The Treasury Laws Amendment (2019 Measures No 3) Bill recently passed the Senate.
The ATO has outlined the new way of calculating the debit which arises in an individual’s transfer balance account when a member commutes a market linked pension and the compliance approach they will be taking.
Background
Prior to this amendment, there was an issue with how the debit to an individuals transfer balance account was calculated resulting in a $nil / $0 debit (and therefore subsequent double-counting of credits on commencement of a new market linked pension).
The following is from the Explanatory Memorandum:
For a commutation of a capped defined benefit income stream as set out in items 3 to 7 of the table in subsection 294-130(1) of the Income Tax Assessment Act 1997, the transfer balance debit for a full commutation of the superannuation income stream is currently required to be calculated by reference to the first superannuation income stream benefit the individual is entitled to receive after the commutation occurs.
However, in the case of a full commutation the individual is not entitled to receive any further payments after the commutation occurs because the income stream has ceased, in which case the transfer balance debit will be nil. This is not the correct outcome and was not the original policy intent of the legislation.
What's been changed
This change corrects this valuation error under the pension transfer balance cap rules where a market-linked pension, that is a capped defined benefit income stream, is commuted and rolled over, or involved in a successor fund transfer.
Example of transfer balance account debit for a market linked pension
Daniel was the recipient of a market linked pension (MLP1) from before 1 July 2017 and this was the only superannuation income stream he was receiving on 1 July 2017. The transfer balance credit that arose in his transfer balance account on 1 July 2017 was $1,829,697 (being the special value of his market linked pension at that time).
In the 2017–18 income year, Daniel received superannuation income stream benefits from the pension totalling $91,485. In the 2018-19 income year, he received superannuation income stream benefits from the pension totalling $91,941 (the minimum amount required to be paid to Daniel under the regulations). The account balance of MLP1 as at 30 June 2019 is $1,218,994.
As at 30 June 2019, no transfer balance debits have arisen in Daniel’s transfer balance account in respect of his market linked pension.
Daniel fully commutes MLP1 on 30 June 2019. The debit that arises from this commutation is calculated as:
the original transfer balance credit in respect of the pension ($1,829,697); less
the amount of any transfer balance debits that have arisen in respect of the pension (nil); less
the total amount of superannuation income stream benefits Daniel was entitled to receive before the start of the 2018–19 financial year ($91,485); less
the greater of the superannuation income stream benefits Daniel has received in the 2018–19 financial year, and the minimum amount required to be paid to him under the regulations ($91,941).
Therefore, the debit that arises in Daniel’s transfer balance account as a result of the commutation is $1,646,271.
Due to the regulatory restrictions associated with market linked pensions, after the commutation, Daniel is required to commence a new market linked pension.
As the new market linked pension (MLP2) is not a capped defined benefit income stream, the transfer balance credit that arises reflects its opening account balance of $1,218,994.
Following this credit, Daniel’s transfer balance is $1,402,420. This figure is calculated as the net balance of Daniel’s transfer balance account after the following amounts have been accounted for:
the original credit for MLP1; less
the debit for MLP1; plus
the new credit for MLP2.
That is $1,829,697 –$1,646,271 + $1,218,994= $1,402,420
Reasons for commuting or re-starting a market linked pension
When a market linked pension is commuted, the proceeds cannot be paid as a lump sum, they must be used to purchase another market linked income stream/pension.
The following are potential reasons to commute a market linked income stream:
To reset the term (and therefore change the annual required pension amounts);
Add of remove a reversionary beneficiary to the pension;
Rollover the benefits to either a new provider;
Transfer benefits to a different superannuation fund (for example when winding up an SMSF)
A great fact sheet on Market Linked Pension is available from Accurium here:
There is also a useful technical article from SMSF Adviser here:
If you require any technical assistance with market linked pensions for your SMSF clients, please email technical@intello.com.au
From the ATO: Legislation to change transfer balance account calculations
The Treasury Laws Amendment (2019 Measures No 3) Bill recently passed through the Senate and is waiting Royal Assent. It provides a new way of calculating the debit which arises in an individual’s transfer balance account when a member commutes a market linked pension which is a capped defined benefit income stream.
These changes address the current issue where an individual who commutes a market linked pension which is a capped defined benefit income stream is entitled to a debit valued at ‘nil” and are retrospective to 1 July 2017.
Under the new approach, where one of these pensions is commuted in full, the value of the debit will be calculated as the amount of the original transfer balance cap credit in respect of the income stream - less the sum of the following amounts:
The amount of any transfer balance debits (other than a debit arising from a family law income split) in respect of the income stream
The total amount of superannuation income stream benefits the person was entitled to receive before the start of the financial year in which the commutation took place; and
The greater of:
(1) The sum of the superannuation income stream benefits paid during the financial year in which the commutation takes place OR
(2) The minimum amount required to be paid under regulations 1.07B and 1.07C of the Superannuation Industry (Supervision) Regulations 1994 or regulation 1.08 of the Retirement Savings Account Regulations 1997 during the financial year in which the commutation takes place.
As a result of these changes the ATO is reviewing its compliance approach where we had previously advised funds that we would not, at that time, take compliance action if a fund did not report the required transfer balance account events of the commutation and re-start a market linked pension, or reported a commutation amount other than nil to us. Funds will need to review the information already reported to us and consider whether they need to amend any reporting in line with the legislation.
Acknowledging the focus funds, trustees, agents and other tax professionals have at this time responding to the Government’s stimulus measures and tax time, we intend to provide guidance to trustees and agents in August 2020 regarding the time frame in which we expect any review of the fund’s reporting to be completed and will not take any compliance action against funds who do not review their reporting before this time.