In a media release on 31 October 2018, Assistant Treasurer Stuart Roberts announced that the Government will make technical changes to the superannuation tax law to address some minor but important issues, as part of the ongoing super reforms. The changes are in the following areas:
- comprehensive income product for retirement (CIPR) framework – the start date will be deferred to 1 July 2022;
- innovative income streams – the definition of "life expectancy period" will be amended to account for leap years when determining the maximum commutation amount, and the pension transfer balance cap rules will be amended to provide credits and debits when such products are paid off in instalments;
- defined benefit pensions – the transfer balance cap valuation rules will be amended to reflect certain pensions that are permanently reduced following an initial higher payment;
- market-linked pensions – changes will correct a valuation error under the transfer balance cap rules where a market-linked pension is commuted and rolled over, or involved in a successor fund transfer; and
- death benefit rollovers involving insurance proceeds – changes will ensure these amounts remain tax-free for dependants.
The Government will defer to 1 July 2022 the start date for superannuation funds to offer a comprehensive income product for retirement (CIPR), and will increase the threshold superannuation balance for offering a CIPR from $50,000 to $100,000.
By way of background: the Government released a discussion paper in December 2016 on the development of a CIPR framework, to be known as MyRetirement products. This followed its response to the Murray Financial System Inquiry in which it agreed to facilitate trustees offering these products to members. The Government has also established a consumer and industry advisory group to assist in the next phase of development. The CIPR framework was originally expected to commence at some time after mid-2019, following consultation on exposure draft legislation and regulations (yet to be released as at 1 November 2018). However, the Government has now deferred the start date until 1 July 2022.
To support the development of the CIPR framework, the Government has previously proposed to introduce a retirement income strategy covenant. Among other things, the covenant will require superannuation trustees to consider members' retirement income needs by developing a retirement income strategy for fund members. The principles underpinning this retirement income covenant, as announced in the 2018–2019 Federal Budget, were set out in a Treasury position paper released in May 2018.
The Government had originally proposed to legislate the retirement income covenant by 1 July 2019, with a start date of 1 July 2020. However, the requirement for funds to offer CIPR products has now been deferred until 1 July 2022.
The pension standards for innovative superannuation income streams (regs 1.06A and 1.06B of the Superannuation Industry (Supervision) Regulations 1994) allow for retirement income products from 1 July 2017, including deferred lifetime annuities, investment-linked products and group self-annuitisation products that enable the pooling of risk. These types income streams are a precursor to the development of the CIPR framework that will depend on such pooled annuity-type products. Note that the Government has confirmed the social security means test treatment of pooled lifetime retirement income streams.
Mr Robert announced that the Government will amend the definition of the "life expectancy period" for tax-exempt innovative superannuation income streams to account properly for the number of days in a leap year when determining the maximum commutation amount. The amendment will align the definition of life-expectancy with annuity anniversary dates and ensure that individuals with these products are not short-changed in a leap year.
The Government will also amend the Income Tax Assessment Regulations 1997 to provide transfer balance cap credits and debits for innovative superannuation income stream products that are paid off in instalments. The amendments will ensure that innovative income stream products receive appropriate treatment under the pension transfer balance cap.
Amendments will also be made to the valuation rules for defined benefit pensions under the transfer balance cap to reflect when pensions are permanently reduced following an initial higher payment, such as for some public sector defined benefit reversionary pensions or reclassification of invalidity pensions.
Where an individual receives a capped defined benefit income stream, a credit arises (under s 294-25 of the Income Tax Assessment Act 1997) in their transfer balance account equal to the "special value" of the superannuation interest determined under s 294-135 of ITAA 1997. The calculation of the special value is based on the "first income stream benefit payable".
The amendment will seek to address a problem that can currently arise for certain reversionary lifetime pensions. The governing rules of some public sector super schemes require that a reversionary pension is payable to a spouse at the deceased person's standard pension rate immediately following the death, then is reduced to a lesser rate for the surviving spouse. This means the special value of the credit for the transfer balance account of the reversionary pension beneficiary is based on the higher first pension payment, even though it is only temporary for the surviving spouse.