Legacy pensions causing TSB headaches for SMSFs

The retirement phase value is worked out using the person’s transfer balance account at the end of 30 June, she explained, with modifications in certain circumstances.

“In particular, a modification occurs where the person has account-based income streams. Instead of using the TBA value of the income stream, all debits and credits are disregarded and instead the value for TSB purposes is the current value of interest at the end of 30 June,” she said.

“This current value is the amount that would become payable if you were to voluntarily cease the interest.”

Other types of super income streams, she said, retain the TBA value.

“It is therefore important to understand what types of retirement phase income streams fall under each definition to determine whether the value for TSB purposes is the current value of the TBA value,” she explained.

“In looking at these TSB rules we were not clear whether a market linked pension whilst it was a capped defined benefit  income stream would fall under the ‘account based’ type of income stream and asked the tax office for clarification.”

The ATO confirmed that because market-linked pensions are listed under subsection 307-230(4) of the ITAA 1997 as retirement phase interests which are modified when calculating TSB, that a modified value is used even if it is a capped defined benefit income stream, she said.

“A market-linked pension is therefore considered ‘account based’ for the purposes of the TSB valuation. This is irrespective of whether the pension is a capped DB income stream, and was valued for TBA purposes using a special value,” she explained.

“The current TBA value of the market linked pension is disregarded for TSB purposes and instead the modified amount is used. The modified amount is the amount that would become payable if the member both had the right to cease the interest, and voluntarily caused the interest to cease at that time, i.e. the account balance.”

Other income streams in an SMSF, she said, such as flexi-pensions and defined benefit income streams are not included in the list of pensions modified by subsection 307-230(3) of the ITAA 1997.

“Therefore, the TSB at any given time is calculated using their TBA value,” she said.

“Transfer balance is defined in subsection 294-30(2) of the ITAA 1997 as the sum of all transfer balance credits in that account, less any transfer balance debits. For these types of income streams this does not always equal the account balance at a particular time.”