Eeeek! My client just got an Excess Transfer Balance Determination!

The majority of SMSFs lodged their Transfer Balance Reports to report the 30 June 2017 value of the members’ pension accounts in the final days of the 2018 financial year. In what must surely be a record for the ATO, excess transfer balance determinations then began issuing three to four days later.

So, if you’ve received a determination you didn’t expect, what went wrong?

Remember, an excess transfer balance determination is issued when the ATO believes the value of the client’s:

• retirement phase pensions at 30 June 2017, plus
• the starting value of any new pensions commenced since that time, less
• the value of any lump sum commutations since 30 June 2017 (cashed out or rolled over to another fund)

exceeds the $1.6m Transfer Balance Cap.

We’ve identified three common scenarios where this can happen.

Pensions in other funds were missed at 30 June 2017

It was common practice in the lead up to 30 June 2017 for members of SMSFs to request that the trustee “roll back” to accumulation phase the amount necessary such that the member’s total pension value in all funds was no more than $1.6m at 30 June 2017.

We’ve seen situations where the individual was also drawing a pension from another superannuation fund at that time, but this external pension was missed in calculating the amount which needed to roll back to accumulation phase in the SMSF. Accountants in this situation may need to revise the 30 June 2017 member balances for the SMSF and lodge an amended TBAR.

Importantly, remember that if the documentation prepared before 30 June 2017 expressed the roll back along the lines of “whatever is required” to ensure the retirement pension balances in both the SMSF and other funds were exactly $1.6m in total at 30 June 2017, then amending the TBAR (and updating the member’s pension accounts in the member statements) is correcting an existing error. The amendments are needed to accurately reflect the true position at 30 June 2017. It is not backdating documents. In contrast, if the roll back documentation was expressed in terms of fixed amounts being rolled back to accumulation phase and it turns out those amounts were miscalculated, the issue is different entirely. In that case, the client does, in fact, have an excess and should act promptly to carry out a commutation now.

One of the many benefits of having an SMSF in the 2016/17 year was the ability to prepare documents that allowed for the fact that precise amounts were simply not known at the time.

Clients who qualified for the transitional rule and commuted their excess before 31 December 2017

There is a small group of individuals whose total pension value at 30 June 2017 was greater than $1.6m but less than $1.7m. Provided the excess above $1.6m was withdrawn as a lump sum commutation or rolled back to accumulation phase on/before 31 December 2017 (and there had been no other credits to their transfer balance account in that time), the individual is not liable for excess transfer balance tax.

However, due to a systems error, some individuals who qualified for the transitional rule incorrectly received an excess transfer balance determination. Clients in this situation need to report the problem to the ATO who will check the eligibility rules were met and then manually revoke the determination.

Wind ups of SMSFs & commutations not being reported

The event reporting deadlines for SMSFs are quite different to APRA funds. Consider the situation of an individual drawing an account based pension from an SMSF. The value of the pension account was $850,000 at 30 June 2017. To facilitate the wind up of the SMSF, the bulk of the pension account of $852,000 is commuted to a lump sum on 15 June 2018 and rolled over to an APRA fund. A new pension is commenced in the APRA fund on 18 June 2018 with an amount of $852,015.

The earliest the SMSF is required to report the lump sum commutation is 28 October 2018. However, the APRA fund was required to report the new pension commencement by 29 June 2018 (ie within 10 business days of the event).

Without the reporting of the lump sum commutation, the individual will appear to have an excess transfer balance of $102,015 (ie $850,000 + $852,015 - $1.6m) and the ATO will issue an excess transfer balance determination. This situation can be corrected by the SMSF now lodging a TBAR to report the lump sum commutation.

However, this potentially confusing (and somewhat scary) situation could have been avoided altogether if SMSF accountants remember to report lump sum commutations such as this at the same time as they prepare the rollover benefits statement.

If you’ve received an excess transfer balance determination for a client and need help correcting the situation, feel free to give our tech team a call.

We have a free online tool that calculates your client's transfer balance cap. Simply register here for Heffron IQ to access it.