Another layer of the onion peeled away

Division 296 tax SMSF Association SMSF legacy pensions

The treatment of SMSF legacy pensions in the proposed Division 296 tax raises more questions than it answers, contributing to the overall complexity of the tax measure.

The proposed new tax on total super balances over $3 million, or the Division 296 tax, has been a constant topic of discussion since the measure was announced back in February last year and I have been providing updates into the detail of the legislation to readers via this column as I have been finding out about them.

Most incredibly the experience has been exactly like peeling an onion – every time another layer is stripped away, a new anomaly is uncovered.

And so it was again in the past fortnight with a further revelation about the calculation of a person’s total super balance for the purposes of the new tax, this time pertaining to SMSF legacy pensions. These include arrangements such as market-linked or defined benefit pensions.

The contention until now had been around how these income streams would be valued when assessing if Division 296 tax applied to an individual receiving one.

It has now been declared SMSFs servicing these types of income streams will have to value them by using the family law split factors in the relevant schedule of the Family Law (Superannuation) Regulations 2001.

After reading the previous paragraph, you might be asking yourself what exactly is that. Believe me I certainly was when I found out. And you would be justified in doing so because from an SMSF perspective, why would any of us know what this schedule is.

The schedule and reference to the Family Law (Superannuation) Regulations is predominantly a foreign one for the majority of us and herein lies the problem – yet another one pertaining to this tax policy.

So foreign is this concept, the SMSF Association is unclear where the responsibility for gathering and maintaining the required information will fall. Will the ATO bare this burden or will it be left to fund trustees to do so?

This of course opens up another can of worms. If it is decided trustees have to record this information, how exactly will they do it? In its analysis of the announcement, the industry body recognised current fund administration platforms do not cater for the provision of this type of data. Further, given there are only a small number of SMSFs in the gun, administration providers are unlikely to update their systems for such a small cohort of clients.

So potentially it will mean more hassle and more expense for certain trustees.

What about giving the ATO this responsibility? Well, this is not really a solution because its systems currently do not have the required functionality either. Also, it is highly likely any upgrade to the regulator’s infrastructure will be more difficult and more expensive to execute and we all know who will end up wearing that cost.

I mentioned before there are only a small number of funds with legacy pensions in place, but this shouldn’t preclude proper consideration being given to the treatment of these income streams for Division 296 tax purposes as it is widely recognised it will mainly be SMSFs the measure will capture.

So serious is the development, the SMSF Association has actually called on the government to provide an amnesty for legacy pensions with regard to the Division 296 tax in this year’s federal budget.

I suggest everyone keep an eye out for this on 14 May, but I doubt we will see anything to our liking.


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