Pensions, Superannuation

TBC calculation all inclusive

Transfer balance cap Calculation Excess transfer balance Defined benefit pensions Federal Court

The recipient of two defined benefit pensions has lost a court case to have them excluded from the calculation of his excess transfer balance, failing to prove they were not covered by tax laws.

The full Federal Court has rejected an appeal to overturn decisions by the ATO and Administrative Appeals Tribunal (AAT) that defined benefit lifetime pensions could be excluded from the calculation of an excess transfer balance for the purpose of the transfer balance cap.

The case of Stern v Commissioner of Taxation (2024 FCAFC 21) was dismissed by the court on 1 March after it ruled section 294-140 of the Income Tax Assessment Act (ITAA) 1997 could not be interpreted to exclude defined benefit lifetime pensions that had commutation restrictions from the excess transfer balance calculation.

The court heard Stern was a retirement-phase recipient of three pensions, two of which were capped defined benefit income streams and one a market-linked flexi-pension.

In January 2018, he received an excess balance determination and needed to commute $254,243.39 out of his superannuation pension accounts by March 2018 or the ATO would send an authority instructing his super fund to exit that figure from his flexi-pension.

The excess balance determination was due to Stern’s transfer balance being $3,452,308.57, which was made up of the two defined benefit pensions, valued at $1,826,422.46 and $1,371,642.72 respectively, the flexi-pension valued at $243,955.48 and excess transfer balance earnings of $10,287.91. The excess of $254,243.39 was the total of the latter two amounts.

While he accepted the ATO’s calculations were correct, his counsel argued section 294-410 of the ITAA conflicted with other parts of section 294 so “that it was absurd or unreasonable for the legislation to be construed so as both to treat the income from his defined benefit lifetime pensions as assessable and also to include those pensions in the calculation of his excess transfer balance”.

In rejecting this view, the court stated “section 294-140 makes clear that capped defined benefit income streams are also taken into account in determining whether a person has excess transfer balance”.

“In terms, section 294-140 addresses the situation in which a person has a ‘capped defined benefit income stream’ and another superannuation income stream which is not a ‘capped defined benefit income stream’,” it said.

The court proceedings also noted section 294-140 works with section 294-130, which defines a capped defined benefit income stream by reference to certain products with commutation restrictions and someone “cannot sensibly read section 294-140 as excluding any ‘capped defined benefit income stream’ with commutation restrictions when that is obviously one of the reasons for the enactment of s 294-140”.


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