ATO advice for SMSFs with market linked or life-expectancy income streams | Accurium

Further to our recent technical article Commuting capped DB income streams could lead to an excess transfer balance industry has received advice from the ATO about how they will deal with the current transfer balance cap issues faced when commuting certain capped DB income streams in an SMSF.

Released on 14 June 2018 SMSF News Alert 2018/3 confirms there are unintended consequences associated with the current law for determining the debit value upon commutation of a market-linked or life-expectancy income stream, and outlines the ATO’s compliance approach to this problem.

The Alert confirms that where an SMSF member was receiving a life expectancy or market-linked pension just before 1 July 2017 (and so is a capped defined benefit income stream) then under the current special value rules if that income stream were commuted the member would receive a transfer balance debit of nil. This is based on the special value worked out at the time of commutation using the rules in Income Tax Assessment Act 1997 subsection 294-145(1). 

This means that when the member then commences a new market-linked pension, this may cause them to exceed their transfer balance cap or have a higher than anticipated transfer balance account.

A practical compliance approach
The ATO recognises that this outcome is not the intention of the legislation and outlines a practical compliance approach they will take where an individual’s circumstances align with the scenario noted above.
  • The ATO will not take compliance action at this stage if a fund does not report the transfer balance account events of the commutation or the commencement of the new market-linked pension,
  • The ATO will not apply compliance resources, at this stage, where the fund has reported the transfer balance debit for the commutation as other than nil.
This is a welcome approach by the ATO and will allow funds to continue with plans to restructure capped DB income streams where required without leading to an excess transfer balance due to the nil debit value upon commutation.
Still proceed with caution when commuting complying income streams

It is important to remember that there remain a number of other considerations to be aware of in respect to the commutation of a capped-DB income stream. 

A new market-linked pension will not be a capped DB income stream for transfer balance cap purposes and there is likely to be a difference between the special value debit the member will receive upon commutation, once a fix to the law is made, and the credit that will apply at commencement equal to the account balance. If the credit is greater than the debit then the commutation and recommencement will lead to an increase in the member’s transfer balance account and could still lead to an excess transfer balance. Without knowing the special value debit that will apply it will be hard to know what amount, if any, needs to be commuted from any other commutable income streams held by the member to ensure the new income stream does not raise an excess transfer balance. 

Also remember that if the value of the assets supporting the capped DB income stream exceed $1.6million then it may not be possible to commence a new market linked pension without raising an excess transfer balance which cannot be removed due to the market linked pension being non-commutable. 

If you have any questions please don’t hesitate to contact us on 1800 203 123.

The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances.  While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.