Heffron | Transfer Balance Account Report update

Transfer Balance Account Report update

We learned something new – and weird – about the new Transfer Balance Account Reports (TBARs) last week.

In a nutshell, the TBAR prepared to report pre-existing pensions at 1 July 2017 will also need to include accumulation balances in almost all cases.

If these accumulation balances are not reported, there is a risk the ATO will unintentionally double count any retirement phase pension reported on the TBAR when it comes to calculating the individual’s Total Superannuation Balance (TSB).  This is not consistent with the current instructions for the TBAR and the ATO is in the process of updating these.

The issue has now been reported in a couple of online publications but this article puts a little more flesh on the bones.

Huh?

The ATO needs to understand each and every person’s Total Superannuation Balance for a range of reasons including:

  • To see whether they can make non-concessional contributions in 2017/18 (and if so, whether they can bring forward one or more future years’ $100,000 limit);
  • To assess whether a particular fund is allowed to operate on a segregated basis for tax purposes; and
  • In future, to check whether an individual is eligible for the “catch up” concessional contributions that start from 1 July 2018.

It’s an important number.

In future, it will be a figure that the ATO can work out from the SMSF Annual Return for members with a balance in an SMSF.

At 30 June 2017, however, it’s tricky.

In theory, the ATO could just take the Closing Account Balance shown for each member on their SMSF’s 2016/17 Annual Return (Section F).  (They would then add any other balances reported for other funds.)

But the annual return does not provide a breakdown between pensions and accumulation accounts.  Plus for some pensions, the figure needed for the Total Superannuation Balance is not just the amount shown on the annual return – there is a special calculation carried out to value the pension for both TBAR purposes and the Total Superannuation Balance.

So the ATO has decided to do the following to determine a member’s Total Superannuation Balance as at 30 June 2017:

  • If no TBAR is lodged, they will use the figures shown on the annual return (effectively assuming that the entire balance for each member is in accumulation phase) – this makes sense;
  • If a TBAR is lodged, they will use the TBAR figures instead of the annual return figure as long as:
    • There were no contributions into the fund during the year for that member; or
    • An accumulation balance is explicitly reported in the TBAR (including a $nil value) (the relevant spot is Question 15)
  • Otherwise they will use the sum of both the TBAR and annual return figures.  This is the problematic part!

The examples below show how an SMSF member could easily end up with the wrong amount being recorded as their Total Superannuation Balance if the fund’s reporting is not as the ATO expects.

Example 1

Jane and John have been in pension phase (account based pensions) for many years and no contributions were made to their fund in 2016/17.  They each had $2m in their SMSF at 30 June 2017 (in retirement phase pensions) and so each rolled back $400,000 to accumulation phase on 30 June 2017 to fall within the new $1.6m Transfer Balance Cap.

Their SMSF’s TBAR for each of them should show:

  • Retirement phase pension values of $1.6m; and
  • Accumulation accounts of $400,000

If no accumulation balance is reported on the TBAR, the ATO will underestimate Jane and John’s Total Superannuation Balance as the ATO will only count the amount shown on their TBAR ($1.6m each).

 

Example 2

Mike and Marcia are in precisely the same position as Jane and John at 30 June 2017.  However, they each made contributions to their fund during 2016/17.

Like Jane and John, their SMSF’s TBAR should show both their retirement phase pension values and their accumulation accounts.

However unlike Jane and John, if they do not do so, the outcome will be different for them.  Instead of underestimating their Total Superannuation Balance, the ATO will actually overestimate it.  This is because it will be calculated as:

  • The $1.6m retirement phase pension value reported on the TBAR; plus
  • Their $2m member balance shown on the annual return

That is, a total of $3.6m for each of them.

 

Does it matter?

In fact in these two examples, none of the key superannuation tests will be affected if their Total Superannuation Balances are misreported:

  • None of the members are able to make further non-concessional contributions and this will be correctly determined by the ATO even if their Total Superannuation Balances are under or over reported in line with the examples above;
  • The same applies for their fund’s ability to be treated as segregated for tax purposes
  • Overstating the Total Superannuation Balance has no impact on the amounts assessed against the Transfer Balance Account – these will be based exclusively on the TBAR.

However, it will mean that the amount shown on MyGov for the member will appear very strange to the member and the fund has technically misreported figures to the ATO (although it is unlikely the ATO will take draconian action as a result).

But it could be important.

If Mike (say) had a $1.0m retirement phase pension at 30 June 2017 but did receive contributions during the year, the situation would be entirely different.  Assuming he meets the relevant age or work tests, he is allowed to make non-concessional contributions during 2017/18.

However, if his TBAR does not show a $nil accumulation balance at 1 July 2017, his Total Superannuation Balance will be calculated by the ATO as follows:

  • Values reported via the TBAR ($1m); plus
  • Balance reported on his SMSF’s annual return (also $1m).

That is, a total of $2m.

If he makes non-concessional contributions during 2017/18, the ATO will assume these are in excess of the permitted level ($nil for someone with more than $1.6m in superannuation) and issue the relevant assessments.  Even if the reporting is corrected, there will obviously be a fairly anxious wait for the member and action will need to be taken very quickly.

As a result, we expect that trustees who have already lodged their TBAR without reporting the accumulation balances (including $nil if applicable) at 1 July 2017 may need to re-report.

However we know the ATO is still looking for alternatives that are less onerous so for now, watch this space.  We understand the ATO is unlikely to start using the Total Superannuation Balance information until September / October 2018 so there is some time to decide what to do.

For those using specialist superannuation software, a software update may be required before TBARs will automatically include accumulation balances.