SMSF members who plan on using changes to regulations to enact the commutation of a market-linked pension (MLP) without being saddled with an excess transfer balance must use correct reporting dates to avoid further tax.
Smarter SMSF chief executive Aaron Dunn said the changes to the Treasury Laws Amendment (Allowing Commutation of Certain Income Streams) Regulations 2022, which allow people with an MLP started before 1 July 2017 to convert it into a new MLP without an excess transfer balance, have created a new reporting date since they commenced on 5 April 2022.
“With these regulations finalised, the ATO has provided us with some updates around the transfer balance account reporting requirements to ensure the debits and credits are accurate where these pensions have been commuted and a new pension has started,” Dunn said during a webinar today.
“If the pension has been commuted before 4 April 2022, you should report 5 April 2022 as the reported effective date even though the events have happened previously.
“The effective date here is the commencement of the regulations and that is going to be the attributable date for the earnings around excess transfer balance earnings for that arrangement.
“If the commutation occurs from 5 April 2022 onwards, you should report the date of the events based upon the effective date when that commutation occurs.”
He added reporting from a valuation perspective should be from the date the commutation occurred, not the reported date, and pointed to an example of a commutation that took place on 1 July 2018.
“In this case, we are using the value from 1 July 2018, but the reporting date would be 5 April 2022 and that ensures that we get the earnings calculation correct,” he said.
He highlighted the ATO will be supporting SMSF members impacted by the regulation change by not applying late lodgement penalties where a trustee is required to report a transfer balance event that relates to this issue only for a member and where the lodgement due date for the event is prior to 1 January 2023, and the fund lodges the transfer balance account report by that date.
“The fund should commence that reporting as soon as practicable because of the fact that people will begin to accrue excess transfer balance tax as a result of the change,” he said.
“If you have an arrangement that may have occurred, such as the example on 1 July 2018, the longer that we take to get this done, the longer the period of time earnings tax will be applied or that excess transfer balance tax liability will accrue from 5 April 2022.”