“The Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025 is a pragmatic move to align social security outcomes with superannuation reforms. It reflects an understanding that retirees shouldn’t be penalised for following Treasury-sanctioned pathways out of legacy products.”

Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024, which commenced on 7 December 2024, opened the door for members of certain legacy products to commute their income streams and, where possible, convert them into modern, more flexible retirement income solutions, Miller said.

“But here’s the catch, the very features that made these legacy products eligible for favourable treatment under the social security system — namely, their non-commutability — were undone by these reforms.”

“In other words, commutation, while great from a superannuation flexibility standpoint, could lead to a reversal of the asset-test exemption that underpinned many retirees’ social security entitlements.”

He added that the problem arose under section 1223A of the Social Security Act 1991, which stated that if a recipient commutes an asset-test exempt income stream in a way that conflicts with the original rules of the product, they may incur a social security debt.

“The way it works is that legacy income streams were granted asset-test exemption if they met specific conditions such as being non-commutable, or providing lifetime income. However, if these products are commuted, even lawfully under the new Treasury regulations, they technically breach their original terms,” he said.

“This breach triggers section 1223A, causing Centrelink to retrospectively reassess the income stream as not asset-test exempt for a period up to five years with the result that the pensioner may owe a debt equivalent to the difference in pension payments received under the exempt versus non-exempt treatment.”

He added that this outcome ran contrary to the intention behind Treasury reforms to allow retirees to reshape outdated products without penalty.

“To reconcile this disconnect, the Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025 has been introduced under subsection 1237AB(1) of the Social Security Act.”

“This provision allows the secretary of the Department of Social Services (or their delegate) to waive certain classes of debts arising under the Act. It should be noted that it’s not just income streams that are commuted that may be liable for a debt.”

Two key classes of debts have been covered.

The first is debts arising from commutation (section 1223A), which usually happens when a retiree fully commutes a legacy income stream, triggering section 1223A.

Miller said for an SMSF to be eligible for a waiver, the commutation must comply with the new regulations (SIS Regulation 1.06C) and the debt must not result from false or misleading information.

Furthermore, the product must have originally satisfied section 9A, 9B, or 9BA (asset-test exempt status requirements).

The second class of debt is that arising from non-commutation (section 1223), however, Miller warned there was a “curveball” linked to this.

“Even if a retiree doesn’t commute their legacy product, changing the rules of the product to allow for commutation can still trigger a loss of asset-test exemption and, as such, result in a debt," he said.

“This is because asset-test exemption is conditional on the income stream continuing to meet the criteria, including being non-commutable.”

If the governing rules were updated to enable commutation, even if the person doesn’t act on it, the product may cease to meet the exemption conditions and thereby trigger a debt under section 1223.

“It’s important to note that the Social Security Act 1991 definition of governing rules includes any legislation governing the operation of the income stream,” Miller said.

“While the specification does state a debt would only likely be raised if the contract or governing rules of the income stream were changed to enable the income stream to be commuted in accordance with the new SIS Regulations, there is a risk some clients may fall foul of the law with a poorly worded governing rules.”

To be eligible for the waiver in this instance, conditions apply, including that the only reason the exemption status failed must be the rule change for commutation. Additionally, the product must have originally met the exemption requirements, and no false or misleading information must have been provided.

“This is a crucial safety net for individuals who do nothing wrong but are affected by technical outcomes of regulatory change,” Miller said.

“The intention has always been to allow individuals to retain their asset-test exemption if they so choose to.”

Miller said the waiver not only aligned policy and practice, but also served a reminder that any change to superannuation products, especially legacy ones, must be viewed through both a tax and social security lens.

“For advisers working with clients considering legacy commutations, this specification provides much-needed assurance that adverse Centrelink consequences can be mitigated, provided the commutation or product change follows the specified rules,” he said.

The specification started after the disallowance period set under the Legislation Act 2003, and Miller warned that from that point on, the secretary (via Services Australia) had the authority to waive relevant debts, both retrospectively and going forward.

“It’s important to note that the waiver is not automatic and is subject to a decision by the secretary or delegate.”

“Additionally, the decision is reviewable under the Social Security (Administration) Act 1999, giving affected recipients access to internal and external review mechanisms. Finally, the specification does not impose compliance obligations or create new offences – its purpose is entirely beneficial.”