Changes to reserve allocations

What are the changes?

From 7 December 2024, the Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024External Link (the Regulation) changes the way allocations from reserves count towards an individual's contribution caps.

Before 7 December 2024, certain reserve allocations by a complying superannuation plan for an individual counted towards the individual's concessional contributions cap. This could result in excess concessional contributions for the individual.

From 7 December 2024, the Regulation:

• counts those allocations towards the individual’s non-concessional contributions cap instead of their concessional contributions cap
• updates the drafting used to describe those allocations, and
• excludes from the non-concessional contributions cap an additional class of reserve allocation (from a pension reserve), making allocations of that class effectively 'uncapped'.

These changes are not limited to reserves associated with legacy pension products (although the changes may be applicable to such reserves).

See Other concessional and other non-concessional contributions for more information on when reserve allocations by Australian Prudential Regulation Authority (APRA) funds will need to be reported.

Reserve allocations before 7 December 2024

Before 7 December 2024, 2 classes of reserve allocation counted towards the concessional contributions cap:

1. A particular allocation of an assessable contribution.
2. Any other allocation ('a capped allocation') that did not fall within various specified exclusions.

In other words, for allocations other than assessable contributions (the first class mentioned above), a 'catch-all' mechanism counted towards the concessional contributions cap all allocations that did not fall within the specified exclusions (the second class mentioned above).

The exclusions ('excluded allocations') did not count towards the concessional contributions cap, with the result that they could be made without contribution cap taxation consequences for the member.

Capped allocations before 7 December 2024

An allocation was a capped allocation unless it was an excluded allocation. The excluded allocations were:

• a certain type of rollover superannuation benefit
• an amount of applicable fund earnings transferred from a foreign super fund included in the assessable income of the plan
• a refund of excess capped fees and costs charged to a member
• a 'fair and reasonable allocation', which could be made from any kind of reserve (subject to fund rules and regulatory requirements), being an allocation
  • made to each member of the fund, or each member of a class of member
  • for which the amount allocated was less than 5% of the value of the member’s interest at the time of allocation, and
  • that would not have been assessable income of the fund if it were made as a contribution
• the following types of pension reserve allocation
  • an allocation to satisfy a pension liability
  • an allocation on the commutation of an income stream, except as a result of the death of the primary beneficiary, to the recipient to commence another income stream as soon as practicable
  • certain allocations on the commutation of an income stream as a result of the death of the beneficiary.

Reserve allocations from 7 December 2024

From 7 December 2024, the Regulation counts capped allocations towards the non-concessional contributions cap instead of the concessional contributions cap. The mechanism for counting allocations has not changed: a reserve allocation counts towards the non-concessional contributions cap it if does not fall within specified exclusions.

Each class of exclusion specified for the concessional contributions cap before 7 December 2024 has been specified for the non-concessional contributions cap from that date. This means types of allocations that fell within those exclusions before 7 December 2024 continue to be uncapped if made from that date. The Regulation makes no change to the treatment of allocations of certain assessable contributions, which continue to count towards the concessional contributions cap.

The drafting of the 'fair and reasonable' and 'pension reserve' exclusions in the Regulation has been updated. As a result, the exclusions do not mirror those specified for the concessional contributions cap word-for-word. One class of excluded allocation – 'pension reserve allocation except as a result of death – after commutation to commence another income stream' – is not explicitly specified as an exclusion for the purposes of the non-concessional contributions cap, because it falls within a new pension reserve exclusion discussed below ('excluded cessation allocation').

The table below lists these exclusions for the concessional contributions cap and their non-concessional contributions cap equivalents (legislative references are to the Income Tax Assessment (1997 Act) Regulations 2021 (ITAR (1997 Act) 2021).

Counting allocations towards the non-concessional contributions cap instead of the concessional contributions cap will affect the amount that can be allocated to some individuals without incurring contribution cap taxation consequences.

For example, some individuals have a nil non-concessional contributions cap. If a reserve allocation counts towards the individual's non-concessional contributions cap in those circumstances, the amount of the allocation will exceed their non-concessional contributions cap.

