Retirement, Strategy, Superannuation

Transfer balance cap catches

If there’s something all laws have in them, it’s unintended consequences. The introduction of the transfer balance cap (TBC) is no exception. It’s got them, just like fleas on a dog’s back.

One example occurs with death benefits payable to a surviving spouse in some statutory defined benefit schemes. Whether the tax law around TBCs or the rules of the relevant scheme need to be changed is a moot point. However, there are cases where the application of the TBC and the imposition of the penalty interest rate must be considered as just inequitable, if not grossly unfair.

I refer to the situation that occurs in some funds where a pension becomes payable to the surviving spouse on the original pensioner’s death. The original pension is considered to be non-reversionary and on the death of the original pensioner a new pension is payable to the surviving spouse from the date of death. The pension payable to the surviving spouse is calculated as a proportion of the pension payable to the deceased. In terms of the TBC, the value of the spouse’s pension is reported as at the date of the original pensioner’s death.

As a case study, take for instance a spouse (wife) who is drawing an account-based pension from her SMSF and her husband is receiving a statutory defined benefit pension under the relevant legislation. The husband dies and the wife becomes entitled to a statutory defined benefit pension equal to 50 per cent of the pension payable to the husband as at his death. The value of the wife’s account-based pension for TBC purposes is $900,000 and the value of the statutory defined benefit pension for TBC purposes is $1.7 million.

From the date of the spouse’s death, the defined benefit pension is counted against the survivor’s TBC. There is no ‘luxury’ in the 12-month amnesty available as in the case of reversionary pensions before they are measured for TBC purposes, nor is there some leeway provided if the surviving spouse should commence a death benefit pension as soon as practicable after the death of their loved one in the case of SMSFs and Australian Prudential Regulation Authority-based funds.

What this means is the surviving spouse has exceeded her TBC precisely on the date of death of her husband and is up for the interest rate penalty immediately due to the excess. To ensure no interest penalty was applied to the surviving spouse’s pension, she would need to commute their account-based pensions the day before the death of her husband. This is something that is difficult to predict, unless she has a hand in his demise. In any case, the superannuation situation is something that is probably not top of her mind at the time, believe it or not.

In other cases, a surviving spouse may be entitled to a reversionary pension, however, for a period after the death of the original pensioner a higher pension may be payable, after which it decreases to a proportion of that is payable to the deceased. An example could be a reversionary pension that is equal to the pension payable to the deceased for, say, 12 weeks, after which it is reduced to two-thirds of the pension payable to the deceased.

For TBC purposes the value of the pension will not be based on the two-thirds pension, but on 100 per cent of the pension payable to the deceased. If the surviving spouse is receiving a pension from another source, they may exceed their TBC when it will not be a true reflection of the long-term value of their situation. Had that value been used, it is possible the TBC may not have been exceeded. At least the consolation prize is that the 12-month amnesty concerning reporting of the value of the reversionary pension will apply until the anniversary of the original pensioner’s death.

In these cases, the surviving spouse is in a no-win situation, which is something that does not apply to other death benefit pensions because of the way in which they are measured against the survivor’s TBC. Surely some type of discretion can be applied to these situations so reporting of the amounts for TBC purposes is not required until 12 months after the death of the original pensioner in the same way as reversionary pensions. This will help avoid the position where the survivor is unable to avoid the interest penalty, especially where the commutation of pensions should have been made prior to the death of a spouse.

Graeme Colley is SMSF technical and private wealth executive manager at SuperConcepts.

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