Under proposed changes to allow SMSF members to exit legacy pensions, reserve amounts will be treated differently depending on how they are defined and understanding this distinction will be crucial to timing the commutation of an income stream, according to a superannuation specialist.
Draft regulations released by Treasury in September proposed a five-year window for members to commute certain non-commutable legacy pensions and also stipulated reserve allocations linked to pensions will be excluded from counting towards a member’s contribution caps.
Colonial First State senior technical manager Tim Sanderson pointed out the draft regulations go further and propose to count an allocation from any other reserves, such as a leftover anti-detriment reserve, that previously have counted towards the concessional contribution cap to instead count against the member’s non-concessional cap.
Sanderson confirmed these proposed changes to reserve allocations will not be subject to the five-year window that would apply to the ability to commute legacy pensions.
“At the moment the default position is that unless an exemption applies, a reserve allocation is an amount that counts towards the member’s concessional contributions cap,” he noted in a recent FirstTech podcast.
“Under these draft regulations, [there will be] a permanent move of those rules from the concessional cap to the non-concessional cap with certain exemptions, so that would apply in an ongoing way in the future.
“[There will be no five-year window] and there’s potentially greater flexibility to allocate other amounts down the track and have them counting towards the non-concessional cap if the exemption doesn’t apply.”
He added further guidance may be needed to establish which amounts qualify under the new cap rules and how best to apply them in practice.
“Historically, the ATO have taken a series of differing views on how much a reserve is said to be supporting a pension which can qualify for that existing reserve allocation exemption,” he noted.
“More recently, it’s taken the view that for life expectancy pensions and flexi-pensions, the pension reserve is limited to the commutation amount and anything above that is really just a general non-pension reserve.
“We really need this to be clarified before knowing more about what part of these reserve allocations will be exempt from or count towards the non-concessional cap when making that decision to commute.”
Despite calls to exclude reserve allocations from contribution caps entirely, Colonial First State head of technical Craig Day considered the shift in the draft regulations a step in the right direction.
“Even where an exemption doesn’t apply, this will be really good news for many SMSFs with large residual reserves as larger allocations will often be able to be made due to the higher non-concessional cap so [it] can help reduce that reserve balance more quickly,” Day acknowledged.
