The treatment of reserve allocations from legacy pensions as a contribution for Division 296 purposes is another reason the government needs to defer its start date and make changes to the operation of the planned new impost, the SMSF Association has stated.
Speaking at its recent Technical Summit 2025 in Sydney, association chief executive Peter Burgess said the regulations that allowed reserves to be allocated from a pension had passed the disallowance period and were now locked in, but they run into the treatment of contributions under the proposed Division 296 rules.
“From 7 December [last year], reserve allocations that were previously classified as concessional contributions will now count against the non-concessional cap,” Burgess said.
“There are some unresolved issues here when it comes to the allocation of reserves and how they’ll be taxed under Division 296.
“When it comes to these types of pensions, the amount that is currently included in the total super balance is a special value, which will be replaced with a family law value.
“Under this new value, when these pensions are commuted, reserves will then be counted against your client’s total super balance.
“Their balance will be increased by the amount of any reserves that are allocated because they don’t meet the definition of a contribution.
“That means they are going to possibly get kicked with a whopping amount of Division 296 tax because their total super balance is going to be increased substantially during that income year.”
He said this was an additional reason for the Division 296 tax to be deferred alongside the fact its introduction and backdating in the next few months would heavily impact the calculation of total super balances for all superannuants.
“We need to give people the opportunity to act on these new regulations before the start of the legislation,” he said.
“We need people to be able to access these rules and commute these pensions and at least have certainty as to how the reserves are going to be treated.
“Right now they don’t have certainty if they are going to commute these pensions as to how reserves are going to be taxed for Division 296 purposes if they bring in the tax with a start date of 1 July 2025.
“Ideally, we want a deferral to allow people to be able to do this before the start of Division 296 and we are also asking for the definition of contributions to include allocations from reserves so that amount will be taken off and won’t count as earnings under the new tax.”
