Private ruling: Undeducted purchase price (UPP) of pension
Published: September 2011
Ruling period: 2010-11 income year.
Date scheme commenced: On or after 1 July 1983

Ruling: Q1: Are you entitled to a deductible amount of the UPP in respect of your overseas pension? | A1: Yes, your deductible amount has been calculated in accordance with section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

Relevant facts and circumstances: 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. The pension is paid by an institution. The pension reverted to you on the death of your spouse. All the pension is payable to you. There is a taxation ruling that provides for an alternative calculation of the deductible amount under section 27H of the ITAA 1936. You have provided documentary evidence of the contributive amounts for each relevant calendar year. You receive your pension on a monthly basis.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 27H. | Income Tax Assessment Act 1936 Subsection 27H(2). | Income Tax Assessment Act 1997 Section 960-50. | Income Tax Assessment Act 1997 Subsection 960-50(1). | Income Tax Assessment Act 1997 Subsection 960-50(4). | Income Tax Assessment Regulations 1997 Regulation 960-50.

Reasons for decision: Summary: 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. There is a Taxation Ruling which considers the taxation treatment of certain overseas 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 overseas pension meets these requirements. Therefore, you are entitled to a deductible amount of the UPP of your pension for the 2010-11 income year. The Taxation Ruling states that in recognition of the difficulties for pensioners in obtaining information relating to their contributions to the overseas government agency, it has been decided to accept that the portion of the pension identified by the overseas government agency 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, it must be noted that the figures supplied by the overseas government agency are based on calendar years and therefore two years' statements are required to calculate the amount for each Australian financial year. Therefore the formula for calculating the deductible amount of your UPP for the 2010-11 income year is: (amount of contributive portions for 2010 and 2011 calendar years) ÷ 2 x 90% The deductible amount of UPP has been calculated in accordance with the above formula. 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, pension or annuities 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 or annuity. Alternatively, regulation 960-50 of the Income Tax Assessment Regulations 1997 (ITR 1997) and Schedule 2 to the ITR 1997 allow pensions and annuities 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 or annuity 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 payments on a monthly 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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