Commissioner’s remedial powers a ‘solution’ for market-linked pensions

The amendments rectified an issue where the value of a market-linked pension (MLP) was being double counted for transfer balance cap purposes where the pension was restarted.

SMSF Association technical manager Mary Simmons said while the amendments were welcomed by the industry, the retrospective application of the new formula continues to leave the industry in limbo.

“The ATO has acknowledged there are some challenges with applying the new formula and that more guidance is required,” Ms Simmons said.

The government’s rationale for a retrospective application date, she explained, was that all affected taxpayers would benefit from the new law in comparison to the original law which resulted in a “nil” debit value and effectively led to the double counting of benefits for transfer balance cap (TBC) purposes.

“Although this may be true, this rationale is flawed as it is based on the notion that members were aware of the nil value issue from 1 July 2017,” she said.

“The reality is that it was almost a year after the law was introduced before the ATO confirmed its interpretation of the law and the unintended consequences of the original calculation. It was then a further eight-month wait before draft law was released, alerting industry to a proposed formula that was materially different to the treatment of any other income stream subject to the TBC.”

The ATO announced later that week that it would defer the need for any retrospective reporting of post-1 July 2017 MLP commutations until November 2020, pending further guidance, she said.

It also updated its web content to provide further clarity on its interpretation of the law.

“Although the SMSF Association applauds the ATO’s efforts to provide some clarity and defer the administrative pressure of reporting these commutations until further guidance is finalised, we feel the regulator will come under pressure to do more,” Ms Simmons said.

“The crux of the matter is that the longer the ATO takes to publish guidance, the more excess transfer balance earnings continue to accrue for those affected.”

The SMSF Association is keen to achieve a more sensible solution that altogether avoids triggering any excess for those affected, she said.

“In the absence of such a solution, a member in excess would be required to pay excess transfer balance tax on a daily notional earnings amount indefinitely,” she stated.

One solution put forward by the SMSF Association, she said, is to explore the ATO’s regulation-making powers which are designed to address unforeseen issues that arise under the TBC.

“SMSFA believes that the current situation warrants a closer look at these powers,” she said.

“The use of these powers could potentially give rise to a new ‘debit’ to effectively write off any unintended excess, using similar processes that the ATO adopted back in July 2017 to ensure that members with only non-commutable income streams did not trigger an excess.”

The alternative solution of advocating for a legislative fix to amend the SIS Regulations to allow a trustee to commute a restructured MLP to remove any excess, is not considered viable given the lengthy delays to date and the other priorities faced by the government amid the COVID-19 pandemic, she cautioned.

“We believe the use of the ATO’s regulation-making powers present the most effective mechanism to mitigate the imposition of a tax in perpetuity, particularly for those members who acted in good faith in applying the original formula,” she said.

“They also provide an administrative solution to reduce the burden on the ATO to have to manually issue excess transfer balance determinations to members indefinitely.”