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Self Managed Super Fund (SMSF) Article
Update of Defined Benefit Pension Changes
By Tony Negline.
This article may be out of date.
25th August 2004
The Self Managed Super Fund sector is anxiously awaiting the Senate Economics Committee’s report into controversial Government regulations which restrict small super funds from providing new defined benefit (db) pensions.
A db pension is an income stream which is not an allocated pension or the new Growth Pension (which you might see called either a Market Linked Income Stream or Term Allocated Pension). Db pensions are paid either for life or for a specified term.
The Committee are expected to report to the Senate on 30 August. This date will apply even if the election is called in the meantime.
In evidence before the Committee the Australian Taxation Office revealed that, “In each year from 1995 to 1998, tens of individuals commenced defined benefit pensions. In 1999, hundreds of individuals commenced defined benefit pensions. In each year from 2000 onwards, thousands of individuals commenced defined benefit pensions.
“We have now dug below that to find the figures involved. In each year from 1995 to 1998 there were millions of dollars involved; in 1999, tens of millions of dollars involved; in 2000 and 2001, hundreds of millions of dollars involved; and in 2002 and 2003, billions of dollars involved.
“… until 1998 the RBL [Reasonable Benefit Limit] amount reported largely mirrored the dollar figures involved in the pensions. In 1999, this started to change. The RBL amounts reported now – that is in 2003, which is the last year for which we have full figures – are roughly 40 per cent of the dollar values backing the pensions. Of all those pensions, going back over the whole period, almost none of the pensions are excessive, which means that almost none of those individuals exceeded their RBL.”
In the ATO’s view this is an indication of the extent to which db pensions have been used to obtain tax benefits which really should not have been available. The ATO may be right. To be absolutely sure about the level of tax concessions these defined benefit pensions have received we would need a lot more information than what was detailed at the Senate’s hearing. Unfortunately the Senators did not ask the ATO to provide this data.
The Senate will not only have to deal with the Committee’s report. It will also have to deal with a motion, brought on by Senator Sherry, to disallow the government’s ban on db pensions in small funds. Senate Sherry has told the Senate that he intends to move his motion 15 sitting days after 10th August. If Senator Sherry’s motion is successful, small funds will be allowed to commence new db pensions.
The disallowance of regulations is a complex affair. According to the Parliament House website, there are four possibilities that might eventuate as a result of Senator Sherry’s disallowance motion:
- The motion is debated and the instrument is disallowed. The instrument will cease to have effect from the date of disallowance
- The motion is debated and the instrument is not disallowed. The instrument continues to have effect
- The motion is not called on and the instrument is deemed to be disallowed on the last day on which the matter could have been resolved. The instrument will cease to have effect from that date
- The relevant Senator or Member of the House of Representatives may withdraw their motion. However, under Senate Standing Orders, Senators must first give notice of their intention to withdraw the motion and if another Senator objects to the withdrawal the motion will be transferred to their name so that they may bring it on for debate and a vote.
If Parliament is still sitting in early October then fifteen sittings days from the date Senator Sherry notified his motion is 5th October. If the election campaign is in full swing in early October (and Parliament is not sitting) then 15 sitting days after Senator Sherry informed us about his motion may not be until early 2005.
At the same time, the Treasury is conducting a government initiated inquiry into db pensions. The report for this review is due to be handed to the government in April 2005. If other reports are any guide then the government will spend sometime reviewing the report before publicly releasing the report and announcing what recommendations it intends to adopt.
The Treasury is taking a first round of submissions on this inquiry before 1st October. Further details are available at: http://assistant.treasurer.gov.au/mtb/content/pressreleases/2004/001.asp
For everyone involved in small funds, novices and experts, this is an extremely confusing time. Anyone contemplating retirement may want to consider waiting before acting. However if your don’t act now you may miss out on an opportunity.
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