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New laws provide a strategic opportunity for exiting certain legacy pensions.<\/p>\n
We will cover this opportunity in great detail in a webinar to be held at 12 noon (AEST) Thursday 28 April 2022. Those who can\u2019t attend can watch a recorded version. To register visit https:\/\/attendee.gotowebinar.com\/register\/3108445138265877264<\/a><\/p>\n In this article we detail the preliminary \u2018ins and outs\u2019 of the strategic opportunity provided under the new laws.<\/p>\n No. This opportunity does not stem from last year\u2019s Federal Budget announcement.<\/p>\n Firstly, the opportunity applies to:<\/p>\n that were in existence before 1\u00a0July 2017. These are called \u2018capped defined benefit income streams\u2019 (CDBISs<\/strong>).<\/p>\n Predominantly, a market linked pension rarely suits the needs of an SMSF member anymore. They are inflexible and usually relate to legacy planning under long since repealed laws. <\/span><\/p>\n Many market linked pension recipients would rather exchange at least some of that pension for an accumulation account where they can withdraw lump sums as needed.<\/span><\/p>\n In addition, there are also tax issues.<\/span><\/p>\n Consider an SMSF market linked pension that is funded by $10\u00a0million of assets. Presumably this market linked pension was in existence before 1\u00a0July 2017 (ie, it is a CDBIS). If the pensioner is now 80 years old it is possible that in the current (FY2022) financial year the pensioner must receive at least $316,678.40 of pension payments. And, if it weren\u2019t for the current 50% COVID19 pension draw down relief, the pension minimum would be $633,356.79!<\/span><\/p>\n Even if the market linked pension is funded 100% by the tax-free component, this will lead to a significant amount of personal assessable income for the pensioner. In the current financial year presumably it will lead to $105,214.20 of assessable income (calculated as 50% x [$316,678.40 less the pensioner\u2019s defined benefit income cap, which presumably is $106,250]). Further, in financial years when the current 50% COVID19 pension draw down relief does not apply, it will probably lead to $263,553.40 of assessable income (or realistically even more since the pensioner will be older by then and thus the minimum pension payment will be higher).<\/span><\/p>\n Accordingly, a large market linked pension causes a significant personal income tax liability.<\/span><\/p>\n Much like a market linked pension, a CDBIS with reserves (eg, a complying lifetime or a life expectancy) rarely satisfies the needs of the pensioner anymore. Rather, such a pensioner would also typically much rather exchange at least some of that pension for an accumulation account.<\/p>\n Further, the personal income tax referred to above would also occur for a large complying lifetime pension or a life expectancy pensions too.<\/p>\n Also, there is a significant succession planning issue.<\/p>\n Consider an SMSF that is currently paying a (CDBIS) complying lifetime pension to member. The assets supporting the pension including associated \u2018reserves\u2019 are valued at $3\u00a0million.<\/p>\n Naturally, the \u2018reserves\u2019 pose a significant issue. In Self Managed Superannuation Fund Regulator\u2019s Bulletin 2018\/2 the ATO say that the amounts supporting that pension are reserves for taxation law purposes however they are not reserves for superannuation law purposes (see paragraphs\u00a024 and 25 respectively).<\/p>\n If this ATO view is correct, the implications of this presumably would cause a massive succession planning issue. If taken to its logical conclusion, this means that upon pensioner\u2019s death:<\/p>\n On Monday 4 April 2022 the Government registered the Treasury Laws Amendment (Allowing Commutation of Certain Income Streams) Regulations 2022<\/i> (Cth). The exact mechanisms of the new provisions that the regulations introduced are somewhat complex.<\/span><\/p>\n However, at their core, they operate as for follows. Consider a $10\u00a0million CDBIS that is now (ie, after 4\u00a0April 2022) converted into a $10\u00a0million market linked pension. The regulations then allow typically $8.4 million of that market linked pension to then be converted into, among other things, an accumulation account after certain restructuring and other steps are taken.<\/span><\/p>\n No. The conversion from the original CDBIS referred to above will first trigger an excess transfer balance (broadly pursuant to the CDBIS pension being converted into a non-CDBIS pension as a preliminary step). Moreover, before any relief is available, the Commissioner will need to provide an excess transfer balance determination and other steps need to be taken in response to this determination. Naturally, the excess transfer balance regime has its own implications that must be considered and managed.<\/p>\n Of course, one way to help address this aspect would involve seeking to implement the conversation within very strategic timelines.<\/p>\n Furthermore, there are other considerations, including:<\/p>\n Subject to these above aspects, the opportunity provided under the new law could result in the member potentially having:<\/p>\n Again, we will cover this opportunity in great detail in the webinar to be held on 12 noon (AEST) Thursday 28 April 2022. Those who can\u2019t attend can watch a recorded version. To register visit https:\/\/attendee.gotowebinar.com\/register\/3108445138265877264<\/a><\/p>\n *\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 *\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 *<\/p>\n This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 <\/em>(Cth).<\/p>\n Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au<\/a> or call 03 9092 9400.<\/p>\n For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au<\/a>.<\/p>\n By Bryce Figot (<\/em>bfigot@dbalawyers.com.au<\/em><\/a>), Special Counsel and William Fettes (<\/em>wfettes@dbalawyers.com.au<\/em><\/a>), Senior Associate, \u00a0DBA Lawyers<\/em><\/p>\n DBA LAWYERS<\/strong><\/p>\n 7\u00a0April 2022<\/p>\nIs this opportunity to do with last year\u2019s Budget announcement?<\/h3>\n
How does the opportunity work?<\/h3>\n
Who is covered?<\/h4>\n
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Why is a large market linked pension (term allocated pension) such an issue?<\/span><\/h4>\n
Why are \u2018reserves\u2019 such an issue?<\/h4>\n
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The mechanisms of the opportunity<\/span><\/h4>\n
Is it really that simple?<\/h4>\n
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For more details<\/h3>\n
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