Pension reserves should be part of tax promise

legacy pension reserves

An election promise of no new taxes on superannuation may lead to legacy pension reserves being untaxed when commuted under a proposed amnesty.

An election promise from the federal government may result in no tax being levied on the reserves of a legacy pension and could allow the proposed legacy pension amnesty to commence by 1 July 2022, according to a technical specialist.

Australian Executor Trustees senior technical services manager Julie Steed said an election promise of no new super taxes under a re-elected Morrison government could be applied to the 2021 budget announcement to create a legacy pension amnesty under which the income streams could be commuted back into an accumulation account.

Steed noted the budget announcement included a proposal to tax the reserves at 15 per cent, but there was currently no fund tax that applied to a commuted reserve.

“So would a Morrison government drop the proposal to tax reserves because it would be a new tax?” Steed told smstrusteenews.

“This makes sense as the reserves are not exempt current pension income – their investment returns are fully taxable.

“In addition, we have various ATO communications confirming that the commutation of all of an existing lifetime or life expectancy pension, including reserves, to a market-linked income stream is acceptable.”

She acknowledged the budget announcement preceded the election promise and therefore may not be covered by the latter, but currently there was no tax on reserves and any changes to tax law to create that would be the same as introducing a new tax.

At the same time, dropping the proposal to tax legacy pension reserves, which would only require an amendment to the income tax legislation, meant the only changes needed to implement the amnesty were in the Superannuation Industry (Supervision) Regulations and a disallowable instrument to prevent a social security clawback.

“This means there is a small possibility that the amnesty could be implemented by 1 July 2022,” Steed said, adding that while nothing official has been released by the government since the 2021 budget announcements, Treasury and the ATO had set aside resources for the change.

“The December 2021 Mid-Year Economic and Fiscal Outlook allocated $2.8 million to provide funding to Services Australia and the Department of Veterans’ Affairs to implement the legacy pension conversions.

“Also on 14 March there was a change to the ATO’s Superannuation Changes Industry Roadmap, which added an action item of reporting the conversion of legacy pension conversions but with the caveat ‘pending legislation’.”


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