The treatment of reserves originally established to fund a legacy pension, such as market-linked, life-expectancy and lifetime income streams, announced in last week’s federal budget is of great concern as it currently stands, an SMSF technical expert has said.
The budget measure stipulated commuted reserves associated with a legacy pension that members choose to cease and wind back into the accumulation phase of the SMSF will not be counted towards an individual’s concessional contribution cap and will not trigger excess contributions.
Rather they will be taxed as an assessable contribution of the fund (with a 15 per cent tax rate), recognising the prior concessional tax treatment received when the reserve was accumulated and held to pay a pension.
“[You might be] thinking 15 per cent, that’s okay, that’s not a particularly high amount. But remember what it is being applied to. The reserves themselves are part of your client’s capital, and if they’re going to be taxed like a concessional contribution, you’re talking about applying tax to capital,” Heffron managing director Meg Heffron warned during a post-budget presentation last week.
“It’s every bit as bad as death benefits tax which we try our hardest to avoid,” she added.
Heffron pointed out the severity of this tax could be quite significant given it would not be uncommon for these reserves to house large dollar amounts such as $500,000.
“Fifteen per cent of $500,000 is $75,000. So if you had a really large complying lifetime or life expectancy pension, and the way the reserves were defined in this process was to include a very large amount, I reckon this might put you off [choosing to extinguish these types of pensions],” she explained.
“I’m all for simplifying things, and if I was the recipient of [a particular] lifetime pension I would definitely want out, but I’m not sure I’d pay $75,000 for the privilege.
“That’s obviously a tax bill to the fund but it feels like a tax bill to me.”
