Issue
How is the annual deductible amount of the UPP calculated in relation to a lifetime pension paid from a retirement fund established and managed outside Australia, where there is no Taxation Ruling or Taxation Determination published which provides for an alternative calculation or Commissioner's discretion under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
The annual deductible amount of the superannuation pension is ascertained in accordance with the formula found in subsection 27H(2) of the ITAA 1936.
Facts
The taxpayer receives a pension from a retirement fund established and managed outside Australia.
There is no Taxation Ruling or Taxation Determination published which provides for an alternative calculation or Commissioner's discretion under section 27H of the ITAA 1936.
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.
The pension became payable after 30 June 1994.
The pension is payable for life, and on death reverts to the spouse of the taxpayer.
The taxpayer has provided the total amount of contributions, other than employer contributions, paid to the retirement fund towards purchase of the pension.
The residual capital value of the pension is nil.
Reasons for Decision
As the pension commenced to be payable after 1 July 1983, section 27H of the ITAA 1936 applies. Under subsection 27H(2), the annual deductible amount of a foreign pension is ascertained in accordance with the formula: where: A = is the relevant share of the pension payable to the taxpayer in relation to the year of income (in this case all of the pension is payable to the taxpayer, so A = 1); B = is the amount of the undeducted purchase price of the pension; C = is the residual capital value; and D = is the relevant number in relation to the pension.
The 'undeducted purchase price' of the pension is defined in subsection 27A(1) of the ITAA 1936. The undeducted purchase price of the pension is the sum of contributions, other than employer contributions or contributions paid by another person under an agreement to which the employer was a party, paid to the pension fund towards purchase of the pension.
Under subsection 27H(4) of the ITAA 1936 where 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.
In Taxation Ruling IT 2157 the Commissioner states, in paragraph 27, that in cases where a pension reverts to a surviving spouse the relevant number will be the greater of the two life expectancies.
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, pensions received in foreign currency should be translated to Australian currency on the following basis: (a) where pensions are remitted to Australia - at the exchange rate applicable when each instalment of pension is received; or (b) 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, the annual deductible amount may also be translated to Australian dollars at the average annual exchange rate for the year.
The average annual exchange rate is available from the ATO Superannuation Hotline Ph: 131 020.
Paragraph 18 of Taxation Ruling IT 2157 states that where a pension commences during a year of income, then subsection 27H(3) is to apply. The deductible amount is the proportion of the amount calculated under subsection 27H(2) that the period for which the pension is payable during the year bears to the full year.