Taxation Ruling TR 93/13
Date of effect: 1 July 1983


Class of entities or scheme: FOI status:

Ruling: (a) Deductible amount determined by the Commissioner 6. The exact method for calculating UPP and the deductible amount of a contributory pension received under the Scheme is outlined in paragraphs 7 to 13. However, if the pension recipient chooses not to perform this calculation, for contributory pensions which do not fall within paragraph 11 the Commissioner will accept an alternative method, being a deductible amount of 8% of the annual amount of the pension (expressed in Australian currency). In this regard, it has been our experience that the deductible amount calculated using the exact method is invariably less than 8% of the pension received. If the pensioner chooses the alternative method, paragraphs 7 to 13 can be disregarded and the only further calculation necessary is the conversion of British to Australian currency (described at paragraphs 14 to 16). (b) The exact method for calculating deductible amount 7. If a person decides not to adopt the 8% exclusion, the deductible amount of a contributory pension received from the Scheme is calculated as explained below. (i) Deductible amount of a Category A pension 8. The deductible amount of a Category A pension (explained in paragraph 27) is: UPP / Relevant number * UPP is the undeducted purchase price of the pension calculated according to the method described in paragraphs 12 and 13. * Relevant number is the pensioner's life expectancy when the pension is first received (or, if the pensioner is married and the pension was first payable on or after 1 July 1983, the greater of the life expectancy of the pensioner and his or her spouse). (ii) Deductible amount of widowed mother's allowances, widow's pensions and Category B pensions 9. Widowed mother's allowances, widow's pensions and Category B pensions paid to widows and widowers (explained in paragraph 27) which are paid on or after 1 July 1983 following the death of a spouse who was receiving a Category A pension have the same deductible amount as the Category A pension. If the spouse who died did not receive a Category A pension the deductible amount of the widow/er's pension is: UPP / Relevant number * UPP is the undeducted purchase price of the pension calculated by applying the method described in paragraphs 12 and 13 to the deceased spouse's contributions. * Relevant number is the pensioner's life expectancy when the pension is first received. 10. If a single contribution record gives rise to a number of consecutive pensions, the deductible amount off-set annually against each pension is the amount of UPP divided by the relevant number ascertained when the first pension is received. 11. There is no deductible amount for a married woman's Category B pension paid to a wife while her husband receives a Category A pension, nor for a widowed mother's allowance, a widow's pension and a Category B pension paid to a widow/er before 1 July 1983. (iii) Undeducted purchase price 12. The UPP of a contributory pension received under the Scheme is the sum of : The following contributions do not form part of UPP: 13. Contributions which secure entitlement to a pension depend on the year in which the contributions are made: WLEL x N x C% * WLEL is the weekly lower earnings limit for the year (see Table 2); * N is the number of weeks in respect of which Class 2 contributions are not paid; and * C% is the Class 1 contributions percentage rate provided in Table 4 at paragraph 28. Contributions - [Excess x CO%] * Contributions is all primary Class 1 and Class 2 contributions made during the year; * Excess is the amount by which the contributor's earnings factor in a year exceeds that year's lower earnings limit (see Table 2); and * CO% is the contracted-out percentage for the year as shown in Table 5 and Table 6 at paragraph 28 (contracted-out percentage is explained in paragraph 27). (c) Currency translation 14. For taxation purposes, pensions paid under the Scheme must be converted into Australian currency. To determine the appropriate currency exchange to be used for converting British currency into Australian currency, refer to section 20 and Taxation Ruling IT 2498. Pensions received in foreign currency should, strictly, be translated to Australian currency on the following basis: 15. However, recognising the difficulties that a strict application of the law may cause some pensioners, we will accept translation of pensions sent to Australia on the basis of the average annual exchange rate for the relevant year of income. 16. If the pension is translated to Australian dollars at the average annual exchange rate or at the exchange rate applicable at the end of a year of income:




