“The exceptions allow commutations to occur to comply with commutation authorities. The commutation authorities would require recipients to address excess amounts above the transfer balance cap for certain products specified in the table in subsection 294-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) – namely, life expectancy pensions, life expectancy annuities, market-linked pensions and market-linked annuities (affected products),” the government said.

“Previously, the exceptions contained in the SIS Regulations and the RSA Regulations did not permit for such commutations to occur. As such, retirement phase recipients of affected products were not able to address any existing excess transfer balance and were therefore unable to comply with transfer balance cap rules.

“The exceptions rectify this problem by enabling recipients of affected products that were commenced on or after 1 July 2017 to undertake commutations to resolve excess transfer balance amounts. 

“Individuals who were previously recipients of a capped defined benefit income stream (including a person who was previously a recipient of a lifetime annuity or lifetime pension) and commuted a lump sum to directly purchase an affected product on or after 1 July 2017 can now commute up to the amount that they are in excess of the transfer balance cap from the commenced income stream.”

Accordingly, the lump sum that results from commuting the excess transfer balance would reduce a recipient’s transfer balance account, according to Treasury. Commutation in this instance may only occur in response to a commutation authority that is issued after the Australian Taxation Office has determined the excess transfer balance for the individual.

The new changes also see that total payment amounts to be made in a year to recipients of life expectancy annuities and life expectancy pensions may be varied to allow commutation to address an excess transfer balance. These amendments ensure that funds can reduce annual payment amounts to avoid solvency problems that may arise following commutations that reduce the value of underlying assets that support these income streams.

Specifically, these amendments change when the transfer balance credit and transfer balance debit arise in relation to calculating the excess transfer balance tax for an individual who commuted from a capped defined benefit income stream and commenced an affected product on or after 1 July 2017.

“That is an individual’s transfer balance credit for a capped defined benefit income stream that they have commuted from normally arises under item 1 in the table in section 294-25(1) of the ITAA 1997 (and this timing is not modified by items 1 or 2 of the Regulations), the transfer balance debit, for a commutation from a capped defined benefit income stream, arises immediately after the commencement of Schedule 1 to the Regulations or immediately after the commutation occurs, whichever occurs later,” the draft legislative paper noted.

“This debit arises prior to the transfer balance credit (for commencing an affected product). It will also affect the transfer balance credit, for commencing an affected product, which arises after the transfer balance debit (for a full commutation out of a product) so that any excess transfer balance tax liability accrues after the commencement of the Regulations.”

In an example provided, on 1 July 2018, Steven purchased a market-linked pension (the credit) directly from the lump sum resulting from a commutation of his CDBIS life-expectancy pension (the debit).

As his new market-linked pension commenced after 1 July 2017, it was not classified as a CDBIS for transfer balance cap purposes.

“Under the Regulations, the debit and credit for this commutation and commencement will arise in his transfer balance account on the date the Regulations commence,” the government explained.

“The debit arises prior to the transfer balance credit. Steven will then have an excess transfer balance amount that he would have been unable to resolve if it arose before the commencement of the Regulations. Steven will then receive a determination of his excess transfer balance amount.

“The excess transfer balance amount on the determination will be the amount that exceeds Steven’s personal transfer balance cap and the deemed earnings that accrue after the Regulations commence. Steven will not have accrued any transfer balance credits for deemed earnings between 1 July 2018 and the commencement of the Regulations.

“A commutation authority will enable Steven to commute the excess amount as a lump sum from his market-linked pension to an account in the accumulation phase, where it can be retained or be paid out as a lump sum.”