The ATO has released new guidance which has implications for SMSFs with legacy pensions, which, while limited in number, are often complex and have substantial capital backing them.
Late last week, the ATO published LCG 2016/10 Superannuation reform: capped defined benefit income streams - non commutable, lifetime pensions and lifetime annuities.
You can access the LCG in its entirety here.
The guidance only applies to treatment of non-commutable lifetime complying pensions and annuities for the purpose of the transfer balance cap, SuperConcepts’ Mark Ellem explained to SMSF Adviser. It does not deal with other capped defined benefit pensions.
Mr Ellem said the guidance effectively confirms what the industry already understood in terms of how lifetime pensions would work from a transfer balance cap viewpoint.
This LCG confirms that the “special value” of such an interest for the purpose of crediting a member’s transfer balance account is annual entitlement multiplied by 16.
He noted that for an existing lifetime complying pension, the annual entitlement is calculated with reference to the first superannuation income stream benefit the member is entitled to receive on or after 1 July 2017.
Also, it is now clear that these pensions get counted against the member’s transfer balance cap.
“Whilst they cannot result in an excess transfer balance account amount, it means that where a member has a commutable pension, for example an account based pension, they will… be required to be commuted, where the balance of the account based pension takes the member over their transfer balance cap,” Mr Ellem said.
“Whilst a non-commutable, lifetime complying pension cannot result in an excess transfer balance, there is a penalty for the member. For such pensions from a taxed superannuation fund, an SMSF for example, where the annual pension exceeds the ‘defined benefit income cap’, initially set at $100,000, 50 per cent of the excess will be assessable to the member at marginal tax rates,” he added.
“There is no consideration of tax components, age of the member or the 15 per cent tax offset, the assessable amount is taxed as if it was ordinary income. This will mean that members today who may not lodge a personal income return, as they are over age 60 and all benefits from a taxed super fund are effectively exempt, will now have assessable income. They will also be issued with a PAYG Summary Statement,” he said.
The number of SMSFs with such legacy pensions in place are small in number, but as Mr Ellem noted, the capital backing them can be “significant.”
As such, SMSF professionals with clients in this situation should take note of these guidelines, and in particular consider the knock-on effect for a client’s portfolio, including estate planning.
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