The current budget contained only one SMSF relevant measure: the extension of the pension drawdown relief for another year.

The Government was quick off the mark with the implementing legislation being gazetted on Friday, 1 April 2022.  The relevant legislation being Superannuation Legislation Amendment (Superannuation Drawdown) Regulations 2022.  This legislation extends the 50% pension drawdown relief to the 2022/23 financial year.

What is the benefit of this change?

The change will benefit both individuals who are already in pension phase as well as individuals who will commence a pension during the 2022/23 financial year. 

For account-based pensions – the minimum pension drawdown will be 50% of the rate which would have normally applied.  The pension drawdown relief also applies to allocated pensions which have not converted to account-based pension.

For transition to retirement pensions - the minimum pension drawdown will be 50% of the rate which would have normally applied.  There has been no change to the 10% pension ceiling cap which applies to transition to retirement pensions.

For market-linked pensions - the minimum pension drawdown will be 45% of the calculated amount.  For these pensions, the pension drawdown must be within the range 90% to 110% of the calculated amount (as selected by the individual).  The drawdown relief means that for the 2022/23 financial year the pension drawdown must be within the range 45% to 110% of the calculated amount.

For other types of pensions (complying lifetime pensions, life expectancy pensions and flexi-term pensions) – there is no pension drawdown relief.

Who will benefit from this change?

Anyone who will be receiving in the 2022/23 financial year an account-based pension (or allocated pension), transition to retirement pension or a market-linked pension. 

They can, if they so wish, drawdown their pension at the lower permitted rate.  This may be done because they do not need a higher pension drawdown or wish to retain more pension capital in the fund benefiting from the earnings tax exemption.  This last benefit will not apply to transition to retirement pensions unless and until the member satisfies an unrestricted release condition (typically, attaining age 65 or being retired for superannuation purposes).

Missing Budget Super Changes – Control Test and Legacy Pension Reforms

While last year’s Federal Budget contained significant superannuation changes – the majority of which have now been legislated (see the next article), two changes are “missing in action”.   Unfortunately, the Government has not been able to introduce the proposed relaxation of the residency requirement for self managed superannuation funds or the significant reform to legacy pensions.

The proposed relaxation of the residency requirement relates to the requirement that for an SMSF to be eligible for the superannuation tax concessions, the fund must be an Australian superannuation fund. 

One prerequisite for an SMSF to be an Australian superannuation fund, is that the central management and control of the fund must be in Australia (the “CM&C test”).  If, however, central management and control is outside of Australia (for example, all members are non-residents) the fund will still be treated as satisfying the CM&C test if the central management and control of the fund is temporarily outside Australia for 2 years or less.  This could occur because the members are residing overseas on a temporary but extended basis for example, to write the Great Australian Novel in the Bordeaux.  However, due to the Covid-19 travel restrictions, the extended Bordeaux stay may have gone beyond 2 years – in which case, the concession to the CM&C test would not apply.  The Government’s proposal was to change the concession from 2 years to 5 years.  It is hoped that the Government will continue with this proposal given the very significant adverse tax consequences of an SMSF ceasing to qualify as an Australian superannuation fund.  These adverse tax consequences will apply even though there may have been no failure to comply with the SIS operating standards or misuse of the superannuation tax concessions.

The legacy pension reform was to permit members with legacy pensions (such as complying lifetime, life expectancy and market-linked pensions) to have a 2 year window (proposed to commence from 1 July 2022) in which to commute (if they so wished) the legacy pension and transfer the underlying capital (including any reserves associated with the pension) to accumulation phase and either then commence an account-based pension (transfer balance cap space permitting), retain the underlying capital in accumulation phase or to cash out the underlying capital. 

Under this reform, the value of any pension reserves would be taxed at 15% in the fund and would not be counted as concessional contribution of the member.  

If the legacy pensions have asset test exempt status (whether 100% or 50%), commuting the legacy pension will not give rise to a re-assessment of past asset test treatment of the legacy pension (which would normally be the case) in the period before the commutation of the pension.

Unfortunately, the necessary enabling legislation for these reforms has not been released (let alone enacted).  Given the forthcoming Federal election, it seems that the fate of both of these reforms will have to await the outcome of the election.

For any further information regarding this article please call SUPERCentral on 02 8296 6266 or email info@supercentral.com.au.