Treasury has released exposure draft regulations and explanatory statement to make minor and technical changes that address unintended outcomes arising from the inability of recipients of certain non-capped defined benefit income streams (that were commenced on or after 1 July 2017) to address excess transfer balance amounts. From an SMSF perspective this concerns members who have commenced a market linked pension (MLP)1 on or after 1 July 2017 that gives rise to an excess transfer balance account (TBA) amount for which they were unable to commute. These draft amendments seek to address this issue by allow the member to commute the excess TBA amount from their MLP.

An SMSF has been unable to commence a defined benefit pension since 1 January 2006. Consequently, from an SMSF perspective these draft amendments to the SIS Regulations apply to SMSF members who have commenced a MLP on or after 1 July 2017. An SMSF member can only commence a MLP as a consequence of a commutation of a previous ‘complying pension’, being either a:

  • Lifetime complying pension per SIS sub-regulation 1.06(2); or
  • Life expectancy pension per SIS sub-regulation 1.06(7); or
  • Market linked pension per SIS sub-regulation 1.06(8).

These draft amending regulations are a consequence of the Federal Government’s December 2020 Mid-year Economic and Fiscal Outlook (MYEFO) statement that included a proposed measure to enable the partial commutation, equal to the amount in excess of an individual’s transfer balance cap (TBC), in relation to certain market linked pension, life expectancy pension and similar products that were commenced on or after 1 July 2017. For a background of this issue please refer to our blog article ‘MYEFO has (potential) hidden gem for legacy pensions’.

The explanatory statement to the amending regulation notes that ‘Commutation in this instance may only occur in response to a commutation authority that is issued after the Australian Taxation Office has determined the excess transfer balance for the individual’.

A commutation of the SMSF member’s post 30 June 2017 MLP will give rise to a transfer balance debit and will reduce their TBA. It would be expected that the commutation would result in the SMSF member’s TBA balance no longer exceeding their personal TBC.

There are also supporting draft amendments to the income tax regulations to ensure that the period in which affected SMSF members accrue excess transfer balance tax liabilities begins on or after the commencement of the amending regulations. This will allow appropriate tax outcomes for these SMSF members given their prior inability to commute their post 30 June 2017 MLP to comply with the transfer balance cap rules.

The following example has been adapted from the example provided in the explanatory statement:

On 1 July 2018 Steven commenced a MLP (the TBA credit) directly from the lump sum resulting from the commutation of his CDBIS2 life expectancy pension (the TBA debit). As his new MLP commenced on or after 1 July 2017, it was not classified as a CDBIS for transfer balance cap purposes. Draft : Under the proposed amending regulations, the debit and credit for this commutation and commencement will arise in his transfer balance account on the date the amending regulations commence. The debit arises prior to the transfer balance credit.

Where these pension transactions resulted in Steven exceeding his personal TBC and has an excess TBA amount, he would have been unable to resolve it prior to the proposed amending regulation commencing.

Where Steven does have an excess TBA amount due to the pension transactions, he will receive a determination of his excess TBA amount. The excess TBA amount on the determination will be the amount that exceeds Steven’s personal transfer balance cap and the deemed earnings that accrue after the amending regulations commence. Importantly, Steven will not have accrued any transfer balance credits for deemed earnings between 1 July 2018 and the commencement of the amending regulations.

A commutation authority will enable Steven to commute the excess amount as a lump sum from his post 30 June 2017 MLP to an account in the accumulation phase, where it can be retained or be paid out as a lump sum.

Please note that this measure is separate to the proposed measure in this year’s Federal Budget to allow a 2-year exit strategy for certain legacy pensions. For further information on this measure refer to our blog article ‘Legacy pension conversion – an escape route but watch for some traps!’.

1. MLP is also referred to as a ‘Term Allocation Pension’ (TAP)
2.Capped defined benefit income stream – as the life expectancy pension was originally commenced prior to 1 July 2017.

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