The bill rectified an issue where the value of a market-linked pension (MLP) was being double counted for transfer balance cap purposes where the pension was restarted.

After the legislative amendment to fix the issue was passed, the ATO issued a new alert, CRT Alert 031/2020, on 19 June 2020.

The ATO stated in the alert that it would be reviewing its compliance approach where it had previously advised funds that it would not take compliance action if a fund did not report the required transfer balance account events of the commutation and restart of a market-linked pension, or reported a commutation amount other than nil.

“Funds will need to review the information already reported to us and consider whether they need to amend any reporting in line with the legislation,” the ATO previously stated.

The ATO also said in June that it would not be engaging with funds on how the legislation impacts their reporting obligations until August 2020, and that it would not take compliance action against funds who do not review their reporting before this time.

In an online update this week, the ATO stated that it has been hearing from funds that “calculating the value of the debit retrospectively is challenging”.

It has also published updated guidance on how the value of the debit should be calculated. Due to the delay in publishing this guidance, the ATO is providing funds more time to start their retrospective reporting.

“We do not expect any funds to begin to commence their retrospective reporting until November 2020,” the Tax Office said.

“We anticipate providing additional guidance before the end of November as to when we would expect that retrospective reporting to be completed by.”

The ATO also made clear that reporting does not need to be reviewed for a member who is deceased.

“We acknowledge that where an SMSF has been wound up, it will not be possible for the reporting to be reviewed,” it said.

Updated guidance

The ATO stated that the guidance applies to the calculation of a debit value that arises where a non-commutable, life expectancy or market-linked income stream that is also a capped defined benefit income stream (CDBIS) is commuted.

“Most commonly, these will be market-linked pensions and annuities which commenced prior to 1 July 2017 and were not subsequently commuted in full. This includes market-linked pensions which were CDBIS and continue to be paid to reversionary beneficiaries,” the Tax Office explained.

“The change also applies to CDBIS which are life expectancy pensions paid under subregulation 1.06(7) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) and life expectancy annuities paid under a contract that meets the standards of subregulation 1.05(9) of the SISR.”

The ATO explained that the debit value of the superannuation interest just before the full commutation is the amount of the original transfer balance credit in respect of the superannuation income stream less the sum of the following amounts:

• The amount of any transfer balance debits (other than a debit arising under item 4 of the table in subsection 294-80(1) of the Income Tax Assessment Act 1997 in respect of the income stream before the commutation.
• The total amount of superannuation income stream benefits the person was entitled to receive before the start of the financial year the commutation takes place.
• The greater of
• The sum of the superannuation income stream benefits paid during the financial year the commutation takes place.
• The minimum amount required to be paid under regulations 1.07B and 1.07C of SISR or regulation 1.08 of the Retirement Savings Account Regulations 1997 during the financial year the commutation takes.
• Where the transfer balance debits that need to be considered are those debits arising out of a partial commutation of the income stream on or after 1 July 2017 — these include partial commutations arising out of a family law superannuation split.

Following a divorce or other relationship breakdown, the ATO said that superannuation interests may be split by the spouse by fully or partially commuting a superannuation income stream or by dividing the superannuation income stream payments.

“It is only debits arising when an income stream is divided (a payment split) that are disregarded when calculating the value of this debit. Debits arising from a payment split are reported to us by the individual,” it explained.

The total amount of superannuation income stream benefits the member was entitled to receive before the start of the financial year the commutation takes place will be equivalent to the actual pension payments made between 1 July 2017 and the year the commutation occurs, provided that the payments are made in accordance with the requisite standards, the ATO said.

“In the year the commutation occurs, any income stream benefits paid prior to the commutation occurring are included in the calculation to reduce the value of the debit. If the commutation occurred partway through the year, then any benefits paid would be included up to commutation date,” it explained.

“For market-linked income streams under 294-145 (6A)(c), the minimum amount would encompass the annual amount calculation which considers percentage variances in accordance with schedule 6 of the SISR.”

Where a market-linked or similar income stream that was a CDBIS is, or was, commuted and restarted on or after 1 July 2017, the ATO stated that the income stream will no longer be a CDBIS.

SMSFs should ensure they calculate the ordinary value of the credit and ensure that it is reported as an account-based pension.