In a submission to Treasury on the exposure draft of Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2017, the Actuaries Institute said it is concerned issues may arise with SMSFs if pensioners with capped defined benefit income streams are given the option to partially commute for the purpose of reducing or avoiding an excess transfer balance.
“We seek clarification on whether additional guidance will be given on how SMSF trustees should determine appropriate communication factors,” the institute said.
In its submission, the Actuaries Institute gave an example of an SMSF trustee with a market-linked pension where the account balance of their pension is $2 million at 1 July 2017 and the remaining term is ten years.
“The payment factor for this pension is 8.32, meaning [the trustee] can opt to receive a pension payment of between $216,350 and $264,420 in the 2018 financial year,” the submission said.
“The special value of [the] trustee’s superannuation is, therefore, between $2.16 million and $2.64 million, depending on how much pension he decides to draw from his SMSF.”
Assuming the trustee opts to take the minimum, the submission said his special value will be $563,500 over the transfer balance cap.
The Actuaries Institute said it is unclear in situations like this whether the trustee has the option of partially commuting his market-linked pension in order to bring his special value below the transfer balance cap and if so, how the commutation value should be calculated.
“If he commutes the excess special value of $563,500, leaving the market-linked pension account balance at $1,436,500, then the required payment for the 2018 year is between $155,390 and $189,920,” it said.
“If he instead commutes the ‘real’ excess account balance of $400,000, leaving $1.6 million in his market-linked pension, the required payment for the 2018 year is between $173,080 and $211,540.”
The Actuaries Institute said these payment options are obviously in excess of the defined benefit income cap.
“Would the [trustee] be required to include the appropriate proportion of the excess defined benefit income in his individual tax return?” the submission asked.
“If so, can he opt to commute a different amount such that his required pension payments fall below the defined benefit income cap?”
How about this situation, we have a real member that has an MLIS paying $88,000pa with a remaining term of 25 years, that gives the transfer cap assessment at $2.2M, but the actual balance in the SMSF is only $1.6M.
My understanding is they can commute one MLIS to another, so if they did that after1st July 2017, say from the SMSF to a retail MLIS (Term allocated pension), my understanding is the transfer cap debit amount is $2.2M ($88kpa x 25 years), but the restarted MLIS (after 01 July 2017) will be assessed at the start value being $1.6M, so the balance transfer cap account ends up with a negative, ie -$600k.
So they could then start ABPs with other money in their SMSF to the value of $600k thus using up the negative balance transfer cap debit/credit balance, thus they now have $2.2M in actual pension phase! Better still the exiting MLIS is subject to the $100k pa marginal tax rate rule, but the MLIS started after 1st July 2017, isn’t subject to the $100k pa tax rule.
All seems a bit bonkers, if we have understood the rules correctly!