Industry sees double over super changes

When the Federal Government announced that from July 1, 2001, superannuation assets were to be exempted from the social security income and assets tests from age 55 until pension age, it caused quite a stir.

Following the announcement, many allocated pensioners in this age range decided to commute their unused pension back into an accumulation account within the same super fund. In essence, performing an ‘internal rollover’ in their super fund.

Where allocated pensioners have commuted their pension into the accumulation account of a separate superannuation fund, there is no issue. This is because the commuted amount is a payment from one superannuation fund to another, and so complies with the definition of a ‘qualifying eligible termination payment (ETP)’ under the Income Tax Assessment Act 1936.

The issue arises when both the pension account and the accumulation account are held in the same superannuation fund, for example, a self-managed superannuation fund. In these funds, when the pensioner commutes their pension, it is only transferred within the fund from the pension account to the accumulation account — that is, internally rolled over.

Questions were raised with respect to this internal rollover issue, including “has an ETP been created?”, and if so, “is the internal transfer considered a rollover?”.

The Australian Taxation Office (ATO) had sought to clarify the issue by issuing an ATO Interpretative Decision (ATO ID 2001/802), which basically stated that an ‘internal rollover’ did not give rise to the creation of an ETP, and hence was not a reportable event for reasonable benefit limit (RBL) purposes.

This means the amount originally counted when the pension first commenced is not discounted. As a result, at a later date if a pension is commenced, or an ETP is taken in cash, there will be an element of double counting. There is also the potential for an excess benefit problem and a likely reduction in the proportion of the pension or annuity that qualifies for the 15 per cent rebate.

The following example demonstrates these issues.

Three years ago when Adrienne was 56, she decided to commence an allocated pension with $400,000. Recently she was offered full-time work, and in accepting the job decided that she no longer needed the income from her pension.

Adrienne decided to commute her pension and roll the funds back into an accumulation account in the same super fund. At the time of commutation, her pension was worth $360,000.

According to the ATO Interpretive Decision, the commutation of Adrienne’s pension does not give rise to an ETP and so she will not be entitled to a reduction in the original amount counted towards her reasonable benefit limit (RBL).

If we assume that Adrienne decides to use these accumulated benefits to purchase an allocated pension when she turns 65 (which by then will have grown to $480,000), her RBL assessment will include this new amount, that is $480,000, plus the original $400,000 (because she was not entitled to a reduction for the amount already used).

This means her total RBL amount is $880,000 — well in excess of the lump sum RBL. It also means that she will not be entitled to the full 15 per cent pension tax offset, potentially resulting in more income tax being payable on the new allocated pension commenced.

Given the potential problems with internal rollovers, several industry bodies have lobbied for fairer treatment.

In response, the Federal Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, announced in a press release dated July 1, 2002, that internal rollovers are to be treated as ETPs, and will therefore be able to be reported for RBL purposes, avoiding the potential adverse tax consequences that would otherwise arise.

The issue is currently with Federal Parliament and the industry awaits a final decision.

John Perri is technical servicesmanager, AMP AustralianFinancial Services.