Tax Institute calls for raft of changes to TBAR

The submission noted that there tends to be issues for non-account-based pensions such as market-linked pensions that were already in existence in retirement phase on 1 July 2017.

“These types of pensions, in the most part, are not account-based, so special values have been used to work out the credit [for the transfer balance account]. For whatever reason, a special value was also used for the 1 July 2017 value of account-based market-linked pensions,” the submission stated.

“Unfortunately, the interaction of the credit and later debit upon commutation do not always produce sensible outcomes.”

While it noted that the bill and regulations are intended to rectify the position for account-based market-linked pensions and in other situations, it said there is further work needed to achieve this objective.

The submission noted, for example, that the bill does not provide any debit for accrued undrawn earnings rolled out of an account-based market-linked pension.

“That means purchase of a replacement account-based market-linked pension using just the lump sum proceeds from the original pension is not possible without using up additional cap space,” the submission said.

“The credit for the replacement pension is larger than the debit for the existing pension that is commuted.”

The Tax Institute said the debit on commutation of a pre-1 July 2017 account-based market-linked pension should be at least equal to the lump sum actually drawn to enable a replacement account-based pension to be purchased using the whole of that lump sum without using up additional cap space.

“This approach also accords with ATO reporting requirements that existed at the time under which the ATO required the debit on commutation of an account-based market-linked pension to equal the account balance drawn,” it said.

“In short, ATO reporting required commutation of an account-based market-linked pension to be treated in the same way as commutation of a standard account-based pension.”

The Tax Institute said the issue of ensuring there is no net credit on pension commutation and restart also arises for indexed defined benefit lifetime pensions.

The credit on commencement of a defined benefit lifetime pension is the annual payment times 16, and the debit on full commutation is the same amount, assuming there has not been any preceding part commutation.

“However, if the pension payments have been indexed, the higher annual payments will mean that the credit for the replacement defined benefit pension will exceed the debit for the defined benefit pension that ended. This imbalance should also be rectified by the bill,” it said.

The submission also stated that the credit for a successor fund transfer (SFT) should be made to explicitly match the debit that also arises at that time where the pension benefits do not change as a result of the transfer or replacement.

“Existing pensions ordinarily continue to be paid after an SFT from the successor fund without any change to the benefit terms. In short, the same pension legally continues. The commencement date of the pension remains unchanged,” the submission explained.

“Demonstration that that is indeed the case is that the trustee of the successor fund is liable to the member for any previous pre-SFT underpayment of the pension going back to the original commencement date. If it were a new pension post-SFT, the trustee of the successor fund would not have that liability and would rather only have a liability for pension payments due from the date of the SFT.”

This is also demonstrated by the fact that no pension money is transferred back into an accumulation phase account, even momentarily, as would be a necessary precondition for a second pension to commence post-SFT, it explained.

The submission said, therefore, that the SFT does not give rise to a debit for pension commutation nor a credit for a pension restart that needs to be reported in TBAR.

“The Tax Institute can understand that the ATO may still wish for a debit and credit to be reported for efficient operation of its record-keeping systems given the change in the fund USI key for member accounts. However, that is not a legal reason to treat an SFT as a pension stop and restart,” it said.

The submission welcomed the change in the regulations to recognise a debit when the annual payments from a defined benefit pension step down.

“That can occur, for example, when a defined benefit pension reverts to the spouse, or when one of the children reaches adulthood,” it said.

The Tax Institute said that it also welcomes the change in the bill to exclude the untaxed element that can arise on a death benefit rollover from being taxable to the recipient fund under section 295-190 of the ITAA 97. 

“However, it would be administratively simpler if the amendment stopped the untaxed element arising in the first place on a rollover of a death benefit by amending [section] 307-290 of the ITAA 97.”