New ATO guidance on restructured market linked pensions
The ATO has recently updated its guidance on how the transfer balance cap (TBC) rules apply where a market linked pension (MLP) that was in place prior to 1 July 2017 has been commuted or restructured on or after that date.
We examine below the ATO’s current approach (see CRT Alerts 007/2022 and 010/2022) to restructured MLPs, particularly in light of:
- the June 2020 changes to the transfer balance account (TBA) debit rules; and
- Treasury Laws Amendment (Allowing Commutation of Certain Income Streams) Regulations 2022 (Cth) (New Regs)) which came into effect on 5 April 2022.
Background on the debit rules that apply to restructured MLPs
On 22 June 2020, the Federal Government put in place new legislation impacting how TBA debit events are calculated where an MLP that is a capped defined benefit income stream (CDBIS) is commuted.
These laws (see Treasury Laws Amendment (2019 Measures No. 3) Act 2019 (Cth)) were introduced to correct a purported deficiency in the prior rules based on the ATO’s view that a ‘nil’ debit value applied where a CDBIS MLP is commuted. Accordingly, the legislation was enacted to address the nil debit issue with retrospective effect from 1 July 2017.
However, the new debit rules were somewhat more complex than originally expected. Many industry observers expected a more straightforward approach (eg, based on a debit value equivalent to the special value recognised on 1 July 2017 for the original the CDBIS MLP) rather than the current complex method which involves a reduction to original special value based on prior MLP pension payments.
Due to the complexity of these retrospective changes which required reporting in many instances and may have resulted in excess TBC impacts for certain taxpayers, the ATO issued guidance on its compliance approach (see, eg, CRT Alerts 031/2020 and 042/2020) for SMSF trustees who may need to amend their TBA reporting, eg, due to:
- reporting a nil debit value for an CDBIS MLP commutation under the prior rules that had not yet been cancelled; or
- reporting a value other than nil for a CDBIS MLP commutation where the value was not calculated in line with the new legislation.
Under this prior ATO guidance, SMSFs were generally not expected to address any required retrospective reporting obligations for restructured MLPs until 1 November 2020.
With the introduction of the New Regs on 5 April 2022, this prior guidance is now somewhat outdated to the extent that it does not address the new modified timing rules that can apply to debits and credits under the New Regs (discussed below).
Impact of the New Regs
In broad terms, the New Regs allow for a restructured MLP (ie, a non-CDBIS MLP commenced on or after 1 July 2017 pursuant to an existing pre-1 July 2017 CDBIS MLP being commuted) to be partially commuted in response to a commutation authority issued by the ATO.
Prior to the New Regs being in place, non-CDBIS MLPs which produced an excess transfer balance could not be commuted under the regulatory restrictions in regs 1.06(8) and 1.07C of the SISR. This meant that SMSF members who were receiving a CDBIS MLP with a large account balance could not restructure their MLP without a perpetual excess transfer balance problem arising, as the non-CDBIS MLP remained a non-commutable pension.
The New Regs overcome this issue by allowing SMSF trustees to partially commute a (restructured) non-CDBIS MLP to comply with a notice issued pursuant to s 136-80 of sch 1 of the Taxation Administration Act 1953 (Cth) (ie, an ATO commutation authority).
(The New Regs also cover complying lifetime pensions and life expectancy pensions, however, we focus on MLPs in this article.)
Importantly, the New Regs also contain modified timing rules for the TBA debits and credit that arise where a CDBIS MLP has been restructured to non-CDBIS MLP prior to 5 April 2022.
This timing modification helps mitigate exposure to potential excess transfer balance tax for CDBIS MLPs that were restructured between 1 July 2017 and the introduction of the New Regs on 5 April 2022.
CRT Alerts 007/2022 and 010/2022
CRT Alerts 007/2022 and 010/2022 confirm that SMSF trustees who have restructured a CDBIS MLP to a non-CDBIS MLP must report any debits and credits in line with the current debit value approach and the modified timing rules in the New Regs.
The timing of the debit for the commutation of a CDBIS MLP is the later of 5 April 2022 or immediately after the commutation occurs, and the timing of the credit (ie, for the commencement of the new non-CDBIS MLP) is immediately after the TBA debit arises under the New Regs.
This means that CDBIS MLPs that were restructured prior to the introduction of the New Regs will have an deemed TBA event date of 5 April 2022 for the relevant debits and credits. In contrast, the timing of TBA events that arise for CDBIS MLPs that are restructured on or after 5 April 2022 will be in line with the usual rules.
Naturally, TBAR reporting for any relevant TBA events in relation to CDBIS MLPs restructured on or after 5 April 2022 should follow the usual protocols, eg, 28 days after the end of the quarter of the relevant event unless the SMSF is reporting on an annual basis.
Timely action required
SMSFs with members who have previously commuted an MLP that is a CDBIS should have their transfer balance account position carefully reviewed to ensure that:
- the correct values for all debits and credits are reflected in their TBA; and
- the correct reporting date is used based on the modified timing rules in the New Regs.
In many cases, this is likely to require prior events being cancelled and new event being reported as soon as practicable with the debit and credit having an effective date of 5 April 2022 for CDBIS MLPs that were restructured prior to the introduction of the New Regs.
Thus, reviewing prior TBAR reporting and taking action to re-report where appropriate is strongly recommended to ensure that SMSF members are not subject to adverse ATO compliance scrutiny.
Members wishing to restructure their MLP
Members who are still contemplating restructuring their existing MLP should obtain expert advice prior to undertaking any action. This advice should at a minimum cover:
- tax advice on the TBC and the defined benefit income cap implications of any restructure;
- superannuation law advice on the succession planning implications of restructuring the MLP including whether it should be made non-reversionary to provide the surviving spouse with access to greater cash;
- actuarial input on the different term scenarios that are available for a new MLP;
- advice on whether there are any adverse social security implications (ie, in respect of Centrelink or the Department of Veteran Affairs), or the Commonwealth Seniors Health Card;
- financial product advice under the Corporations Act 2001 (Cth) in relation to any commutation of the MLP and any new MLP that may be commenced, including the financial and cash flow impacts; and
- any other items to consider including making sure the right documents are in place.
Advisers and MLP pensioners should carefully review the latest ATO’s guidance and take timely action to ensure they are complying with the current law and applicable TBAR reporting requirements. Dealing with MLPs and other legacy pensions is a complex exercise, and expert advice should be obtained if there is any doubt.
By William Fettes, senior associate, and Daniel Butler, director, DBA Lawyers