SMSF members planning in reporting a revised commutation value on a pre-1 July 2017 market-linked pension may wish to hold off on that move until further information is released by the government around the treatment of commutations in excess of a transfer balance account, a technical expert has advised.
Accurium head of education Mark Ellem said while retrospective amending legislation applicable from June 2020 meant any commutation from a pre-1 July 2017 market-linked pension required a revised calculation of that commutation and either its reporting or re-reporting to the ATO, a proposal in the “Mid-Year Economic and Fiscal Outlook (MYEFO)” gave reason to pause this plan.
“When the amending legislation came out, the ATO put out a practical compliance approach with two choices for where you didn’t report the commutation and restart of the new market-linked pension or you could report a commutation value other than nil,” Ellem said.
“Now those who did record a value relied on the examples in the explanatory memorandum to the original bill and calculated accordingly, but the revised rule is somewhat different from that and can result in a different outcome.
“When you do that calculation it may result in a higher transfer balance account balance apart from what otherwise would have been expected and the ATO updated their website to say funds will need to review the information already reported and consider whether this needs to be re-reported.”
He said the ATO had planned to provide further guidance by the end of November 2020 as to how this reporting was to be done, but had yet to do so, however, advisers should still be reviewing their client base to see what funds may have commuted a relevant pension before the new calculation method was released.
Advisers also should be revising transfer balance cap debit calculations in order to work out whether there was any cap space and what effect this might have on a member’s transfer balance account, but should hold off reporting to the ATO, he said.
“One of those reasons is just before Christmas as part of the MYEFO statement in December, there was an proposal put forward to allow for non-commutable pensions like a market-linked pension to be commuted where they are in excess of the member’s transfer balance account,” he said.
“This was another one of those technical conundrums because if a person commenced a market-linked pension after 30 June 2017, it wasn’t actually a market-linked pension, so the credit for transfer balance cap purposes was simply the value used to commence the pension.
“Where that resulted in an excess, you could end up with a scenario where the capital used to commence that new market-linked pension was greater than $1.6 million and therefore you end up with an excess.
“The market-linked pension is non-commutable, so you could not commute the excess, but this announcement by the government proposes to allow computation of the amount in excess of the member’s transfer balance cap.”
Draft legislation to allow this had yet to be released, but advisers should be reviewing SMSFs with pre-1 July 2017 market-linked pensions that may be in excess of the member’s transfer balance cap to find members who were in excess of the capital backing their pre-1 July 17 market-linked pension, he said.
“Review your client base for those clients because this proposal may provide an option to consider for restructure, which will depend on what the taxation outcome of those pension payments will be, keeping in mind a post-30 June 17 market-linked pension is not a cap defined benefit income stream, so it’s not subject to a $100,000 defined benefit income cap,” he said.
