TBC change offers pension fix opportunity

TBC pensions

The indexation of the transfer balance cap may create an opportunity for SMSF members to restructure pensions to reduce tax paid on those income streams.

SMSF members holding a capped defined benefit income stream (CDBIS) may be able to restructure that arrangement due to the pending increase in the general transfer balance cap (TBC) and how that will impact the taxing of these pensions, according to an actuarial certificate provider.

Accurium stated a CDBIS, which are lifetime pensions, life expectancy pensions or market linked pensions commenced prior to 1 July 2017, is assessed against the defined benefit income cap, which is set at the general TBC divided by 16.

“For the 2021/22 and 2022/23 income years the defined benefit income cap is $106,250, which is the general TBC of $1.7 million divided by 16,” the firm noted in a recent online article.

“Under current legislation, the general TBC will increase on 1 July 2023 to $1.9 million and consequently the defined benefit income cap will also increase to $118,750, again the general TBC divided by 16.”

It added that where the CDBIS pension exceeds the defined benefit income cap, 50 per cent of that pension payment would be fully assessable to the member, regardless of their age and the tax components of the pension.

“How much tax the recipient of the CDBIS will pay will be dependent upon their other assessable income, allowable deductions and available tax offsets,” it said.

“SMSFs that are paying a CDBIS will be required to review the amount of any PAYG (pay-as-you-go) withholding amount against the relevant withholding table from 1 July 2023 to adjust for the increase to the defined benefit income cap.”

It noted that while under tax law a lifetime pension, life expectancy pension or MLP were all considered to be a CDBIS, only the latter were useful for restructuring pension arrangements.

“Given that an SMSF has not been able to commence a new defined benefit pension since 31 December 2005, all lifetime and life expectancy pensions paid from an SMSF will be a CDBIS,” it said.

“Of the pensions listed above, the only one an SMSF can still commence is a MLP. However, the commencement of an MLP can only occur as a consequence of the commutation of a complying pension.

“A MLP commenced on or after 1 July 2017 will not be a CDBIS and consequently not subject to the defined benefit income cap.

“This means that where the recipient is at least age 60, which generally they would be, 100 per cent of the payment from the pension will be tax-free.

“This treatment, together with the April 2022 legislative amendment to include an additional exception to the prohibition on commuting a MLP, provides an opportunity for members receiving one of the pensions listed in the table above to consider a restructure of their pension.”

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