An amnesty to allow the holders of legacy pensions to exit them is awaiting clarity on how the federal government may tax reserves and the resolution of loose ends related to market-linked income streams (MLIS), according to the SMSF Association (SMSFA).
SMSFA deputy chief executive and director of policy and education Peter Burgess said while the changes to legacy pensions outlined in the budget were welcome, the government would have to address two issues with MLIS that he believed stood in the way of the start of the amnesty to allow people to move out of a legacy pension.
“One of those issues is the announcement made in December last year where the government stated they will fix the issue where people had commenced a MLIS in excess of the transfer balance cap, but had no ability in the current legislation for that excess to be commuted,” Burgess said at the recent SMSF Association Virtual Technical Summit 2021.
“We understand the government is intending to proceed with that particular measure and it does need to be finalised so we can provide advice to clients as to whether they should take advantage of the amnesty period.”
He said a related issue was the reporting of MLIS commutations following the introduction of a new formula in legislation to calculate the commutation value of an MLIS.
“There is still some uncertainty as to when those commutations need to be reported and in the SMSFA’s view there are some aspects of that formula that still need to be clarified,” he said.
“It’s not clear as to how you apply the formula if the client has a write-off debit or how it would be applied in the case of a reversionary MLIS which has been commuted.
“We are seeking clarification from the ATO as to how the formula would work and those things would need to be clarified before we can start this two-year amnesty period.”
He noted the government’s intention to tax legacy pension reserves as an assessable contribution of the fund lacked detail and questioned which method would be used.
“This is an important issue and is a make or break because there are many lifetime and life expectancy pensions out there that have very significant reserves,” he said.
“If those will be taxed as an assessable contribution, it could result in significant tax liability for the fund and significant disincentive for some clients to take advantage of this measure.
“If we are going to have a situation where these reserves are taxed, what approach will be used?
“The actuary’s best estimate is the most popular view or it may be reserve is what is left over after you calculate the transfer balance cap special value of a pension, or it may be based on the formula in SIS (Superannuation industry (Supervision)) regulation schedule 1B, which calculates the commutation value of some of these pensions.”
