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Proposed 'special debit fix' far cry from original intent

Dec 20, 2019, 12:18 PM

By Mark Ellem


Key points: 

  • New proposed legislation 
  • Potential issues on excess transfer balance caps
  • Example of the impact from the change

A new Bill recently introduced into the House of Representatives included, at the end, proposed legislation to fix the technical issues with the special debit value for pre-1 July 2017 Market Linked Pensions. However, the proposed fix, whilst being far removed from the intent of the original legislation, may mean that members will have an excess transfer balance cap issue.

The proposed fix is contained in Treasury Laws Amendment (2019 Measure No.3) Bill 2019 and despite industry’s raising concerns about the application of this fix, it appears not to have changed from the original draft that was released for consultation back in February 2019.

The February 2019 Exposure Draft and Explanatory Materials, reflected in this latest Bill, propose and describe a very different approach to calculating the debit value of a commutation of a Market Linked Pension (MLP) from the example in the Explanatory Memorandum (EM) to the original Bill. And this fix will apply effective 1 July 2017.

Yes, the Government may have good reason for wanting to move the goals posts but moving the posts with retrospect effect is another matter and it may leave many clients who acted, on previously provided explanatory materials in good faith, with a substantial excess transfer balance cap issue.

The new approach, per the example in the Explanatory Materials to the Exposure Draft and the EM to this latest Bill, when calculating the debit value for the commutation, takes into consideration pension payments made in the financial year preceding the year the commutation takes place and the pension payments in the year of commutation. This is at odds with the general approach of pension payment not having any effect on a person’s transfer balance account.

Looking at the example in the EM of Daniel, for a full commutation of his MLP, if we apply the intent from the example of Grant (Examples 3.30 & 3.31) in the previous EM to the original Bill, I calculate a transfer balance account balance $17,000 lower – not a large amount in this example, but it will depend on the numbers for each case.

This new approach to calculating the debit value of a pre-1 July 2017 MLP commutation could mean a potential excess transfer balance amount for a member. This new approach is to apply from 1 July 2017, so all the calculations of debit value for commutations of these MLPs since 1 July 2017, that advisers, accountants and administrators have used may be and probably are now incorrect. It is not clear what action, if any, the ATO will take in situations where the debit value calculations has already been done using the approach outlined in the EM to the original Bill, particularly those that reported under their practical compliance approach.

I also have a concern about the interpretation of one aspect of the new approach and how it’s been applied in the Daniel example in the Explanatory Materials. The debit value is the original special value credit, reduced by any debit previously arisen, but is then further reduced by “the total amount of superannuation income stream benefits the person was entitled to receive before the start of the financial year in which the commutation takes place”.

In the Daniel example, this is the MLP payments received in the financial year preceding the year in which the commutation occurs. However, my question is how do you arrive at this figure given the wording of the relevant provision? Could it be interpreted as Daniel’s pension payments he’s entitled to for the remaining term of the MLP? That would severely reduce the debit value as the MLP still have a further 18 years to run.

If the commutation of the pre 1 July 2017 MLP was done on 1 July 2017, would the amount of the debit (which would start equal to the special value credit) be reduced by the actual pension payments received in the 2016/17 income year – a year in which the TBC did not operate?

Using the example of Daniel, but changing the commutation date to 1 July 2017:

  • The credit for the special value is $1,829,697;
  • The debit starts off as $1,829,697, but is reduced by MLP payments in the 2016/17 financial year, say $91,000. No further reduction as no payments in 2017/18 (year of commutation and pro-rata min is nil) – so debit is $1,738,697, leaving TBA balance of $91,000 credit;
  • Using the approach of the original Bill and the Grant example from the EM, the debit would have been $1,829,697.

If the value of Daniel’s MLP at 1 July 2017 was say $1.3m, he may have transferred $300,000 of accumulation benefits to a retirement phase ABP to maximise his TBC. However, applying the new approach, he’s got an excess TBA of $91,000.

In relation to fixing the original issue (special debit value of zero), it was said that the problem was that after a full commutation, there was no remaining term and no annual entitlement and therefore a resultant of zero. However, why could Treasury not simply have drafted the provision so the calculation is done as if the commutation did not take place, that is, the value at that point in time. They have done similar for when a retirement phase pension ceases due to failure to pay the minimum pension. The pension still ceases from the start of the year, but for TBA purposes only, the credit arises at the end of the income year – they could apply the same principal here, that is, calculate the special debit value as if the commutation did not occur.

It's now 3 and half years since the start of the super reforms and the introduction of the transfer balance cap. The application of this fix is intended to apply from the start of the super reforms which means it  applies from 3 and half years ago. It’s taken a long time to fix this problem. Hopefully it won’t take as long to fix the problems this fix may well create!