The Federal Government released today its Mid-Year Economic and Fiscal Outlook (MYEFO), noting that the delayed 2020 Federal Budget was only released on 6 October 2020. There was an interesting proposed change to enable the partial commutation of certain non-commutable pensions included in the MYEFO papers.
“The Government is amending the law to ensure that retirees who have commuted and restarted certain market-linked pension, life expectancy pension and similar products are treated appropriately under the transfer balance cap.
The measure will enable retirees with these products who have been unable to commute amounts in excess of their transfer balance cap to undertake the necessary partial commutation. The measure also ensures appropriate tax outcomes for these retirees given their prior inability to comply with the transfer balance cap rules.
These amendments will take effect from the date the relevant bill receives Royal Assent. This measure is expected to have no impact on receipts over the forward estimates period.”
It appears that this proposal will provide a solution to the current technical problem of a member commencing a new market linked pension, upon the full commutation of either:
- A lifetime complying pension (SIS reg 1.06(2));
- A life expectancy pension (SIS reg 1.06(7));
- A pre 1 July 2017 market linked pension (SIS reg 1.06(8)).
and commencing a new market linked pension, where the commencement value of the new market linked pension is more than the member’s personal transfer balance cap.
Currently, in this scenario, there appears to be no answer to the question of what the tax outcome would be for the member in relation to the excess transfer balance account balance that the new market linked pension has caused. The proposed change appears to allow the member to affect a partial commutation of their new market linked pension to allow them to reduce their transfer balance account balance such that they no longer had an excess transfer balance amount.
A market linked pension that commences on or after 1 July 2017 is not a capped defined benefit income stream and consequently, does not enjoy the special rules that apply when a member exceeds their personal transfer balance cap and their only retirement phase income stream is a capped defined benefit income stream. However, unlike an account-based pension, a market linked pension, regardless of when it was commenced, is non-commutable. Consequently, the member can have a scenario where they have an excess transfer balance account but are unable to commute the excess.
Gary has an old legacy lifetime complying pension which is currently backed by assets totaling $2.3m. This is his only retirement phase income stream.
He would like to fully commute his lifetime complying pension and commence a new market linked pension. Gary’s objective for restructuring his pension is to ensure that on death, any residual value of the pension can be paid out as a superannuation death benefit to his dependents and that the pension can be subject to a direction under a binding death benefit nomination.
Upon the full commutation of Gary’s lifetime complying pension, his transfer balance account balance is nil (his transfer balance account balance debit will equal the previous credit that arose from this pension). However, the transfer balance account credit from the commencement of his new market linked pension is simply the commencement value, being $2.3m.
This creates an excess transfer balance account amount of $700,000. Gary will be issued with an excess transfer balance account determination. However, given this is a non-commutable pension, the amount required to be commuted from the pension will be zero. But this still leaves Gary will an excess transfer balance account that cannot be rectified. The unresolved issue in this scenario is that we do not know how this will be assessed from a notional earnings perspective.
The MYEFO proposal appears to provide a solution for Gary. It appears that it will allow Gary to partially commute his market linked pension by $700,000, the excess transfer balance account amount, and reduce his transfer balance account balance down to her personal transfer balance cap amount – $1.6m.
There are some questions that come to mind in relation to this proposal, which will hopefully be answered when draft legislation is provided:
- Will the affected member be required to commute the excess transfer balance account balance out of the superannuation system – similar to the requirement for the commutation of a death benefit pension, or will the affected member be able to commute the amount back to their accumulation interest, effectively retaining the amount in the superannuation system?
- Will the proposed measure only apply in situations where a member will have an excess transfer balance account amount in relation to a post 30 June 2017 market linked pension? If this is the case, it raises the question of fairness of the proposal – those with pension capital greater than $1.6m appear to be able to covert the excess amount to a lump, with full access. However, those with these types of pensions who are under their transfer balance cap have no opportunity to access.
- There will also be a need to consider the Centrelink consequences where a pension restructure involves an asset test exempt pension or for a member that has a pre 1 January 2015 grandfathered pension.
This is a very welcomed proposal to resolve one of the issues that these old legacy pensions have had since the introduction of the super reforms on 1 July 2017. We wait to see the draft legislation to ascertain if it is the Christmas present that I have been asking for (for many years).