Aaron Dunn, CEO of Smarter SMSF, said at the SMSF Adviser Technical Strategy Day in Brisbane yesterday that if the controversial legislation proceeds through the Senate, it will link back to how the sector deals with the retirement phase as a valuation.
“Retirement phase value is effectively linked to the transfer balance account of the individual, whereas what we’re going to see in this change is a combined TSB value that links itself to cessation value at the time,” he said.
“That’s not a dramatic change for SMSF, because account-based pensions or income streams are all dictated by a cessation value anyway unless they are a defined benefit pension legacy pension fund.”
He said another point is that the calculation of certain outstanding LRBA amounts, which must be included post-1 July 2018 under the current requirements, will also be excluded.
“So, where we have defined benefit pensions, regardless of value, we would need to look at including that value every year for the purposes of this [tax],” he said.
“This is why the government is finally twigging to the budget measure that was announced back in 2021–22 – to get people out of legacy pensions. For some, they don’t make sense anymore, and there’s going to have to be some ongoing valuation requirements every year even when they might not be impacted by these laws.”
Dunn added that the recent changes to the ability to exit these legacy pensions are more generous than was originally anticipated, moving from a two-year amnesty to five years.
“There are ongoing discussions about, in particular with respect to death, whether that could expand beyond that period,” he said.
“Ultimately, we’re going to see an ability to commute what were previously non-commutable pensions and that exit quite clearly will be done with basically no tax impost to the individuals themselves.”
Dunn said the new legacy pension regulations would create a “shift” around how the allocations from reserves will work.
“Most importantly, the key shift that we’ll see is an exclusion from the caps where the allocation is being attributed to the pension member. That also applies if the member has died, and in essence, that reserve would have been left in the fund,” he said.
“The fair and reasonable allocation rules will continue to apply, but rather than being assessed against the concessional cap, we’re going to see a shift to those being assessed to the non-concessional cap – a fairly substantial difference between how much we could look to allocate to members within the fund as a result of that change.”
He concluded that the question now is whether the government would line up these changes in legacy pensions with the proposed Div 296 tax, or if it would push it through and allow people to make decisions to manage it going forward.
“We’ll just have to wait and see,” he said.
The SMSF Adviser Technical Strategy Day will move to Melbourne on 22 October and Sydney on 24 October. Tickets are still available for these events.
This whole scenario and stupid drafting of the Div 296 tax just shows the poor education of many politicians. The utterly incorrect comments by Stephen Jones re existing taxation of unrealised capital gains illustrates this profoundly.
This is so simple, if you must start unwinding the original tax saving incentives for people to provide for their own retirement (and, remembering the “drovers dog”, you are prepared to whether the political risk), why not just a progressive tax rate. If a super account has income in excess of $150,000 (including realised capital gains) the excess is taxed at 30% not 15%. More detailed reporting of all superannuation accounts in personal tax returns would be needed, otherwise smart people will split their super into multiple accounts. If separate accounts are under the $150,000 threshold, but the aggregate above, the tax on excess is levied against the individual, and if they are still in accumulation a withdrawal to pay the tax can be permitted.
Alternatively, given the rising population of retirees receiving tax exempt pensions from superannuation, just change the pension phase tax rate from 0.00% to 5.00%. However, you will be tampering with a politically sensitive issue, so again beware the “drovers dog” syndrome.