In December last year, the government released draft legislation aimed at addressing an issue with excess transfer balance amounts for those with defined benefit pensions and market-linked pensions.
In an online article, Heffron managing director Meg Heffron explained that these pensions currently have a “permanent excess” problem, which arises when one of these pensions is commuted and converted to a new legacy pension.
“While that doesn’t sound particularly attractive to begin with it does happen. For example, people with defined benefit pensions often move them to market linked pensions later in life to make sure all their super can be paid out to their beneficiaries when they die,” said Ms Heffron.
“It also happens when people change super funds. For example, someone with a market linked pension in an SMSF who winds up their fund and moves to a public super fund will also need to have a market linked pension in their new fund.”
Under the current law, Ms Heffron said that people who have their super in one of these pensions but have an excess over their TBC currently have no way of solving that problem.
“Remember, anyone else who goes over their TBC is simply told by the ATO to commute part of their pension back to accumulation phase or pay it out of the fund. But people with legacy pensions aren’t allowed to make that commutation,” she stated.
The draft regulations propose making a few changes to help solve this problem, she said.
As this change has been a long time coming, said Ms Heffron, it’s possible that people have actually had an excess for years and are only now in a position to do something about it.
“That’s a problem because the current law keeps adding interest to the excess. The interest is taxed and both the excess itself and the interest have to be rolled back to accumulation phase,” she said.
“In other words, the longer it takes to solve the problem, the bigger and more expensive it becomes.”
Fortunately, the draft regulations, she said, also include some special rules about timing.
“In particular, interest will only start from the date these new rules come in for commutations that happened earlier,” she noted.
A very important point with the new rules, however, is that the new rules only allow the SMSF trustee to commute the $500,000 (plus interest) once they receive their excess notice from the ATO, Ms Heffron stressed.
“Until that happens, [they] have to leave the pension untouched. This means there’s nothing [the member] can do to minimise the amount of interest building up – other than hope the ATO issues its determination quickly,” she said.
“This is quite different to the situation for people with account-based pensions who work out (belatedly) that they have exceeded their cap. They can commute some of their pension as soon as they work it out – even before the ATO tells them to do so.”
This means they can limit their interest bill to negligible amounts if they deal with it quickly enough, she noted.
“That said the draft regulations will be extremely beneficial for some people,” she said.
She reminded SMSF professionals that if they have clients who have already commuted their market-linked pension and started a new one post-1 July but have not lodged their relevant TBARs, the ATO expects trustees to commence reporting as soon as the regulations commence.
Miranda Brownlee
02 February 2022
smsfadviser.com
Director
BEc (Acc), MBA, CPA, FFin
David has been in the Financial Services Industry for nearly 30 years. He was one of the founding Directors of the successful Financial Planning and Stockbroking Practice, Henderson Gregory Forrest, for a decade. Prior to that, he held senior roles in companies such as ING, KPMG Accountants and AMP. David was previously Chairman of OAMPS Superannuation Trustee Board and currently serves as an independent Board Director for several companies.
David’s extensive experience in all forms of superannuation, including Self Managed Super Funds (SMSF), Defined Benefit Funds, retirement funding through Account Based Pensions, stockbroking with a focus on Direct Share Investment, Taxation/Remuneration Planning, Centrelink, Aged Care and business management, equip him to advise expertly on all aspects of Financial Advice.
Those with a particular interest in superannuation/SMSFs, direct share investment, salary packaging or applying for the Centrelink Pension will find his knowledge and ability in formulating and implementing creative, logical and simple wealth creation strategies a valuable asset.
David maintains a strong personalised client service focus, providing tailored solutions for clients.
Qualifications:
Memberships:
Contact:
David Forrest is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846
Business Finance Manager
B Bus (Acc), CPA
Michelle’s career has spanned across the Financial Services, Retirement Living and Aged Care industries working in the private sector, not for profit and more recently with the state government for over 20 years. Her experience extends to many facets of the financial services industry, having worked in superannuation administration, technical support and financial planning practice administration.
Commencing with AMP and subsequently working in commerce and accounting roles with companies such as Brambles, Adelaide Bank Retirement Services, ECH Inc and SA Health and Wellbeing, Michelle returns to financial services after working in practice financial management at Henderson Gregory Forrest. This wide range of experience from senior accounting and management roles has provided Michelle with a strong background in business administration.
With an astute financial acumen and keen interest in business improvement strategies, Michelle ensures the smooth running of the Integrity Financial Advisory practice providing valued management support to our personalised client service focus.
Qualifications:
Memberships:
Contact:
Client Service Manager
Jasmine has worked in the financial services industry for over 12 years in all areas of client administration, working with David since 2013.
Jasmine has extensive knowledge and experience in client service including implementation of advice, portfolio reporting, assisting with the establishment of Self Managed Super Funds (SMSFs), term deposit management and a long history of helping clients with their enquiries.
Jasmine’s attention to detail, yet gentle approach, means she is able to solve the trickiest of questions for our client community.
Jasmine has gained her Certificate III in Financial Services qualification.
Contact:
Senior Client Service Manager
Merrilyn has worked in the financial services industry for over 11 years in all areas of client administration, and is a new addition to our client services team, returning from Melbourne to join the team in June 2019.
Merrilyn has extensive knowledge and experience in client service including implementation of advice, managed fund administration, assisting with the establishment of Self Managed Super Funds (SMSFs) and process improvement for the previous practices she has worked with. Merrilyn’s experience with direct shares constitutes the other part of our administrative support for direct equity investments.
Merrilyn’s warm and caring nature continues to endear her to our clients and she has already established herself as a valued member of our team.
Contact: