In June 2020, we saw the Federal Government finalise legislative fixes to anomalies dating back to the super reform measures that commenced on 1 July 2017.  These legislative adjustments included fixing the debit value that arises when a non-commutable, life expectancy or market linked income stream that is also a capped defined benefit income stream (CDBIS) is commuted.

See our previous article on the announcement of these amendments that are now law:

Government announces technical tinkering for Market Linked Pension and Death Benefit Rollovers

Whilst waiting for these amendments to pass, the ATO had previously released CRT Alert 066/2018 to address its practical compliance approach to the issue surrounding reporting for transfer balance cap purposes.  This included the ATO not taking compliance action at during this time:

“if a fund does not report the transfer balance account events of the commutation or the commencement of the market-linked pension [or] if the transferring fund does not report the commutation and the successor fund does not report the new market-linked pension when the events occur as part of a successor fund transfer”.  

It also stipulated where the fund has reported the transfer balance debit for the commutation as other than nil, it will not apply any compliance resources to the situation.

 

Calculating the debit

The debit value of the superannuation interest just before the full commutation is the amount of the original transfer balance credit in respect of the super income stream less the sum of the following amounts:

• the amount of any transfer balance debits (other than a debit arising under item 4 of the table in subsection 294-80(1) of the ITAA 1997 in respect of the income stream before the commutation
• the total amount of super income stream benefits the person was entitled to receive before the start of the financial year the commutation takes place
• the greater of:
  • the sum of the super income stream benefits paid during the financial year the commutation takes place
  • the minimum amount required to be paid under regulations 1.07B and 1.07C of SISR during the financial year the commutation takes
• Where the transfer balance debits that need to be considered are those debits arising out of a partial commutation of the income stream on or after 1 July 2017 – these include partial commutations arising out of a family law superannuation split.

The total amount of super income stream benefits the member was entitled to receive before the start of the financial year the commutation takes place will be equivalent to the actual pension payments made between 1 July 2017 and the year the commutation occurs, provided that the payments are made in accordance with the requisite standards

In the year the commutation occurs, any income stream benefits paid prior to the commutation occurring are included in the calculation to reduce the value of the debit. If the commutation occurred part way through the year, then any benefits paid would be included up to commutation date.

For market linked income streams under 294-145 (6A)(c) the minimum amount would encompass the annual amount calculation which considers percentage variances in accordance with schedule 6 of the SISR.

 

Calculating and reporting the credit when the income stream recommences

Where a market linked or similar income stream that was a CDBIS is, or was, commuted and restarted on or after 1 July 2017, the income stream will no longer be a CDBIS.

You will be required to calculate the ordinary value of the credit and ensure for SMSFs that the amount is reported as an account based pension.

 

Example:

Doug was in receipt of MLP1 on 1 July 2017 that had the following special value reported against his transfer balance account (TBA):

	DR	CR	BAL ($)
Market Linked Pension		$1,829,697	$1,829,697 CR

 

From 1 July 2017, Doug has received the following amounts:

• FY 2017-18 – $91,485
• FY 2018-19 – $91,941
• FY 2019-20 – $92,658

The account balance of MLP1 at 30 June 2020 is $1,218,994.  There have been no transfer balance debits that have arisen on Daniel’s TBA in respect of his market linked pension.

Doug fully commutes MLP1 on 30 June 2020.

Using the formula set out in subsection 294-80(1) of the ITAA 1997, the debit that arises from this commutation is calculated as:

• $1,829,697 – $0 – $91,485 – $91,941 – $92,658 = $1,553,613

As the new MLP2 is not a CDBIS, the transfer balance credit is calculated based on the purchase price – that is, the current balance of the income stream.

Doug’s TBA as a result of the MLP conversion is:

	DR	CR	BAL ($)
MLP1		$1,829,697	$1,829,697 CR
Commutation of MLP1	$1,553,613		$276,084 CR
MLP2		$1,218,994	$1,495,078 CR

 

Reporting timeframe

With this legislation now finalised, the ATO is providing funds relief as indicated in CRT Alert 042/2020 that they do not expect any funds to begin to commence their retrospective reporting until November 2020.

For more information, refer to the ATO recent guidance published on its website (QC 63529)

 

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