Pension can’t be excluded from TBC: court

In the case, the plaintiff, Dr Stern, received two “capped defined benefit income streams” and a third super income stream which was not a “capped defined benefit income stream”.

He argued that Div 294 of the Income Tax Assessment Act 1997 (ITAA 97) should not be interpreted so that both his pensions were to be commuted under a commutation authority issued by the ATO due to his pensions exceeding his TBC, and that he also must pay excess transfer balance tax for exceeding his TBC.

Butler told SMSF Adviser the question in this case is whether section 294-140 of the ITAA 1997 be construed to exclude defined benefit lifetime pensions that are subject to commutation restrictions from resulting in “excess transfer balance”.

Div 294, subdivision 294-D modifies the transfer balance account calculations where the taxpayer has defined benefit pensions.

“However, to understand how this question arises, it is necessary to understand the statutory context and the facts,” he said.

He continued that the facts in the judgment state that “the general scheme of Div 294 is to limit the amount of capital used to support a super income stream by firstly forcing a commutation of any excess over the transfer balance cap; and secondly imposing a tax on retirement phase income streams that have resulted in excess transfer balance”.

Accordingly, the court stated that this general scheme only works where commutation is possible, and more importantly, only certain super income streams cannot be commuted.

The ruling stated that “because the resolution of an excess transfer balance is generally to require commutation of the excess over the transfer balance cap, the standard rules cannot apply to these superannuation income streams and the resolution to this problem is addressed by Subdiv 294-D and Subdiv 303-A”.

The judgment continued that Subdivision 294-D operates such that a “capped defined benefit income stream” cannot of itself result in an “excess transfer balance”. This is necessary because a person who only has a “capped defined benefit income stream” cannot commute the excess to a lump sum even if the transfer balance cap were exceeded.

However, the value of a “capped defined benefit income stream” will cause a person to have an “excess transfer balance” if the balance in their transfer balance account exceeds both their “transfer balance cap” and their “capped defined benefit balance”.

Butler said Stern received an “excess balance determination” dated 3 January 2018. It stated that he needed to commute an amount of $254,243.39 out of his super income streams by 6 March 2018 and that, if he did not do so, the Commissioner would send a commutation authority to UniSuper instructing it to commute $254,243.39 from his flexi-pension.

The court argued it cannot “sensibly be argued that non-commutable defined benefit lifetime pensions are excluded from the calculation of the transfer balance of a retirement phase recipient of one or more superannuation income streams, or in the determination of excess transfer balance.

It concluded that this is an argument that is directed more to the “reasonableness or otherwise of the policy underlying the legislation, rather than demonstrating any manifest absurdity or unreasonableness in the relevant sense. Policy is a matter for the legislature and not a question for the Court.”

Butler said ultimately, the court disagreed with Stern’s claim that it was “unfair or unreasonable” to take his defined benefit lifetime pensions into account in calculating whether he has an excess transfer balance, to require commutation of his other super income streams and to impose excess transfer balance tax.