The ATO has updated the way in which a transfer balance cap debit is calculated upon the cessation of a non-commutable life expectancy or market-linked pension that is also a capped defined benefit income stream.
The regulator has stipulated the debit value recognised in these situations will be the amount of the original transfer balance credit for the pension after certain items have been deducted.
To this end, three main amounts need to be taken into consideration.
The first is the amount of any transfer balance debits (other than a debit arising under item 4 of the table in subsection 294-80(1) of the Income Tax Assessment Act 1997 in respect of the income stream before the commutation), with the second being the total amount of pension benefits the person was entitled to receive before the start of the financial year the commutation takes place.
Further, the greater of sum of the pension payments made during the financial year in which the income stream is stopped or the minimum pension paid required for the same period needs to be subtracted from the original transfer balance credit.
The ATO also pointed out where transfer debits relating to a partial income stream commutation on or after 1 July 2017 need to be taken into account, partial commutations arising out of a family law superannuation split will be included.
In addition, the regulator noted in the event of a relationship breakdown between spousal SMSF members, only debits arising when an income stream is divided (a payment split) are disregarded when calculating the value of the transfer balance cap debit.
Finally, it also noted how the methodology will apply in circumstances where an income stream is reversionary.
“Where the income stream started to be paid to a reversionary beneficiary on or after 1 July 2017, only the benefits the reversionary beneficiary was entitled to receive are considered when calculating the value of the debit,” it said.
