Private ruling: Undeducted purchase price of a foreign pension or annuity
Date of advice: 6 June 2024
Published: 19 August 2024
Ruling period: Income year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

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

Relevant facts and circumstances: You are a resident of Australia for income tax purposes. Your pension is paid by a foreign pension scheme. You have provided statements from the Scheme to assist the Commissioner in determining the amount of your personal contributions. You have provided a letter from the Scheme stating your personal contributions are XXX. Your pension is payable for life. You received a lump sum of XXX from the Scheme upon the commencement of your pension. You currently receive XX% of the pension and on your death, it reverts to your spouse. The residual capital value of the pension is nil. When the pension commenced you were XXX years of age and your life expectancy factor was XXX. When the pension commenced your spouse was XXX years of age and their life expectancy factor was XXX. Your pension is paid on a monthly basis.

Relevant legislative provisions: Income Tax Assessment Act 1936 Former subsection 27A(1) | 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 Assessment (1936 Act) Regulation 2015 section 9 | Income Tax Assessment (1997 Act) Regulations 2021 section 960-50.01 | Superannuation Industry (Supervision) Regulations 1994 schedule 1B We followed these ATO view documents | Taxation Ruling IT 2272 | Taxation Ruling IT 2554 | Taxation Ruling IT 2498 | Taxation Ruling IT 2498A - Addendum | Taxation Ruling TR 2002/17 | Other references | Taxation Determination TD 2006/17 | Taxation Determination TD 2006/54 | Taxation Determination TD 2006/72

Reasons for decision: Detailed Reasoning - Detailed reasoning: The part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. The tax-free portion is called the UPP deductible amount. | Detailed Reasoning - Apportioning contributions where both a lump sum and a pension is paid: The definition of purchase price is contained in subsection 27H(4) of the Income Tax Assessment Act 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. Where a person is entitled to both a pension and a lump sum payment, it must be determined whether part of the personal contributions made to the fund are 'undeducted contributions' relating to the lump sum payment, or form part of the 'purchase price' relating to the superannuation pension. Taxation Ruling IT 2272 Income tax: Eligible termination payments and superannuation pensions - determination of undeducted contributions and undeducted purchase price states that where there is no apparent basis for allocating the contributions, the apportioning of the contributions made to obtain both a pension and lump sum is to be calculated on a pro-rata basis as follows: Purchase of pension = B ÷ (A + B) Purchase of lump sum = A ÷ (A + B) Where: A = is the amount of the lump sum benefit received, and B = is the net present value of the pension entitlement at the time when the lump sum benefit is received. You received both a lump sum payment and a pension from the Scheme on retirement. You paid personal contributions of XXX into the fund to obtain your retirement benefits. Therefore, some of the personal contributions would have been allocated to the lump sum benefit and some would have formed part of the 'purchase price' of your pension. It is necessary to determine what proportion of the total personal contributions, have been made to obtain your pension. As there is no alternative basis for allocating the personal contributions made to obtain both the pension and lump sum benefit, the apportioning is to be calculated using the previous pro-rata formula. The proportion of the total personal contributions attributable to the pension from the Scheme is determined as follows: Purchase of pension = XXX ÷ [(lumpsum) + (present value)] = 0.XX (or XX%) This percentage is applied to your total contributions paid to determine the purchase price of your pension benefit. Therefore, the amount of personal contributions (UPP) as being made by you to obtain your pension from the Scheme is determined to be XXX x XX.XX% = XXX. It is calculated by dividing the UPP of your pension by either the term of the pension (if fixed), or a life expectancy factor - that applies to you or your spouse if they have a greater life expectancy - according to life expectancy statistics. The Australian life tables are published by the Australian Government Actuary, and the life expectancy is taken from when the pension first became payable. The annual UPP deductible amount is calculated using the following formula: [A(B-C)] ÷ D A = relevant share of the pension payable to you (if all the pension is payable to you then A = 1) B = is the amount of the UPP of the pension, which in your case is XXX C = is the residual capital value (if any), which in your case is XXX D = is the relevant number, which in your case is XXX. By putting your information into the above formula, your annual UPP deductible amount is XXX. | Detailed Reasoning - Part year calculation: As your pension was paid for XXX days in the 20YY-YY income year, a pro-rated amount of XXX applies for that year.