Monthly technical briefing - February 2025 | Macquarie

Recent developments

Welcome to the February technical briefing, an update of technical developments for financial advisers for the period from 5 December 2024 to 29 January 2025.

In this edition we highlight a number of developments to look out for in 2025, including the next tranche of the Delivering Better Financial Outcomes legislation, indexation of the general transfer balance cap for 2025-26 and the total superannuation balance thresholds for making non-concessional contributions.

We also look at the recent change to allow individuals a five-year window to close certain complying income streams, such as market-linked pensions, as well as lifetime and life expectancy pensions not paid from a defined benefit fund.

The adviser query of the month delves into some considerations when thinking about using this increased flexibility to close a market-linked pension.

Adviser query of the month

Considerations when commuting a market-linked pension

Question:

My client has a market-linked pension that was started in early 2007. What are their options in terms of exiting the pension and what are some of the considerations when doing so?

Answer:

The law has now been amended to provide a five-year window for those with market linked pensions to commute the pension in full (refer ‘Complying pension commutations and super reserve changes’ for more information).

Market-linked pensions were usually commenced for one of two reasons. One was to receive a 50 per cent exemption from the amount counting towards the Centrelink/DVA assets test. The other was for Reasonable Benefit Limit (RBL) purposes. Similar to the transfer balance cap rules, the RBL system limited the tax benefits of income streams up to a point.

In return for these benefits were a number of rules that restricted access. For instance, the income received each year was limited to an amount based on the account balance and term remaining. This amount could be varied by +/-10 per cent. Lump sum payments are not available. If the pension was commuted in full, the proceeds needed to be rolled over to a similarly restrictive income stream.

There are many reasons why someone may want to close their market-linked pension, these include:

They are no longer receiving a Centrelink/Department of Veterans’ Affairs (DVA) benefit from the pension
They commenced the pension for RBL purposes, which were abolished in 2007
Their income needs are not being met and they require greater accessibility
They want to withdraw the benefit from the super environment for estate planning purposes

When looking at commuting there are a number of areas to consider, including:

Centrelink/DVA

Many individuals will be receiving a 50 per cent assets test exemption, which may increase their Centrelink/DVA entitlement. For Centrelink purposes, this could equate to an increased Age Pension of up to 3.9 per cent of the balance of the pension.

In addition to the assets test considerations, the income test should also be considered. Market-linked pensions are assessed on the income received less a deduction amount (ie the purchase price less commutations divided by the term at commencement). This is very different to the deeming that would apply if the funds were held in financial investments, such as super (accumulation and/or account-based pensions) or cash, shares, managed funds in the individual’s name.

Longer term planning is also worth considering. At the moment, the market-linked pension may not be providing a Centrelink/DVA benefit however if there is a reversionary nomination in place and the client dies, retaining the pension may provide a Centrelink/DVA benefit for the reversionary beneficiary.

Under current law, where a market-linked pension is commuted and not used to commence a similar income stream, the Government will retrospectively treat the market-linked pension as not having the partial or full assets test exemption from commencement. The Government can then clawback five years’ worth of overpayments from Centrelink/DVA. On the 14^th of December 2024, the Government issued a press release indicating that the clawback won’t apply. It is expected that the Government will issue a legislative instrument to waive this debt.

Commonwealth Senior Health Card (CSHC)

Market-linked pensions aren’t included in the CSHC’s income test.

If commuted and moved to an asset that will have income counting to the CSHC’s test, how will this impact their eligibility. Investments that create assessable income for the individual and account-based pensions will result in additional income counting towards the CSHC’s test.

Possible negative transfer balance cap (TBC) implications

For market-linked pensions in place prior to 1 July 2017, the commutation debit will be equal to the original credit less the sum of:

Pension payments received from 1 July 2017 to 30 June of the financial year prior to commutation
The greater of the minimum pension payment required for the financial year of commutation, and the actual pension payment received in that year
Any prior debits (excluding family law payment splits)

The debit value will usually be different to the proceeds received from the commutation. Where the proceeds are greater and the intention is to commence another income stream (eg account-based pension), the individual will use more of their TBC, potentially limiting the amount of the proceeds they use for the new pension, which could reduce the tax effectiveness of their financial plan.

