ATO view posing ‘double counting’ issue for market-linked pensions
Where a member ceases a market-linked pension and commences a new one, this may result in the pension being double counted under the transfer balance cap due to an ATO interpretation, warns a technical expert.
Cooper Partners head of SMSF and Succession Jemma Sanderson explained that market-linked pensions fall under the definition of the capped defined benefit income streams where they were in place before 1 July 2017.
Individuals with market linked pensions with an account balance below $1.6 million, she said, are not treated that favourably from a transfer balance cap perspective, but there’s a provision that states that where a member stops a market linked pension and starts a new market linked pension after 1 July 2017, then it will fall under the standard transfer balance cap provisions where the account balance is assessed towards the transfer balance cap.
“[However], the ATO has the view that if you did that then you’d actually end up double counting the market-link pension from a transfer balance cap perspective,” she warned, “as it is considered that there is no Transfer Balance Debit on the commutation of the original pension”.
“Now I disagree with the view, because I feel that in the law and in the explanatory memorandum it’s actually uncontentious in terms of how that is to be treated but they're sticking by that view at the moment.”
Ms Sanderson said it’s an issue that needs to be rectified since there are individuals looking to restructure their market linked pensions post 1 July 2017, in order to either make them reversionary, cease the reversionary status, manage their pension payments and expenditure requirements, or to achieve a more favourable transfer balance cap outcome where they have other pension accounts that would be excessive due to the special value treatment of the market linked pension.
“They're ending up falling foul of the ATO's interpretation on this front so it would be good to get some further clarification from the ATO on their perspective,” she said.
Advisers with clients who are looking to restructure market-linked pensions start a new market-linked pension may need to consider at obtaining a private ruling first, she said, which a lot of people are reluctant to do because of the time involved and the cost, or wait until the ATO’s view becomes more concrete with public guidance.
“So we will watch this space. Hopefully the ATO will release some more guidance about their view in the short term,” she said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.