The federal government’s proposal to allow SMSF members to exit legacy pensions and draw down reserves may not eventuate if its separate plans to introduce the Division 296 tax are unsuccessful, a technical specialist has said.
Colonial First State head of technical Craig Day said one of the key benefits of moving out of a legacy pension was to avoid a potential Division 296 liability, which could occur with large older pensions which could not be commuted to avoid the new tax rules.
“The reason for the question marks here is we had it confirmed to us by Treasury that these rules are all dependent on the Division 296 rules passing through parliament,” Day said during an online briefing today.
“If we don’t get the Division 296 rules passed, then these rules [for legacy pensions] are not really required because the government sees them as a way to get complex complying defined benefit pensions out of SMSFs as they are hard to value for Division 296 and total super balance (TSB) purposes under the new rules.
“So, if we don’t get those tax rules coming through, then to what extent can we expect these pension changes to come through?”
He added the Division 296 legislation was now likely to be debated when the Senate sits for seven days in February 2025 after the government deprioritised its passage in order to pass a number of other bills that were stalled in the upper house.
This timing may result in the bill failing to pass if an election was called early next year and it would have to be reintroduced, providing the government with an opportunity to present a revised version of the tax, he noted.
“It really comes down to what happens next year and what happens with who wins the election. If it’s the Labor Party, they may have the opportunity to reintroduce the bill, but do so in a way that addresses the issues the Senate has with it,” he said, pointing to concerns about the taxing of unrealised gains and the lack of indexation.
“Instead of calculating earnings as differences in TSB, maybe they could apply a deemed earnings rate or allow some funds, if they can do it, to calculate income that is attributable to each member and figure out what proportion is in relation to balances over $3 million.
“In relation to this, we’ve had reports of people getting ahead of the curve here and telling clients they need to take action now to avoid these rules.
“Any sort of action before we’ve got final legislation is very premature and could end up costing the client, so we would not support that action at all.”
