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Market-linked pension commutations unclear

The SMSF Association is seeking clarity from the ATO over its position regarding the treatment of market-linked pension commutations on an individual’s transfer balance account.

During a webinar hosted by the industry body, association head of policy Jordan George explained the ATO is now saying market-linked pensions that are commuted post-1 July 2017 will carry with them a nil transfer balance account debit.

“We don’t think it is in accordance with the original legislative intent and that’s something we’re seeking further clarity on from the ATO,” George said.

“We thought it was well understood at the time when legislation was being developed and introduced that the special value credit [assigned to a market-linked pension] could be washed out by commuting and restarting a market-linked pension after 1 July 2017.”

According to George, when the legislation was being formulated, market-linked pensions were to be assigned a special capital value for transfer balance account purposes that would be significantly larger than the capital value of the underlying asset supporting the market-linked pension in question.

“It was generally then a well-understood strategy that if you commuted that market-linked pension after 1 July 2017, you would be able to wash out the [special value transfer balance account] credit with a debit [of equivalent value] and restart the market-linked pension with the transfer balance cap credit only being the capital value of the pension,” he said.

George pointed out the new interpretation of the legislation presents the danger of double counting of a market-linked pension against an individual’s transfer balance cap.

“[The nil value debit] would potentially then start a double counting of the credit when you restart that pension as a new [income stream] that is rolled over post-July 2017,” he said.

“So that is something we’d like to seek clarity on.”

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