Trustees looking to exit legacy pensions may have to act before the end of the current income year if they are set to receive a lump sum that would push their total super balance (TSB) past $3 million and make them exposed to the proposed Division 296 tax, an SMSF administrator has noted.
Heffron managing director Meg Heffron recognised trying to reduce super balances below $3 million prior to 30 June this year was not necessary yet for most people as the date that would concern them, if the bill become law, was most likely to be 30 June 2026.
However, the end of the current financial year may be when people receiving a complying lifetime, complying life expectancy or flexi pension that might be commuted in the future, and those likely to receive a reserve allocation that won’t count towards their contribution cap, should look to reduce their balance below $3 million.
Using an example of a complying lifetime pension being paid from an SMSF, Heffron pointed out the Division 296 tax was based on changes in a member’s TSB from year-to-year and a pension commutation would heavily impact that figure.
“A member who has a complying lifetime pension has a strange amount included in their TSB for this pension. It’s not the amount of their pension account or even the actuarial value of their pension. It’s whatever was reported back in 2017 for their transfer balance cap,” Heffron said in a post on the firm’s website.
“Ever since, the same amount has been recorded for that pension in their TSB.”
She noted this amount will influence the member’s Division 296 tax liability.
Further Heffron indicated the pending bill associated with the measure will also introduce rules to more accurately value the pension each year based on the member’s age and, in effect, cause the said figure to rise each year. She confirmed this will not be an issue until the member decides to commute the pension.
“At that point perhaps the trustee will take advantage of the new reserve rules and allocate the entire amount previously supporting the complying lifetime pension to the member’s accumulation account,” Heffron suggested.
“This amount might be way higher than the $2 million value placed on the pension. What if it is much higher, say $3.5 million?
“We don’t know for absolute certain how this ‘bonus’ $1.5 million would be treated because the Division 296 tax legislation was written before the reserve rules were changed in December 2024.
“Under the original drafting, any reserve allocation that doesn’t count towards a contribution cap is part of the member’s earnings for Division 296 tax.”
Given this situation, Heffron recommended SMSF members with large balances to consider acting before 30 June 2025 or consider alternatives strategies where they defer their pension allocation until their balance is less than $3 million, or take specific steps to ensure the allocation does count towards their non-concessional contributions cap and thus side-step the tax.
“Winding up legacy pensions and dealing with reserve allocations should be handled carefully but there is an element of urgency now for those who are also caught in the crosshairs of Division 296 tax,” she warned.
