Proposed changes to allow SMSF members to exit legacy pensions should include provisions enabling the allocation of income stream reserves pertaining to a deceased beneficiary, as well as ATO discretion to permit exits of these structures after the amnesty period ends, according to the SMSF Association.
The industry body put forward the additions in its submission regarding exposure draft regulations released by Treasury in September and also requested any asset test exemptions are not lost when a legacy pension is commuted.
The association made the call to allow the allocation of reserves for deceased pension holders after noting the draft regulations did not provide any pathway for such an event where someone had died and any allocations would follow current superannuation law.
“Ideally, on the commutation or cessation of the pension, the regulations would permit the pension reserve to be allocated to the deceased member’s account and paid as a death benefit to the deceased member’s SIS (Superannuation Industry (Supervision) Act) dependants or their estate,” the submission stated.
“This would ensure a range of circumstances could be addressed, including where there is no surviving spouse. It would also avoid the need for a beneficiary to become a member of an SMSF for the sole purpose of receiving an entitlement from the fund’s pension reserve.”
Noting the five-year timeframe that would apply, the association also called for the ATO commissioner to be given discretion to allow the commutation of a legacy pension and the allocation of reserves under the same conditions beyond the prescribed five-year period.
The reason for this would be the proposed period may be insufficient for people to seek advice on complex matters alongside the limited number of advisers who were familiar with legacy pension products.
“The commutation of a legacy pension is a complex task that should not be undertaken without first obtaining appropriate and sufficient expert advice, which is likely to involve an individual consulting with several professionals,” the association said.
“Given the heavy advice burden, coupled with the relatively small number of suitably experienced advice professionals available to provide such detailed advice on largely obsolete products, impacted members may find it difficult to obtain the necessary advice within the prescribed timeframe.”
The body also called for Treasury to work with the Department of Social Services to find a solution to ensure asset test exemptions were not immediately lost when the regulations are tabled.
“By virtue of the fact that legacy pensions will be commutable during the proposed five-year period, under circumstances not permitted by 9A(2)(h) [of the Social Security Act], this raises the concern that from the moment these regulations are finalised, all legacy pensions will immediately cease to meet the requirements of an asset test exempt income stream,” it said.
“It is noted that section 9A(5) of the Social Security Act 1991 allows the secretary to determine that an income stream is an asset test exempt income stream for the purposes of that act.”
