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SMSFs urged to take action on legacy pension regulations

Mary Simmons
Miranda Brownlee
13 May 2022 — 3 minute read

SMSFs with restructured market-linked pensions with excess transfer balance amounts have been warned not to delay reporting these events to the ATO.

Last month, regulations took effect allowing members of SMSFs with restructured market-linked pensions to remove any excess transfer balance amounts.

These changes impact all SMSF members who, on 1 July 2017, had a complying life expectancy pension or market-linked pension and opt to commute anytime thereafter to start a new market-linked pension.


In an online article, SMSF Association technical manager Mary Simmons explained that market-linked pensions commenced on or after 1 July 2017 are not regarded as capped defined benefit income streams for transfer balance cap (TBC) purposes.

“This results in a difference between the special value debit on commutation of the original complying life expectancy or market linked pension and the credit that arises when the new market linked pension starts, which is based on the pension account balance,” said Ms Simmons.

“Where the credit is greater than the debit, the start of a new market linked pension will lead to an excess transfer balance amount.”

Before the new regulations were registered, Ms Simmons explained that there was no ability to commute an excess amount from a post 1 July 2017 restructured market-linked pension and individuals found themselves in perpetual excess. 

The new regulations already in operation, she said, lift the commutation restrictions that ordinarily apply to a market-linked pension to allow an SMSF trustee to action a commutation authority issued by the ATO to remove an excess transfer balance amount from the new, post 1 July 2017, market-linked pension.

The new regulations have retrospective effect and apply to any complying life expectancy pension or market-linked pension that was commuted on or after 1 July 2017 to fund the start of a new market-linked pension.

Ms Simmons explained that when the amount that exceeds an individual’s personal transfer balance cap is determined, the value of the debit is calculated at the time of the actual commutation.

“However, the debit does not arise in an individual’s transfer balance account until immediately after the commutation occurs or on the commencement of these regulations, whichever occurs later,” she stated.

“The new regulations also ensure that the subsequent credit for the new market linked pension arises immediately after the debit. This is a relief for any restructured pensions during the period 1 July 2017 to 5th of April 2022, as excess transfer balance earnings and the associated tax liability, do not start accruing until the 5th of April 2022.”

The sooner a trustee reports these events to the ATO, the sooner the Commissioner will be able to make an excess transfer balance determination, she said.

“Only once the Commissioner issues the determination will the excess transfer balance earnings be crystalised in calculating how much capital needs to be removed from a retirement income stream,” she noted.

Given that the excess transfer balance tax starts to accrue from 5 April 2022, Ms Simmons said SMSF trustees should not wait for a formal announcement by the ATO to report these transactions.

“The earnings that attract excess transfer balance tax will continue to accrue until the commutation authority is actioned,” she said.

Ms Simmons also stressed that SMSF trustees must wait for the ATO to issue a commutation authority before commuting any amount from a market-linked pension.

“Withdrawing amounts before the ATO issues a commutation authority is a breach of the payment standards as these types of pensions have strict commutation restrictions,” she said.

She noted that the treatment of any resulting reserves on the restructure of a capped defined benefit income stream is yet to be addressed at this stage.

“Industry simply must remain optimistic that last year’s budget announcements, to allow members to exit legacy pensions, sees the light of day and that it extends to any surplus reserves that were once supporting a capped defined benefit income stream in place on 1 July 2017,” she said. 

Ms Simmons said the new regulations provide the certainty that the industry was seeking with respect to meeting reporting obligations for capped defined benefit income stream already commuted and the resulting market-linked pensions started.

“In the meantime, we will continue to work with the ATO to understand how these new regulations impact on TBAR lodgment obligations for impacted SMSFs,” she said.

“We anticipate that the ATO will continue to take no compliance action on SMSFs that are impacted by these new regulations but have yet to meet their TBAR obligations. However, it is unknown for how long they will be prepared to extend this administrative approach.

“Regardless, we remain of the view that SMSFs should report as soon as possible to the ATO to limit the accrual of excess transfer balance earnings and tax.”

Miranda Brownlee

Miranda Brownlee

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 also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: [email protected]momentummedia.com.au
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