ATO, Pensions

Problem with legacy pension fix

SMSF legacy pensions ATO error

SMSF trustees are being prevented from commuting excess transfer balance cap amounts arising from legacy pensions due to an ATO systems glitch.

A flaw in the current ATO processing systems is hampering the efforts of SMSF trustees to manage out legacy pensions being serviced by their funds.

The issue has arisen from situations where a trustee has ceased one market-linked income stream and commenced another, on or after 1 July 2017, resulting in the individual exceeding their transfer balance cap. Legislation introduced last year allows them to commute this excess, but in practice the regulator’s systems are preventing this action from taking place.

“The ATO systems don’t recognise you can make commutations from these pensions. They haven’t updated their systems and they don’t intend to because there are very few people that go through this process,” SMSF Association chief executive Peter Burgess told delegates at the industry body’s recent Technical Summit 2023 held on the Gold Coast.

“So it’s a manual process for [the regulator] when it comes to issuing these determinations calculating the crystallised amounts. They have to override their own systems and do manual calculations.

“The end result is their commutation notices have been delayed and been delayed significantly.”

Burgess pointed out the situation means trustees are facing an additional penalty regarding these excess amounts.

“The problem with that is clients continue to accrue tax on excess transfer balance [cap] earnings every day until that commutation takes place and we can’t [make] the commutation until we’ve got the commutation authority [from the ATO],” he said.

According to Burgess, the SMSF Association is currently working with the regulator to find a solution to this anomaly.

To this end, the industry body is suggesting an amendment be made to the current timeframe the regulator employs regarding these circumstances whereby a commutation authority is issued 60 days after the excess determination has been confirmed.

“What we’re proposing is … once we’ve passed those 60 days [the ATO should] allow people to commute [the excess amount] even if they haven’t got the commutation authority at that time,” Burgess noted.

“So this is one of those issues to be aware of with these legacy pensions when you’re converting [one of them] across into a new market-linked income stream under new provisions which were amended last year.”

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