the time when it is derived. In that case, the pension income must be translated at the exchange rate applying when it is received. Similarly, the deductible amount must also be translated at the exchange rate applying when the pension is received or derived. In your case, as you received your pension payments on an annual or bi-annual basis, you must use the exchange rate applicable at the time the pension was received or derived. | Detailed Reasoning - Important information to note: Income tax returns may be amended within two years from the date upon which the Commissioner gives notice of the assessment to the individual (for assessments for the 2004-05 and later financial years) or within four years from the date upon which the tax became due and payable under the assessment (for assessments for financial years prior to the 2004-05 financial year). If you choose to rely on this private ruling, when lodging your income tax return for the relevant financial year, you may include the 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.

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