Passage of bill delivers ‘good news’ measures for SMSFs

While the bill provided advisers with additional time to complete the FASEA exam and meet the qualification requirements, Smarter SMSF chief executive Aaron Dunn said the bill also corrects two anomalies that arose from the super reform measures implemented from 1 July 2017. 

Death benefit rollover issue

One of the critical issues the bill rectifies is the unintended tax penalties that can arise for SMSF members who roll over the proceeds of a death benefit to a public offer fund. 

“[This is where] there is a rollover of super death benefits and you had insurance proceeds that were paid out as part of that death benefit but the decision was made by that surviving beneficiary but they no longer wanted to be retained in that fund,” Mr Dunn explained.

“So, the non-dominant trustee of an SMSF may say, ‘Look, this is all too hard for me, let’s roll this money into a public offer fund.’ The problem with the rollover of that untaxed element is that it would impose a 15 per cent tax on that point in time rollover. It’s a death benefit, so if it was paid to them tax-free, they should simply receive that payment tax-free and not have to withhold any tax obligation.

“The government has now fixed that anomaly, which in essence is distinguishing between a rollover that is untaxed ordinarily, and a death benefit rollover that has an untaxed element that now in essence has no taxing point within it.”

The position by advisers, he said, has been that they really needed to wait until this became law so that the receiving fund wasn’t obliged to actually have to withhold that tax.

“The bill is just awaiting royal assent and it’ll have a back-dated effect to 1 July 2017. So, some good news there, in addition to the extension granted for the FASEA exam.”

Double-counting issue with market-linked pensions

The other issue the bill will rectify is the value of a market-linked pension being double-counted for transfer balance cap purposes where they choose to restart their pension.

Mr Dunn explained that prior to 1 July 2017, existing market-linked pensions were deemed to be a capped defined benefit income stream, and therefore subject to a calculation as a multiple of the remaining term rather than looking at its purchase value or its account value at that point in time.

“What some people were planning to do is commute that back and re-purchase that market-linked pension which would allow for a lower value to be stated on the individual’s transfer balance cap,” Mr Dunn said. 

“The problem was though the way that legislation was drafted meant that that commutation value came out at zero which then effectively double-counted the value of that income stream. This measure now corrects that issue and it backdates to 1 July 2017.”