What this Ruling is about | Preamble: This Ruling, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner. | What this Ruling is about: 1. Article 14 of the Australia/United Kingdom Double Tax Agreement provides for the taxation of pensions and annuities only in the recipient's country of residence. Therefore, pensions received under the British National Insurance Scheme by Australian residents are not taxed in the United Kingdom but must be included in the recipient's assessable income for Australian taxation purposes under section 27H of the Income Tax Assessment Act 1936 . | 2. The taxable amount of these pensions can generally be reduced by the pension's undeducted purchase price, or UPP. Broadly, UPP comprises non-employer contributions made to purchase a pension which were not allowable as an Australian tax deduction and which, for contributions before 1 July 1983, did not give rise to a rebate of tax. | 4. The Ruling applies to all pensions from the Scheme which are based on a person's contributions (contributory pensions). Contributory pensions include Category A retirement pensions, Category B retirement pensions paid to a widow or widower, widowed mother's allowances and widow's pensions. The Ruling does not apply to Category C and Category D retirement pensions from the Scheme because these pensions are non-contributory and so have no UPP. Nor does it apply to Defence Force pensions, or other British pensions which are not received from the National Insurance Scheme. | 5. Key terms used in this Ruling are defined in paragraph 27. | Date of effect: 17. This Ruling applies (subject to any limitations imposed by statute) to pensions commencing both before and after the date on which it is issued. | 18. Under subsection 27H(3), the Commissioner has a discretion to substitute a deductible amount different from the amount calculated in accordance with the formula in subsection 27H(2). This substituted amount is calculated by the alternative method in this Ruling. The Commissioner will exercise his discretion if he considers the subsection 27H(2) amount is inappropriate having regard to the terms and conditions applying to the pension and to any other matters he considers to be relevant. In this regard, we appreciate that it will be difficult for British National Insurance Scheme pensioners to calculate the exact amount of UPP because of difficulties in obtaining all the necessary information and the complexity of the calculations involved. We accept that contributory pensions from the Scheme have a deductible amount, and we consider 8% of the pension received to be an appropriate estimate of that amount. In selecting a fixed percentage exclusion, it is a relevant factor that the pensions are not indexed for inflation. | 19. Where the Commissioner does not exercise his discretion under subsection 27H(3), the deductible amount of a pension is determined under subsection 27H(2) if it was first payable on or after 1 July 1983; or former section 26AA if payable before 1 July 1983. Essentially, it is the UPP of a pension distributed over the expected term of the pension. | 20. For the purposes of this Ruling, we consider Category A pensions of married people to be reversionary (because a widowed mother's allowance, a widow's pension or a Category B pension may be paid to the surviving spouse). Therefore, for pensions first payable on or after 1 July 1983, the joint life expectancy of husband and wife is taken into account in determining the relevant number. Pensions payable before 1 July 1983 are governed by former section 26AA which provides that only the pensioner's life expectancy is to be taken into account. | 21. A person's entitlement to a widowed mother's allowance, widow's pension or Category B pension is dependent on the contribution record of the spouse who has died and not on the pensioner's own contribution record. Contributions which secured entitlement to the deceased spouse's Category A pension (or would have secured entitlement to one had the spouse not died) also secure entitlement to the widow/er's pension. For the purposes of this Ruling, we consider the widowed mother's allowance, widow's pension and Category B pension to be a reversion of the deceased spouse's pension. Therefore, the deductible amount of the deceased's pension will carry over to a widow/er's pension which is first payable on or after 1 July 1983. | 22. In some cases, a single contribution record may secure entitlement to a number of consecutive pensions. For instance, a widow with a dependent child may first receive a widowed mother's allowance based on her deceased husband's contribution record. When her child ceases to be dependent she may receive a widow's pension. Finally, when she reaches retirement age, she may receive a widow's Category B pension. All these pensions are based on the widow's deceased husband's contribution record and, for the purposes of this Ruling, are considered to be a single pension. Therefore, the deductible amount is determined when the first pension is received. | 23. A married woman may be entitled to a married woman's Category B pension based on her husband's contribution record. However, the purchase price of her Category B pension is the same as the purchase price of her husband's Category A pension, which is paid concurrently. Therefore, there is no deductible amount to be used against the wife's pension while the husband is still alive (rather, the deductible amount is off-set against the husband's pension). A widowed mother's allowance, widow's pension and Category B pension are all based on contributions of someone other than the recipient. These contributions are not included in the definition of UPP in former subsection 26AA(2) (which is applicable to pensions payable before 1 July 1983). | 24. Contributory pensions are paid under the Scheme to people who satisfy certain contribution requirements. The requirements vary according to the contributor's circumstances and may differ from year to year. The cost of satisfying these requirements is the purchase price of the pension. To put it another way, contributions which secure entitlement to a pension form part of its purchase price. As contributions which secure entitlement to the pension are not tax deductible or rebatable in Australia, they form undeducted purchase price, or UPP. | 25. In some cases, to secure entitlement to a Category A pension, a person may supplement a deficient contribution record with contributions of a former spouse. As the contributions secure entitlement to the pension, they can form part of the UPP of a pension first payable on or after 1 July 1983. However, if the contributions used to supplement a person's contribution record have already been included in the UPP of the spouse's pension, there is no basis for allowing them to be included in UPP a second time in respect of a pension secured by virtue of the supplement. | 26. Contributions which are not actually paid but are merely credited are not part of the purchase price of a pension. However, contributions made to another country's national insurance scheme which are credited to the contributor's record for the purpose of securing entitlement to the pension do form part of UPP. This is because a payment has been made to receive the credit (that is to say, the credit, which secured entitlement to the pension in respect of a particular year, has a purchase price). | Definitions: 27. Terms used in this Ruling have the following meanings: | Tables: 28. The tables referred to in this Ruling are set out below. | Year in which contributions first made | Number of credited contributions | Cumulative value of credited contributions* | * Note that the amounts shown in column 3 represent the cumulative total, not the value of each contribution. | Yearly lower earnings limit | Maximum amount of Class 1 contributions in a year which can form part of UPP | 1986-1987 1987-1988 1988-1989 | Depends on earnings factor (see Table 6) | Pd1,846.00 - 2,859.95 Pd2,859.96 - 4,679.99 Pd4,680.00 - 13,779.96 | Pd1,976.00 - 3,119.99 Pd3,120.00 - 4,940.03 Pd4,940.04 - 14,820.00 | Pd2,028.00 - 3,379.99 Pd3,380.00 - 5,199.99 Pd5,200.00 - 15,340.00 | Pd2,132.00 - 3,639.99 Pd3,640.00 - 5,459.99 Pd5,460.00 - 15,860.00 | Pd2,236.00 - 3,899.99 Pd3,900.00 - 5,979.99 Pd5,980.00 - 16,900.00 | Examples: 29. The following examples illustrate the method used for calculating the UPP and deductible amount of pensions received under the British National Insurance Scheme. | Number and class of contributions | Commissioner of Taxation 13 May 1993 | Previously released in draft form as EDR 91


Legislative references: - ITAA 26AA; ITAA 27H
Subject references: - Australia/United Kingdom Double Tax Agreement - British National Insurance Scheme - currency translation - deductible amount - pensions - undeducted purchase price