The SMSF Association has called on the federal government to include an amnesty for legacy pensions in the 2024 budget with regard to the proposed $3 million soft cap in light of the confirmation as to how these income streams will be valued for the measure.
“Treasury has confirmed that the intent is for an SMSF paying a complying lifetime or life expectancy pension to use the family law split factors in the relevant schedule of the Family Law (Superannuation) Regulations 2001 to value the pension for Division 296 purposes,” SMSF Association chief executive Peter Burgess revealed.
“[This is problematic as] these types of pensions do not have a family law split value, meaning under the draft regulations it will require a different set of valuation factors to be used rather than the default family law split factors that appeared to be the intent of the regulation.”
The industry body pointed out the basis of valuation for legacy pensions will also lead to an administrative challenge as to whom the responsibility for gathering and maintaining the relevant data for Division 296 tax will fall.
“Considering the ATO doesn’t have the required information, we assume the funds themselves will be asked to do this calculation and report the value in their annual return,” Burgess said.
If this is the case, he identified other subsequent issues trustees will have to confront.
“Compounding this difficulty is the relatively small and declining number of these pensions, meaning it’s unlikely SMSF administration platforms will undertake this calculation,” he noted.
“There are already many legacy pensions where the costs of administering them is substantial and given the likely complexity of the Division 296 calculations, irrespective of who performs them, these costs look set to increase for impacted members.”
According to the association, the requirement to report the legacy pension values to the ATO once calculated will add an additional layer of complexity and cost to the exercise, as will the treatment of reserves linked to these income streams.
“Division 296 is about to make the valuation of pension reserves and allocations to members a whole lot more complex and we are calling on the government to adopt a wholistic approach in managing reserves that avoids nonsensical tax stacking,” Burgess suggested.
“An amnesty will help reduce the remaining number of these legacy pensions by giving individuals the opportunity to take up new more innovative account-based retirement income products. This in turn will make the administration of Division 296 a whole lot simpler and efficient for taxpayers, regulators and the superannuation industry.”
