The ATO will be unable to provide relief to SMSFs that have commuted a pre-2017 market-linked pension (MLP) which has resulted in an excess transfer balance tax determination, according to an SMSF legal expert.
DBA Lawyers principal Dan Butler said despite being aware of the issue of the determinations, the ATO had no room to move under recently passed legislation that has led to the determinations being applied.
Speaking at a recent webinar presented by the legal firm, Butler said the passing of Treasury Laws Amendment (2019 Measures No 3) Act 2019 in June 2020, which was made retrospective from 1 July 2017, impacted MLPs, that were also capped defined benefit income streams, that commenced before 1 July 2017 but were commuted or restructured after that date.
Prior to the legislative change, the transfer balance account (TBA) debit on a commuted market-linked pension had been calculated using a formula consisting of the annual entitlement multiplied by the remaining term, but the amendment states the formula to be used now is the original TBA debit reduced by the value of previous pensions received or entitled to be received at the date of commutation.
As a result of this change, Butler noted some SMSFs, which have been required to report commutations by November 2020, were receiving excess transfer tax assessments or determinations.
He said the ATO had raised concerns about the debit provisions for an MLP and sought amendments in 2017, but the “legislation has taken three years to get fixed and it is now retroactive and is very different from what people expected in 2017”.
“I brought up the issue at a recent ATO consultation forum and pointed out the legislation is three years late and people will be hit with an excess transfer balance tax assessment, and is there a remission proposed for that,” he said.
“I was told: ‘No, our hands are tied and we do not have legislative basis to let people off from retrospective legislation that is over three years old.’
“It is a shame parliament did not consider that and the ATO stating it cannot give remission because it does not have the power.”
He said the issue would need further lobbying to enact any more change and shortly after the legislation was passed the SMSF Association called on the ATO to use its regulation-making powers to create a write-off debit to deal with the issue.