Undeducted purchase price: Commissioner's discretion

Will the Commissioner exercise his discretion under subsection 27H(3) of the Income Tax Assessment Act 1936 (ITAA 1936) when calculating the deductible amount for a pension paid from a source in Country A?

No. The Commissioner will calculate the deductible amount using the formula contained in subsection 27H(2) of the ITAA 1936.

The taxpayer receives a pension from Country A. The Country A double tax agreement with Australia provides that any pension income received from Country A by an Australian resident is taxable in Australia. The taxpayer had contributed towards the Country A pension and hence is entitled to claim a deduction based on the UPP of the pension. The taxpayer considers that use of the formula contained in subsection 27H(2) of the ITAA 1936 to calculate the deductible amount is inappropriate, and the Commissioner should instead use his discretion under subsection 27H(3) of the ITAA 1936 to calculate the deductible amount having regard to such matters as the Commissioner considers relevant. The taxpayer considers the deductible amount should be calculated in line with Taxation Ruling TR 93/13. Taxation Ruling TR 93/13 allows some recipients of UK pensions a deduction of 8% of the pension received each year.

Taxation Ruling TR 93/13 applies only to the calculation of the UPP of pensions from the British National Insurance Scheme (BNIS) and only to BNIS pensions that are based on the person's contributions (contributory pensions). Pensions paid by any other British authority are not within the ambit of Taxation Ruling TR 93/13. With respect to BNIS pensions, the Commissioner exercises his discretion under subsection 27H(3) of the ITAA 1936 because of the difficulty encountered by pensioners in obtaining all the necessary information for the purposes of calculating the deductible amount using the prescribed method contained in subsection 27H(2) of the ITAA 1936.

The Small Taxation Claim Tribunal in an unpublished case subsequently confirmed the Commissioner's calculation of the taxpayer's deductible amount.