If the market linked pension commenced on or after 1 July 2017 (eg rolled over from another complying income stream), the TBC debit will be equal to the value of the pension at the time of commutation.

Tax

Market-linked pensions are usually very tax effective due to the exemption from tax in the super fund. In addition, pension payments for those 60 and over are tax free.

The tax position of the alternatives varies significantly and can be dependent on the individual’s circumstances. For those with little to no income, investing in their own name may be tax effective but won’t be for those with higher incomes. For those that can move to an account-based pension (without exceeding the TBC), the current tax effectiveness will be retained.

Estate planning

A change to the client’s estate plan may be required where the market-linked pension occurs. Factors such as the time, effort and cost should be considered.

Many individuals who have market-linked pensions will be quite old and may not have the capacity to amend the estate plan. For instance, those that are under a legal disability will be unable to alter their will.

Pension flexibility and access to capital

One of the main limitations of market-linked pensions is the restriction around the level of income that can be received. In addition, there’s very limited ability to access the capital, so much so that the super laws don’t allow access even in the case of severe financial hardship.

Options such as an account-based pension have far fewer restrictions. The annual pension payment is only limited by a minimum amount, not an upper amount. It’s easier to determine each year and reduces the regulatory risks, particularly for SMSFs. There’s also access to capital by way of lump sum payments.

Keep in mind that when commuting the pension, the pro-rata pension for the year must be paid before the commutation takes place. For large super funds, this will be managed by the fund however can be easily overlooked for self-managed super funds (SMSFs).

Product modernisation

The market-linked products were created a long time ago and may not have been updated as product features have advanced. Moving into a more modern product may be in the clients’ interest.

Legislative developments

Regulations

Regulations

Complying pension commutations and super reserve changes

In December 2024 the Government registered regulations that allow people with certain types of super income streams the ability to commute (ie stop) the income stream. These income streams are commonly referred to as complying or legacy pensions. In addition, these regulations change the way super reserves are treated by a super fund when allocated to members.

Complying income stream commutations

As noted in the Adviser Query of the Month, complying income streams were usually commenced for one of two reasons. One was to receive a Centrelink/DVA asset test exemption (part or full). For some people this exemption still provides a Centrelink/DVA benefit. The other was for Reasonable Benefit Limit (RBL) purposes. Similar to the transfer balance cap rules, the RBL system limited the tax benefits of income streams up to a point. The RBL rules ended on 30 June 2007 and so too did the purpose of entering into these income streams for some people.

Key features of the complying income stream changes include:

The changes commenced on the 7^th of December 2024 and end five years later on the 6^th of December 2029
Includes lifetime, fixed interest and market-linked (also known as term allocated) income streams
The original income stream needed to have commenced before 20 September 2007. Income streams that commenced after this date can still qualify, provided the capital used to commence the pension came from an income stream that commenced before 20 September 2007
The super fund cannot be a defined benefits fund. Therefore, commutations from large APRA regulated funds, small APRA regulated funds (SAFs) and self-managed super funds (SMSFs) are allowed
The income stream must be commuted in full, partial commutations aren’t allowed
There are no restrictions on what can be done with the commuted amount. This amount can therefore be retained in the same super fund, rolled over to another super fund or withdrawn from the super environment
Where the income stream contains reserves, the allocation of the reserves to the member won’t count towards a contribution cap and won’t be subject to taxation (as proposed in the original announcement)
Any partial or full assets test exemption for Centrelink/DVA purposes will be lost upon commutation. The Centrelink/DVA means test treatment going forward will be dependent on where the proceeds are invested

Under current law, where a complying pension is commuted and not used to commence a similar income stream, the Government will retrospectively treat the income stream as not having the partial or full assets test exemption from commencement. The Government can then clawback five years’ worth of overpayments from Centrelink/DVA. However, on the 14^th of December 2024, the Government issued a press release indicating that the clawback won’t apply. It is expected that the Government will issue a legislative instrument to waive this debt.

