Calculation issue raised with fix for legacy pensions

Due to the way that market-linked pensions are valued under the transfer balance cap when they are commuted or rolled over, this results in a nil debit, he said.

“This nil debit is an issue because it doesn't accurately reflect the individual’s transfer balance cap position and may lead to an individual breaching their cap,” he explained.

SuperConcepts executive manager of SMSF technical services Mark Ellem said while the announcement of a solution is certainly welcome, there is concern that there could be changes to the method for calculating the commutation value of the market-linked pension.

“What would be a concern is where new legislation changes how the value of the commutation is determined from how it was explained in the Explanatory Memorandum.

“Any proposed legislative change should be done with consultation from industry to ensure the outcome is not different from the original intent, as outlined in the EM. We do not want legislation with an outcome not aligning with intent, for a second time,” said Mr Ellem.

Any proposed fixes should remain in line with the original intent of the legislation, said Mr Ellem.

The original intent was for the debit amount, the reduction to the member’s transfer balance account, to be the “special debit value”, being annual entitlement x remaining term,” he explained.

“While the assistant treasurer’s statement says they will provide a more permanent legislative solution to ensure that the value of a commuted market-linked pension is correct, we believe it is critical for the industry to have input in clarifying and confirming what that value would be.”

Since the ATO announced its practical compliance approach to the issue, members, advisers and accountants have been working on the assumption that the debit value will be per the original intent, being annual entitlement x remaining term, Mr Ellem explained.

“However, if the proposed legislation provides for a different method of calculating the value of the commutation of the MLP, this could lead to members having a different transfer balance out come,” he said.

“Given that the interpretation of the original legislation was different from its intent and how it was explained in the Explanatory Memorandum, and that it is expected to apply from 1 July 2017, any proposed legislation should be drafted with consultation from industry to ensure the outcome is what it was originally intended - this second time around.”