While most traditional defined benefit pensions won’t have a tax-free component, it may be necessary to consider the impact for clients that have market-linked income streams, he said.

Mr Ashenden said market-linked pensions – or in older terminology term allocated pensions (TAP) –  may have been purchased a number of years ago with non-concessional or undeducted contributions as part of the purchase price.

He said many SMSF practitioners still don’t realise that the tax-free component is also assessed under the defined benefit cap and that it actually takes priority.  

“If a client was to receive a payment of, say $200,000 from their TAP, and let’s just assume half or $100,000 of the payment represented a tax-free component, it wouldn’t be a surprise that many take the view that this client has no issue as you can ignore the tax-free component and then deal with what is left over, which in this case is $100,000 and it’s within the defined benefit income cap,” Mr Ashenden explained.

“Whilst understandable, this is wrong. In this example, the $100,000 of tax-free component completely exhausts the defined benefit income cap, meaning the remaining $100,000 taxable component is deemed to be excessive defined benefit income.”

Under the rules prior to 1 July 2017, if the client was over 60, the taxable component was tax free to the recipient, as they would have paid no tax on the taxed element of a super benefit.

“From 1 July 2017, however, 50 per cent of this excessive amount will now be taxed. The client would be taxed at their marginal rates on $50,000 of income,” Mr Ashenden said.