Allocation of reserves

The regulations contain new rules regarding the treatment of reserves when allocated to members. These changes also apply from the 7^th of December 2024 though aren’t subject to the five-year time limit mentioned for complying pensions.

The two main changes include:

Exclusions from a contribution cap

The regulations include additional circumstances where the allocated from a reserve won’t count towards a contribution cap.
These include the full commutation of a complying pension during the five year period mentioned above. It also includes:
- Individuals whose income stream ceased for some other reason, such as reaching the end of its term, and
- Individuals who have been able to commute their income stream, such as flexi pension holders (ie a type of pension usually used for RBL purposes), but still have a reserve amount.
Change from the concessional to the non-concessional contribution cap

For allocations that aren’t excluded from a contribution cap, the new law changes the cap to which the contribution counts. Allocations made from the 7^th December 2024 will count to the non-concessional contribution (NCC) cap rather than the concessional contribution (CC) cap.

This will be of benefit to many people as the NCC cap is higher than the CC cap. However, the individual’s total super balance at the 30^th of June before the allocation will determine their NCC cap and as such, some may have no NCC cap available. Where the reserve is allocated to someone with no NCC cap or it pushes them above their NCC cap, the usual excess NCC rules will apply to that amount.

Despite the amount counting towards a contribution cap, the amount allocated is not a contribution to the fund. As such, the contribution acceptance age limit for NCCs of 75 (including up to the 28^th day after the month they turn 75), doesn’t apply to the allocation of reserves.

Further, when it comes to age and the NCC cap, remember that the last year the NCC bring forward rule can be initiated is the year they are 74 at 1 July.

Macquarie’s Non-concessional contribution flowchart can help you determine your client’s NCC cap for the 2024-25 year.

Further information can be found here: Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024

Regulator views

ATO

Draft practical compliance guideline – Fees paid from super funds

The ATO has released Draft Practical Compliance Guideline (PCG 2025/D1 - Fees for personal financial advice paid from member accounts by superannuation funds - apportioning the deduction and pay as you go withholding obligations) regarding the deduction of advice fees by super funds for consultation.

This Draft Guideline covers:

A methodology a trustee of a super fund (other than a self-managed superannuation fund) can use to determine the extent to which payments of financial advice fees are tax deductible to the fund.

The Draft Guideline notes that the ATO will accept an ‘account-based method’. That is, fees paid from an accumulation phase account (including transition to retirement pensions that are not in the retirement phase) will be considered to be incurred in relation to gaining or producing assessable income and will therefore be deductible. Fees paid from a retirement phase account won’t be deductible under this method.
The ATO’s compliance approach in relation to a fund's pay as you go (PAYG) withholding obligations for financial advice fees paid in the income years prior to 1 July 2019.

The consultation period ends on 14 February 2025.

Further information can be found here: PCG 2025/D1

Division 7A

On 13 January 2025 the ATO published a page titled ‘Division 7A Myths debunked’ as part of the Division 7A section on their website.

Financial advisers with clients that have companies may come across Division 7A loan matters from time to time. It can be a complex area and can sometimes be misunderstood. This page covers some of the common misconceptions the ATO sees when dealing in this area.

Further information can be found here: ATO Division 7A Myths debunked

What to watch out for in 2025

The year ahead will be an interesting one, not least because it is an election year. Here are a number of developments to look out for over the coming year.

