The ATO has released ATO ID 2012/84 with an answer to a complying pension conversion I have for years wanted to see in black and white.
A SMSF fund included a complying lifetime pension for a member - also known as a Reg 1.06(2) pension. At 30th June, 2011 the part of the total fund assets backing this pension were $1.65 million (being $1.2 million in a "pension account" and $450,000 in a "pension reserve account"). The sub-account in the pension reserve account was $170,000 as an investment adequacy amount, $90,000 as a mortality adequacy account and surplus amount of $190,000. The accounts had been used for no other purpose than to back the lifetime pension.
The trustees - at the request of the member - allocated $1.2 million to a market linked pension and $450,000 to an account based pension. The question was whether or not the ABP was treated as a concessional contribution. The Commissioner's view was "Yes"!
Here are some of the important points from the ATO ID:
In the Commissioner's view, the complying lifetime pension account and the pension reserve account together represent a reserve (for the purposes of regulation 292-25.01 of the ITAR 1997) to guarantee the complying lifetime pension payments for the term of the complying pension.
If an amount allocated from a reserve is not to be treated as a concessional contribution by reason of the paragraph 292-25.01(4)(b) exception in ITAR 1997 then the reserve must be "used solely for the purpose of enabling the fund to discharge all or part of its liabilities...in respect of the superannuation income stream benefits that are payably by the fund at that time".
The SIS Regulations provide that a complying lifetime pension may be commuted if the superannuation lump sum resulting from the commutation is transferred directly for the purpose of purchasing another income stream. The market linked pension is one of the specified types of income streams, but an acccount based pension is not.
So, the punchline appears to be that the entire value of the complying lifetime pension account and the pension reserve account could - on commutation of the complying lifetime pension - be used to commence a market linked pension for the relevant member and not counted as a concessional contribution. However "the exclusion in paragraph 292-25.01 (4)(b) of the ITAR 1997 does not apply to an allocation from either the complying lifetime pension account or pension reserve account to commence an account based pension for the member."
With a concessional contribution cap of only $25,000 and the need to "gross up", this constrains what can go into an ABP on commutation. Any amount left over in the reserve after the commutation could also be used for the crediting rate As long as those requirements are met i.e. max 5% and in proportion to the account balances.
The NetActuary Team