There were fears during the consultation period that these regulations would be linked to the Division 296 measures – being a part of the SMSF Association working group that consulted with Treasury, we urged them to separate the two items for a number of reasons, that were ultimately included within the final regulations released. Whilst not all of our wishes were granted, these Regulations provide for some pretty significant opportunities for SMSFs with legacy pensions and reserves.

Whilst we discussed these measures in a previous blog, a brief description of what they provide for, including some further clarity that has been provided in the final explanatory statement.

Commuting the non-commutable

Provisions for the commutation of SIS 1.06(2) – Complying Lifetime, SIS 1.06(7) – Life Expectancy (Fixed Term) and SIS 1.06(8) – Market Linked Pensions have been incorporated into the SIS Regulations. It should be noted that these pensions must be commuted in full. The resulting capital, inclusive of any reserve supporting the pension, can be:

• used to purchase an account based pension, subject to the transfer balance cap,
• retained in accumulation or
• removed from the superannuation system.

The allocation from the reserve will not count towards any contribution cap. We will consider the transfer balance cap ramifications in a separate blog.

Allocations from reserves

The new regulations effectively replace existing income tax regulations that provide for circumstances where allocations from reserves are either excluded from or counted towards the concessional contribution cap.

However, they go one step further as a result of the new commutation provisions, with an added bonus.

Any reserve that was established solely for the purpose of backing a legacy pension, certain pensions provided prior to 1 January 2006, can be allocated to the recipient of the pension whether that pension is commuted as a result of these Regulations, or has ceased prior to their introduction, as is the case with most life expectancy pensions. The catch being the original pensioner must be alive, noting that there are other provisions for reversionary pensions.

The added bonus – flexi pensions

Whilst it was not made totally clear when the Draft Regulations were released, these reserve regulations, and specifically the exception to the allocation counting towards any caps are extended to SIS 1.06(6) flexi pensions. Flexi pensions already have a mechanism that allow for their commutation, albeit to often underwhelming results, but with the new regulations, that commutation can now be complimented with a full allocation from the remaining reserve, music to many remaining flexi pension holders’ ears.

Non-concessional cap allocations

The most significant change to those allocations that otherwise get measured against contributions caps is that they will now be measured against an individual’s non-concessional contribution (NCC) cap rather than concessional contribution (CC) cap. Conveniently, if any allocation was made prior to the introduction of the Regulations they will count towards the concessional cap meaning in the current year there is the possibility of different allocations counting towards different caps.

The enhancement not only provides for greater amounts to be allocated but also provides for the mechanism for those without an NCC cap to remove the excess and 85% of associated earnings potentially leading to a lower personal tax outcome.

In summary & next steps

All in all these measures are a welcome addition to our regulations and whilst we hoped for some further enhancements, they are better than what we had prior to their introduction. Of course there are still plenty of things to consider, especially for those Social Security clients who use these for asset test exemption purposes.