Delivering Better Financial Outcomes (DBFO)

Towards the end of 2024, the Government released a fact sheet containing the next deliverables regarding the DBFO reforms. Some of the key changes include:

The replacement of the statement of advice with a principles-based record
A ‘modernised’ best interests duty
The review and update of the Financial Planners and Advisers Code of Ethics to ensure alignment with the DBFO reforms
A new class of financial adviser to deliver simple advice that is of a high standard, helpful, and safe for consumers

The Government noted in the release that it is working on exposure draft legislation that will be released for public consultation.

Further information can be found here: December 2024 Macquarie technical roundup

Proposed Division 296 tax

This is the proposed tax for those with super balances of more than $3 million. The bill entered Parliament in November 2023, passed the House of Representatives on the 9^th of October 2024 and now sits in the Senate.

Whether this tax becomes law under the current Government will depend on a number of factors including when the Government calls the next election, whether there are any Parliament sitting days before the election and, if there are, whether the Government has the required support for the bill in the Senate.

Once the election is called, all bills in Parliament lapse. The next Government’s super policies will determine whether the Division 296 tax or similar tax for high super balances is a priority.

The general transfer balance cap (TBC) for 2025-26

The indexation of the general TBC is determined by the consumer price index (CPI) and rounded down to the nearest $100,000. It is the December figure that determines whether indexation is to occur for the following financial year. The December 2024 CPI figure has recently been released by the Australian Bureau of Statistics (ABS) and has come in at a value that means the general TBC will increase from $1.9 million to $2 million for the 2025-26 year.

Whether or not an individual’s own TBC benefits from this indexation depends on their specific circumstances. The following rules apply when determining an individual’s TBC:

Those that have never had a transfer balance account transaction before 1 July 2025 will have a cap of $2 million for 2025-26
Those that have fully utilised their TBC (at any time before 1 July 2025) will not receive indexation for 2025-26
Those who have only ever used a portion of their TBC prior to 1 July 2025 receive indexation proportionally on the unused portion of their TBC (based on the highest transfer balance account value at the earliest point they reached that value)

Total superannuation balance (TSB) thresholds for the 2025-26 non-concessional contribution (NCC) caps

An individual’s NCC cap is determined by their TSB at the prior 30 June. The TSB thresholds for this purpose are determined by the general TBC and the NCC cap when looking at eligibility to bring forward NCCs.

As noted in this update, the general TBC will increase to $2 million for the 2025-26 year. Therefore, those with a TSB of less than $2 million at 30 June 2025 will have an NCC cap of at least one years’ NCC cap.

At the time of writing, the indexation figures for the CC and consequently the NCC cap, had not been released. The relevant figures are due to be released by the ABS on 20 February 2025. Therefore, the TSB thresholds for being able to bring forward up to 2 years of future NCCs is not yet known. The following table shows the potential outcomes for the NCC cap and TSB thresholds for next year:

	No indexation of NCC cap		Indexation of NCC cap
	NCC cap	TSB threshold(s)	NCC cap	TSB threshold(s)
3 years cap	$360,000	Less than $1,760,000	$390,000	Less than $1,740,000
2 years cap	$240,000	At least $1,760,000 and less than $1,880,000	$260,000	At least $1,740,000 and less than $1,870,000
1 year cap	$120,000	At least $1,880,000 and less than $2,000,000	$130,000	At least $1,870,000 and less than $2,000,000
No cap	$Nil	$2,000,000 and above	$Nil	$2,000,000 and above

Note: Those that are still in an NCC bring forward period for the 2025-26 year will have an NCC cap of their unused amount, provided their TSB is below $2 million at 30 June 2025. If their TSB is $2 million or more, their cap will be nil.

Super guarantee (SG) increase

The SG rate will increase from 11.5 per cent to 12 per cent of ordinary time earnings from 1 July 2025.

Factoring in this increase for recommendations involving voluntary CCs will be important.

SG was introduced in 1992 at a rate of three or four per cent depending on the size of the employers payroll, we’ve see a reasonably steady increase to SG rate over time and this increase will be the last to occur under current legislation.

Monthly technical briefing - February 2025