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With the introduction of the transfer balance cap regime, a market-linked pension that was commuted and restarted on or after 1 July 2017 may have resulted in the member exceeding their transfer balance cap. Further, until recently, excess amounts could not be commuted from these re-structured market linked pensions which are non-commutable.
With new SIS Regulations enacted on the 5th of April 2022, SMSF members who restructure their market linked pension and receive an excess transfer balance determination can now commute the excess without breaching the pension standards. This law change reinstates an SMSF member’s ability to restructure their market linked pension without perpetually being in an excess situation. For more on the operation of these SIS Regs please refer to our prior article.
However, if you have clients who choose to restructure their market-linked pension in accordance with this law change, you need to be aware that without a commutation authority, they are unable to commute their market linked pension. Commuting a market linked pension, without a commutation authority, jeopardises the SMSF’s entitlement to exempt income on the earnings associated with the pension. In addition, if the commuted amount is taken as a lump sum benefit, the payment will be in breach of the payment standards so the member may be assessed for the early release of superannuation benefits.
As a commutation from a market linked pension can only occur after the ATO has issued a commutation authority to the fund, it’s important to be aware of the timeframe for a commutation authority to be issued by the ATO. Currently, this only occurs after a member has been issued with an excess transfer balance determination by the ATO and a further 60 days has passed for the member to make an election in the default commutation notice. The ATO’s interpretation of the law is that the Commissioner may only issue a commutation authority after the 60 days has ended.
Subsequently, based on the ATO’s current administration of the transfer balance cap regime, the Commissioner applies a service standard of 28 days, within which to issue a commutation authority. The ATO has also confirmed that issuing a commutation authority may take even longer, if the TBAR or determination is amended, an objection is lodged, or the member has elected to extend the election due date in the default commutation notice.
Therefore, a member with a market linked pension may have no choice but to wait up to 88 days to be issued with a commutation authority, before they can withdraw the excess without breaching the pension standards. During this period, excess transfer balance tax continues to grow as it includes earnings that accrue after the excess transfer balance determination is issued.
Ordinarily, any other account-based pension would offer a member the choice of withdrawing the excess, as soon as possible, based on the amount reflected in the default commutation notice. However, given the commutation limitations that apply to market linked pensions, these pensioners do not have this option.
The SMSF Association has raised this matter with the ATO and is advocating for a review of the current processes which, at the time these processes were put in place, did not need to cater for the removal of an excess amount from a market linked pension. The SMSF Association remains optimistic that an administrative solution can be reached to mitigate the accrual of additional excess transfer balance tax, where a member has restructured their market-linked pension in accordance with the law.
We will continue to update you on our discussions with the ATO.
In the meantime, these ATO links may also be useful:
Updated guidance – market linked pensions | Australian Taxation Office (ato.gov.au)
Administrative requirements for TBAR due to law change | Australian Taxation Office (ato.gov.au)
Written by Mary Simmons, Head of Technical