New class of excluded allocation from 7 December 2024

From 7 December 2024, the Regulation also excludes another broad class of pension reserve allocation for an individual. An allocation (an 'excluded cessation allocation') from a reserve of a complying superannuation plan for an individual is excluded if:

• the reserve is a pension reserve of the plan
• the reserve is used to discharge all or part of a liability of the plan to pay a superannuation income stream benefit from a superannuation income stream of which the individual is the recipient
• the superannuation income stream is commuted or ceases
• the commutation or cessation is not a result of the death of the primary beneficiary
• the amount is allocated from the reserve for the individual as a result of the individual having been (before the commutation or cessation) the recipient of the superannuation income stream, and
• where the reserve relates to more than one superannuation income stream, the allocation is fair and reasonable having regard to
  • for each superannuation income stream that has not been commuted or ceased – the value of the interest that supports the superannuation income stream, and
  • for each superannuation income stream that has been commuted or ceased – the value of the interest, that supported the superannuation income stream, immediately before the superannuation income stream was commuted or ceased.

Definition of pension reserve

From 7 December 2024, the Regulation provides that a reserve is a pension reserve of a complying superannuation plan at a particular time if the reserve is used at that time solely for the purpose (the ‘pension liability purpose’) of enabling the plan to discharge all or part of its pension liabilities (contingent or not) as soon as they become due. This definition is relevant not only for excluded cessation allocations, but also for the other excluded allocations (other than fair and reasonable allocations).

In addition:

• under the Regulation, certain allocations made as a result of commutation or cessation of a superannuation income stream are deemed to be a use of a reserve for a pension liability purpose, and
• under transitional rules provided by the Regulation, certain allocations are disregarded in working out, for the purposes of excluded cessation allocations, whether a reserve is a pension reserve at a time occurring after commencement.

The new definition of pension reserve and the 2 additions above are only relevant for determining excluded allocations from 7 December 2024. They do not apply when determining whether a reserve is a 'pension reserve' for the purposes of determining whether allocations are excluded from counting toward the concessional contributions cap before that date.

Allocations deemed to be for a pension liability purpose

From 7 December 2024, the Regulation provides, for the avoidance of doubt, that certain allocations (‘a deemed pension purpose allocation’) to a superannuation income stream recipient after the commutation or cessation of that income stream are taken to be made for the pension liability purpose: see subsection 292-90.02(8) of the ITAR (1997 Act) 2021. This ensures a reserve does not cease to be a pension reserve as a result of such allocations, including in at least the 2 following situations:

• The active reserve situation – where the reserve is, apart from the deemed pension purpose allocation, a pension reserve because it is used solely for the purpose of discharging pension liabilities relating to one or more other income streams. The deemed pension purpose ensures the reserve continues to be a pension reserve after a deemed pension purpose allocation when continuing to discharge pension liabilities. Otherwise, the deemed pension purpose allocation and subsequent allocations to discharge pension liabilities would count towards the non-concessional contributions cap.
• The dormant reserve situation – where the reserve is, apart from the deemed pension purpose allocation
  • not being used for the purpose of discharging pension liabilities (because all income streams the reserve previously supported have been commuted or ceased), and
  • used for no other purpose.

In the dormant reserve situation, the deemed pension purpose allocation does not prevent the reserve from ceasing to be a pension reserve for the purpose of making further cessation allocations.

There is no requirement that a deemed pension purpose allocation must be made within a specific period after the relevant commutation or cessation. If all other requirements for the allocation to be excluded are otherwise met, the allocations can be made long after the commutation or cessation.

Disregarded allocations

The Regulation also contains a transitional provision. That provision disregards certain allocations made before 7 December 2024 in working out whether a reserve of a complying superannuation plan is a pension reserve for the purposes of making excluded cessation allocations.

If one or more allocations before that date are the sole reason the reserve doesn’t otherwise meet the pension reserve definition for that purpose, disregarding the allocations ensures the definition is met.

An allocation from the reserve is disregarded if:

• the reserve was used for the purpose of enabling the plan to discharge all or part of a liability of the plan to pay a superannuation income stream benefit from a superannuation income stream
• the superannuation income stream was commuted or otherwise ceased
• the allocation was made after the commutation or cessation, and
• immediately before the commutation or cessation, the reserve was a pension reserve.

In the case where the reserve only ever supported one income stream, if the above criteria are met, allocations after the income stream commuted or otherwise ceased and before 7 December 2024 are disregarded.

In the case where the reserve was used to support more than one superannuation income stream, allocations made after the above requirements are met for the first time in relation to any of those income streams and before 7 December 2024 are disregarded. In effect, this could result in all allocations from the reserve occurring after that commutation or cessation being disregarded, even while the other income streams were still being supported by the reserve.