SMSFA calls for legacy pension amnesty
The SMSF Association is urging Treasury to prioritise an amnesty for legacy pensions in the upcoming Federal Budget on May 14, following clarification about how these pensions will be valued under the proposed new tax on superannuation balances above $3 million.
This clarification follows concerns expressed by the SMSFA that the draft regulations were insufficiently clear about how these pensions would be valued for the purposes of the new tax.
SMSFA CEO Peter Burgess said the confusion stems from the fact these types of pensions do not have a family law split value, meaning under the draft regulations it will require a different set of valuation factors to be used rather than the default Family Law Split factors, that appeared to be the intent of the regulations.
“Treasury has confirmed that the intent is for an SMSF paying a complying lifetime or life expectancy pension to use the Family Law Split factors in the relevant Schedule of the Family Law (Superannuation) Regulations 2001 to value the pension for Division 296 purposes,” he said.
The SMSFA is also seeking clarification about who will be responsible for calculating the value of these pensions for Division 296 purposes.
“Considering the ATO doesn’t have the required information, we assume the funds themselves will be asked to do this calculation and report the value in their annual return,” Burgess said.
“Compounding this difficulty is the relatively small and declining number of these pensions, meaning it’s unlikely SMSF administration platforms will undertake this calculation.”
He added there are already many legacy pensions where the costs of administering them is substantial and given the likely complexity of the Division 296 calculations, irrespective of who performs them, these costs look set to increase for impacted members.
“Even if funds incur the costs to undertake this calculation, it doesn't alleviate the administrative burden of having to report additional information to the regulator,” he said.
“Without the collection of additional data from funds, it is impossible to see how the ATO will be able to effectively administer the new Division 296 tax regime, especially in relation to legacy pensions.”
Burgess said for the dual reasons of increased costs and greater complexity the SMSFA is urging the government to fast-track the legacy pension amnesty first announced in the 2021 Federal Budget in this year’s Budget.
"There is a window of opportunity now to significantly reduce the number of these pensions before the proposed new tax commences on 1 July 2025,” Burgess said.
"The association also believes there is an opportunity for the government to turn its mind to the long-standing complex issue of reserves associated with legacy pensions. Division 296 is about to make the valuation of pension reserves and allocations to members a whole lot more complex and we are calling on the government to adopt a wholistic approach in managing reserves, that avoids non-sensical tax stacking.”
He concluded that an amnesty would help reduce the remaining number of these legacy pensions by giving individuals the opportunity to take up new more innovative account-based retirement income products which in turn will make the administration of Division 296 simpler and more efficient for taxpayers, regulators, and the superannuation industry.
