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Legacy pension reserves tax lacks logic

Legacy pension reserves tax

Charging a tax on legacy pension reserves appears to be based on incorrect assumptions about their source and has come without any explanation from government.

Imposing a tax on the reserves of a legacy pension that may be rolled over into market-linked products under proposed government changes does not make sense and appears to ignore the role of markets in boosting those amounts, a technical specialist has claimed.

Australian Executor Trustees senior technical services manager Julie Steed said a government proposal in the budget to allow pension holders to move out of legacy products was a good result after many years of lobbying for the change, but a 15 per cent tax on the reserve was based on inaccurate assumptions.

“I am unsure why Treasury would want to do this, unless it has the view that large reserves are the result of large reasonable benefit limit compression strategies that were available at the time the pensions were in the market,” Steed told selfmanagedsuper.

“The main reason large reserves exist is investments have exceeded the actuarial projections made 15 years ago and to penalise pension holders for this seems unfair.

“If you examine the actuarial assumptions in 2001 and 2002, they are very conservative assumptions and the 15 per cent tax does not seem logical and there has been no reason given for the thinking behind it.”

She said applying the tax and treating a reserve amount in a lifetime or life expectancy pension as assessable income was unusual as a reserve amount does not benefit from any exempt current pension income, yet it did open doors to new planning opportunities.

“I appreciate that a 15 per cent tax may be better than allocating the reserve and having it treated as an excess concessional contribution and included in the assessable income of the individual member, but for many smaller accounts this may not be the case,” she noted.

“There may need to be lots of activity in June and July this year of allocating reserves within existing contribution caps and advisers may benefit from liaising with their clients’ actuary.

“It may also create an opportunity for some clients to roll the full amount to a market-linked income stream and then use the amnesty to blow up the market-linked pension, which won’t have any reserves.”

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