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Tax amnesty urged on legacy pension products

Mike Taylor26 April 2024
Chain and padlock around file

The Federal Government is being urged to use next month’s Federal Budget to declare an amnesty on legacy pension products following clarification about how they will be treated under the proposed $3 million superannuation tax cap.

The SMSF Association has made the amnesty call stating that the draft regulations around the $3 million cap are insufficiently clear about how the legacy pension will be valued.

SMSF Association chief executive, Peter Burgess said the confusion stems from the fact that the pensions do not have a family law split value, meaning under the draft regulations it will require a different set of valuation factors to be used rather than the default Family Law Split factors which appeared to be the intent of the regulations.

“Treasury have confirmed that the intent is for an SMSF paying a complying lifetime or life expectancy pension to use the Family Law Split factors in the relevant Schedule of the Family Law (Superannuation) Regulations 2001 to value the pension for Division 296 purposes,” he said.

The Association is also seeking clarification about who will be responsible for calculating the value of these pensions for Division 296 purposes.

“Considering the ATO doesn’t have the required information, we assume the funds themselves will be asked to do this calculation and report the value in their annual return.

“Compounding this difficulty is the relatively small and declining number of these pensions, meaning it’s unlikely SMSF administration platforms will undertake this calculation.

“There are already many legacy pensions where the costs of administering them is substantial and given the likely complexity of the Division 296 calculations, irrespective of who performs them, these costs look set to increase for impacted members,” Burgess said.

He said that even if funds incur the costs to undertake this calculation, it doesn’t alleviate the administrative burden of having to report additional information to the Regulator.

Without the collection of additional data from funds, it is impossible to see how the ATO will be able to effectively administer the new Division 296 tax regime, especially in relation to legacy pensions.

Burgess said for the dual reasons of increased costs and greater complexity the Association is urging the Government to fast track the legacy pension amnesty first announced in the 2021 Federal Budget in this year’s Federal Budget.

“There is a window of opportunity now to significantly reduce the number of these pensions before the proposed new tax commences on 1 July 2025.”

Burgess said that the Association also believes there is an opportunity for the Government to turn their mind to the long-standing complex issue of reserves associated with legacy pensions.

“Division 296 is about to make the valuation of pension reserves and allocations to members a whole lot more complex and we are calling on the Government to adopt a wholistic approach in managing reserves, that avoids non sensical tax stacking.

“An amnesty will help reduce the remaining number of these legacy pensions by giving individuals the opportunity to take up new more innovative account-based retirement income products. This in turn will make the administration of Division 296 a whole lot simpler and efficient for taxpayers, regulators, and the superannuation industry.”


Mike Taylor

Mike Taylor

Managing Editor/Publisher, Financial Newswire

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