The super changes from 1 July 2017 not only had an impact on the amount you can transfer into pension phase but requires additional ATO reporting to measure whether you are over your Transfer Balance Cap limit of $1.6 million. The timing of the report (Transfer Balance Account Report or TBAR) depends on the type of fund and, for SMSFs, the total amount a member has in superannuation. This can lead to the ATO issuing excess inadvertent TBC determinations which don’t reflect the true position.
Larger APRA regulated superannuation funds have been required to provide TBAR reports to the ATO since 14 December 2017. But SMSFs have only been required to report a member’s pension balance(s) as at 30 June 2017 by 1 July this year. Events that occurred during the 2017/18 financial year are required to be sent to the ATO by 28 October 2018 for a fund with a member having a total superannuation balance of at least $1 million. If all SMSF members each have a total superannuation balance of less than $1 million, the additional reporting to the ATO is not required until May 2019 when the SMSF is required to lodge its annual income tax return.
Let’s have a look at a few case studies where ATO determinations could end up being issued due to the timing differences in TBAR reporting.
The first case study is Bridget, aged 83, who has $925,000 providing her with a retirement phase pension (ABP) as at 30 June 2017. The fund has reported the 30 June 2017 balance of Bridget’s ABP to the ATO by 1 July 2018. As Bridget has a total super balance of less than $1 million, her SMSF is not required to report other TBAR events that occurred during the 2017/18 financial year until the fund’s annual return is required to be lodged in May 2019.
During the 2017/18 financial year, Bridget decided that managing and running an SMSF has become too much for her to handle. She decided to cash in the fund’s investments on 20 January 2018 and roll over her benefits to an industry superannuation fund. Bridget requests a new pension from the industry fund which commences straight away.
The industry fund’s TBAR reporting requires that the commencement of the new pension is reported to the ATO within 10 working days in the month after the pension commenced, 14 February 2018. However, the SMSF is not required to report Bridget’s pension ceasing until the fund’s annual return is due in May 2019.
The timing difference between the industry fund and the SMSF when the pension commenced and ceased is 12 months or more. As a result, the ATO issues an excess TBC determination because of the timing differences. Bridget’s pension, in effect, has been double counted. This is due to the SMSF not being required to report the pension ceasing until it lodges its 2017/18 annual return. In these situations, it would have been better if the SMSF had given the required information to the ATO before the excess TBC determination is issued to Bridget.
Another situation where the ATO may issue an excess determination applies if a member exceeds their $1.6 million transfer balance cap but has used a transitional rule which applied up to 31 December 2017. The transitional rule for TBC purposes allows a member to have a pension balance of up to $1.7 million as at 30 June 2017 without exceeding the cap providing the balance is reduced to $1.6 million by 31 December 2017.
In the second case study, Patrick, age 72, is in receipt of an account-based pension (ABP) which has a value of $1,685,500 on 30 June 2017. He is now subject to the $1.6 million TBC and needs to reduce the balance of his ABP by $85,500 before 31 December 2017. He does this by partially commuting his ABP on 10th October 2017 and withdraws the excess as a lump sum from the fund. By doing this, Patrick now meets the TBC requirements within the transitional period.
For TBAR purposes, Patrick’s fund was required to have reported his ABP value of $1,685,500 as at 30 June 2017 by 1 July 2018. Any TBC events that occurred during the 2018 financial year are not required to be reported by the fund until 28 October 2018 as his total superannuation balance was at least $1 million. As a result, the ATO issue Patrick with an excess determination because the information they have shows he is in breach of his TBC.
So that the excess determination can be corrected, the fund should lodge a TBAR to notify the ATO of the partial commutation of Patrick’s ABP on 10 October 2018. If the fund was to wait until 28 October 2018 deadline it would be too late and just create more problems. The fund needs to get the TBAR to the ATO as a matter of priority. Until the ATO receives the TBAR they would not know that Patrick was eligible to have the transitional rules apply to his situation, which resulted in the excess TBC determination being sent to Patrick.
In some situations, like Patrick’s and Bridget’s, it will be better for trustees to report for TBAR purposes to the ATO earlier rather than waiting until required by the rules. This will help avoid those irritating timing issues causing an inadvertent breach of a member’s TBC and the issue of an excess determination notice from the ATO.
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