The commutation of a legacy pension with asset test exempt status under the five-year amnesty allowing SMSF members to do so will not have any long-term social security implications due to a change in the relevant regulations.
According to Smarter SMSF education and technical manager Tim Miller, the commutation of a legacy pension could result in the loss of the asset test exemption for the SMSF member receiving that income stream, which in turn will impact their ability to access Centrelink benefits.
Further, Miller recognised there was a danger, upon loss of the asset test exemption, the secretary of social security could determine a member was never entitled to Centrelink benefits and make them pay back these types of monies received spanning the previous five years.
However, he pointed out fears of this scenario eventuating have been allayed.
“The [intent of the amnesty] was to ensure nobody gets a Centrelink debt out of commuting these pensions. But to [achieve] that [there needs to be] a waiver of debt for social security purposes. That waiver was introduced on 26 March so we do have that,” he acknowledged.
“[It means] the secretary of social security will have the power to waive any debt subject to commuting an asset test exempt pension.”
He pointed out the regulations granting the secretary of social security this discretionary power cannot take effect until a 15-day disallowance, or objection, period has expired. Given the current parliamentary sitting calendar, he anticipated the earliest this period would end is early September.
However, he recognised the waiver can be backdated to cover any commutations that took place from December 2024 onwards, but still recommended practitioners and trustees take the duration of this process into account before commuting any asset test exempt legacy pensions.
“So really what we’re saying with asset test exempt pensions is it will be a positive outcome for everybody. People will be able to commute their asset test exempt pensions, however, from a safety point of view, unless there’s an urgent reason such as the health of the client and they want to unwind it to allocate the reserves out of the pension interest, it’s often better to potentially just hold fire on commuting asset test exempt pensions to this point in time,” he advised.