Heffron | How can my client have an excess non-concessional contribution determination when their Total Superannuation Balance was below $1.6M on 30 June 2017?

How can my client have an excess non-concessional contribution determination when their Total Superannuation Balance was below $1.6M on 30 June 2017?

When Transfer Balance Caps and Total Superannuation Balances (TSB) came into effect in June 2017, some little known transitional arrangements for calculating TSB were in place that has resulted in pensions started on 1 July 2017 being double counted. Don’t panic – it’s fixable.

Some pension members of SMSFs stopped and restarted their pensions on 1 July 2017 as part of their planning for the introduction of the new rules. There are many reasons for doing this, commonly to merge accumulation balances into retirement phase pensions.

We have started getting calls from accountants and administrators wondering why their client’s pension seems to have been double counted for the TSB purposes. It’s to do with how the ATO are calculating TSB in the commencement year, and it’s taken many by surprise.  

Let’s use an example to illustrate.

Joe had a total of $1,400,000 in his super fund on 30 June 2017 which was correctly reported via the SMSF Annual return. This was made up of:

Accumulation Phase Value     $400,000

Retirement Phase Value     $1,000,000

He commuted the pension on 1 July 2017, merged it with his accumulation account, and started a new pension for the full $1,400,000.

The following was reported:

  1. Closing balance of the superannuation accounts reported via the SMSF return: $1,400,000
  2. The opening pension balance on 1 July 2017 (TBAR): $1,000,000
  3. The commutation of the pension on 1 July 2017 (TBAR): -$1,000,000
  4. The commencement of the new pension on 1 July 2017 (TBAR): $1,400,000

During the year, he made an NCC of $100,000 and has recently received an excess NCC determination. How is this possible, when his TSB was under the $1.6M level?

TSB is calculated by adding together the accumulation phase value (APV) and the retirement phase value (RPV) of a person’s superannuation interests. Generally, the 30 June balances of each are reported to the ATO via the SMSF Annual Return and that’s that.

In 2017, however, the ATO were more interested in recording the values of APVs and RPVs as they were to continue from the day after 1 July 2017 as opposed to how they were on 30 June. Hence, they had in place a transitional method for calculating RPVs which is explained here:   

https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions---too-much-can-mean-extra-tax/?anchor=TotalSuperannuationBalance#TotalSuperannuationBalance

Under the transitional arrangements, a members’ transitional transfer balance at the end of 30 June 2017 is equal to the sum of their transfer balance credits just after the start of 1 July 2017. In other words, they ignore 1 July debits and don’t want to know about the original pension opening balance.

Because of the TBAR reporting, Joe’s transfer balance credits totaled $2,400,000 being:

  • the opening pension balance on 1 July ($1,000,000) plus
  • the new pension on the same day ($1,400,000)

resulting in TSB on 30 June 2017 being greater than $1.6M and, hence, the excess NCC determination.

What should have been reported is:

  1. Closing balance of the superannuation accounts reported via the SMSF return: $1,400,000, and
  2. The commencement of the new pension on 1 July 2017 (TBAR): $1,400,000

The pension already in place and the commutation of that pension should not have been reported at all. If those two “events” had not been reported, the members transfer balance account would correctly show $1,400,000 on 1 July.

The APV on 30 June 2017 is then calculated as the difference between the closing account balance from the SMSF Annual Return ($1,400,000) and the value of the member’s transfer balance account for the SMSF at 1 July 2017 ($1,400,000).

APV = $1,400,000 - $1,400,000 = nil.

TSB for 30 June 2017 becomes APV + RPV = 0 + $1,400,000 = $1,400,000

To rectify the situation for Joe, the administrator needs to lodge:

  1. Cancellation TBAR for the existing pension on 1 July 2017.
  2. Cancellation TBAR for the commutation.

Note this only applies to the 2017 year. From 30 June 2018, the TSB should be simply be the closing balances reported via the SMSF return, so this problem effectively fixes itself in future years.

Do I need to go back and cancel TBARs for all clients who stopped and restarted pensions on 1 July 2017?

Not necessarily. This will only be picked up for those whose double counting of pensions resulted in a TSB of over $1.6M AND the member made NCCs in the 2017/2018 year. For all other members, there is no impact, so you might choose to just leave those ones as is. 

Big changes in superannuation laws always causes additional headaches and work for administrators – this one is no different. A client can get very distressed when they get an unexpected excess contribution determination, so being armed with the knowledge when they call is a powerful thing.

 

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