As we’ve moved through a phase of implementation with the superannuation reforms from 1 July 2017, a range of relatively small, but important issues have been flagged with Government regarding the treatment of Market Linked Pensions, and death benefit rollovers.

Market Linked Pension commutations

For Market Linked Pensions, any pre-existing income stream was initially captured under as a capped defined benefit income stream (CDBIS) and when applying the special value formula

annual entitlement multiplied by the remaining term of the pension (in whole years)

this amount significantly inflated the amount to be reported for transfer balance cap purposes.  As a result, it meant in certain circumstances that SMSF members that had both MLPs and Account Based Pensions (ABP), may have been required to commute more of the ABP than what would have otherwise been required (if the MLP was assessed on its account value at 30 June 2017).

Interestingly though, any MLP commenced after 1 July 2017 is not a capped defined benefit income stream, therefore meaning that for transfer balance cap purposes, the value to be reported is based upon the commencing value of the income stream.  As a result, some fund members actively looked to commute their MLP post 1 July 2017 with the view to re-purchasing, resulting in available cap space to move accumulation phase benefits into the retirement phase.

However, under the current legislation, where a CDBIS is commuted on or after 1 July 2017, the transfer balance debit, worked out under the special value rule is subsection 294-145(1) of the ITAA 1997 would be nil. Therefore, when the member re-commenced the new MLP, this may have caused them to exceed their TBC or have a higher than anticipated transfer balance account.

To address this issue, the Assistant Treasurer, Stuart Robert MP has announced that the Government will fix this error.  Currently, the ATO have issued CRT Alert 066/2018 to address the issues surrounding reporting for transfer balance cap purposes.  However, the Government intends on finding a more permanent legislative solution to ensure that the value of a commuted market-linked pension is correct.

Death Benefit Rollovers

Where a member dies and part of the death benefit included insurance proceeds, this untaxed element if paid as a lump sum to a tax dependant beneficiary (e.g. spouse) is paid to them tax-free.

One of the changes introduced with the super reforms was to enable death benefits to be rolled over from one fund to another, subject to the compulsory cashing rules outlined in SIS Regulation 6.21 – i.e. lump sum, income stream or combination of both.  Within a SMSF, the surviving member may no longer be appropriate to continue with the fund and as a result decides to wind-up and rollover the existing death benefits to an APRA regulated fund.

On the basis that the death benefits rolled over will continue to meet the rules around compulsory cashing (e.g. pension to be paid up to member’s $1.6m TBC), currently the rollover of an element untaxed would incur tax at the rate of 15% upon receipt by the new super fund.  This anomaly wasn’t the intended outcome with the new death benefit rollover rules.

As a result, the Assistant Treasurer will look to make amendments to the law regarding the tax treatment of death benefits, ensuring that the the transfer of death benefits either out of superannuation or being transferred between super funds will receive the same tax treatment – that is, the benefit will be tax-free in the hands of the tax dependant beneficiary.

For further information about this announcement, you can refer to the Assistant Treasurer’s media release.