Change in calculation of TSB for defined benefit interest imminent, warns technical specialist
The $3 million super tax legislation intends to change the calculation of the total super balance for a defined benefit interest, says a leading technical expert.
Linda Bruce, senior technical manager for Colonial First State, said this will affect advisers who are dealing with defined benefit interest, such as defined benefit pensions offered by a public scheme, as well as some non-account-based lifetime or life expectancy pensions, which are typically seen in self-managed super funds.
“It also includes defined benefit interest in a public offer fund in the growth phase,” she said.
“Division 296 tax is designed to capture the super earnings corresponding to an individual’s total super balances over $3 million. The individual’s total super balance plays a key role in determining what Division 296 tax would be.”
“Back in November last year, the government introduced the Bill that will enable the Division 296 tax changes if legislated. Details of how the defined benefit interest should be valued for total super balance purposes was not included. Rather, the Bill, which is at the moment still before the parliament, is actually referring to the regulations, which have just been released.”
Bruce said under the current rules the total super balance for defined benefit of pension is valued as per the special value calculation, which is the link to the transfer balance account.
Using a defined benefit pension from a publicly offered fund as an example, the total super balance value – which is a special value – is calculated by the annual entitlement based on the relevant first payment multiplied by 16.
“That special value will never change under the current rules,” she said.
“The Division 296 tax is calculated based on the differences between the total super balance at the beginning of the financial year and the value at the end of the financial year with certain adjustments involved, and it wouldn't be equitable if a defined benefit interest stayed static and technically could not be captured by Division 296 tax.”
She added that the bill clarifies how defined benefit interests would be valued for total super balance purposes and is expected to change from year to year.
The different evaluations can apply depending on whether advisers are dealing with a lifetime pension, fixed term pension, fixed term annuity or accruing defined benefit interest.
“The draft regulations say that in many cases the total super balance will be evaluated as per the family law method, which is based on Family Law (Superannuation) Regulation 2001 that contains default evaluation factors and methods of calculation to be used for the full valuations of a super interests, including defined benefit interests, for the purposes of dividing superannuation in family law separation process,” she said.
“In some circumstances, if the fund already has an alternative evaluation method based on the fund’s actuarial valuation, the draft regulations are saying that the fund is able to use the alternative evaluation method, depending on the situation.”
She added the super fund will need to determine which method it wants to use to determine the total super balance value for defined benefit interest and report that value to the ATO.
She also mentioned that once these changes are finalised, they will apply from the 2025–26 financial year for all purposes.
“As we all know, an individual’s total super balance at the previous 30 June can affect many super measures. For example, among other things, it can affect the amount of non-concessional contributions and the ability to use the carry-forward unused concessional contributions,” she said.
These changes are likely to impact advisers’ super strategy recommendations from the 2025–26 financial year.
Once the regulations are finalised, it’s important to confirm with the fund to understand what the client’s defined benefit interest will be on 30 June 2025 and each 30 June after that if advisers are looking at maximising NCCs or CCs contributions strategies for relevant clients.
