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The transfer balance cap will be raised on 1 July 2021, which means it’s more important than ever to keep an eye on your transfer balance account and understand your transfer balance account reporting obligations.
Remind me, what is the transfer balance cap (TBC)?
Transfer balance cap
The TBC is the limit on the amount that can be used to commence a pension in retirement phase that qualifies for tax exemption in the fund (see our guide to the transfer balance cap). It was introduced at $1.6 million on 1 July 2017 and will be indexed periodically in $100,000 increments with the first increase to $1.7 million on 1 July 2021.
However, the way indexation is applied means that individuals will now have a personal TBC between $1.6 million and $1.7 million and no single TBC will apply to everybody. An individual’s TBC can be accessed via ATO online services through myGov.
Once you have used up your TBC you have a choice of removing any excess amount from superannuation or keeping it in an accumulation account where earnings are taxed at 15%.
If you have already commenced a pension, you may be entitled to an increase in your TBC along with indexation depending on how much of your balance has already been used up. But this is not a simple calculation and it is important to read our TBC guide to understand what your cap could become.
Transfer balance account
To monitor pension account balances, the government introduced the transfer balance account (TBA) to take effect from 1 July 2017. Upon retirement, reaching 65 or meeting another condition of release, if you decide to receive your super as an income stream a transfer balance account will be established in your name with the Australian Taxation Office on the commencement date of your income stream.
If you were already receiving a retirement phase income stream on 30 June 2017 your transfer balance account would have commenced on 1 July 2017.
A transfer balance account is a record of all the events that count towards your transfer balance cap. Everybody in retirement phase has one. If you have a number of separate superannuation pension accounts the amounts used to commence them will be aggregated in the one TBA. This account remains active to your death and you can access its balance at the ATO at any time via your myGov account.
In the case of account-based superannuation income streams with industry or retail funds, your fund is required to report the value that was used to commence each retirement income stream.
If you have an SMSF, as the trustee you are responsible for reporting the initial amount used to commence the pension and you will need to report transfer balance account events at least annually.
A transfer balance account will include both credits and debits as shown in the example below.
|1 Jan 2021||Superannuation income stream||$0||$1,600,000||$1,600,000|
|1 Jun 2021||Partial commutation of the income stream to a lump sum||$200,000||$0||$1,400,000|
Transfer balance account reporting for SMSFs
From 1 July 2017, whenever a transfer balance event occurs – that is, an event that could affect the balance supporting the pension – you need to report this via a transfer balance account report (TBAR).
For SMSFs, reporting depends on the size of the balance of the pension account and the total super balances of members. For a fund with member super balances of no more than $1 million when they start a pension, the fund only needs to report annually with their annual SMSF tax return. However, for funds with even just one member with a balance of more than $1 million, reporting for all members must be done within 28 days of the end of the quarter in which the event occurred.
This reporting schedule for a fund does not change even though total super balances may increase or decrease over time.
The ATO stipulates that the following events need to be reported by an SMSF as transfer balance events:
- Details of pre-existing income streams (including value and type) being received on 30 June 2017 that:
- Continued to be paid to a member (or members) on or after 1 July 2017
- Were in retirement phase on or after 1 July 2017
- Details of new retirement phase and death benefit income streams including value and type (when a death benefit income stream is reversionary, the start date will be the date on which the member died)
- Details of limited recourse borrowing arrangement (LRBA) payments (including the value and date of each relevant payment) if the LRBA was entered into on or after 1 July 2017 (or a pre-existing LRBA was re-financed on or after 1 July 2017) and the payment results in an increase in the value of the member’s interest that supports their retirement phase income stream
- Compliance with a commutation authority issued by the Commissioner
- Details (including value) of personal injury (structured settlement) contributions
- Details (including value) of commutations of retirement phase income streams that occur on or after 1 July 2017.
A commutation authority is issued when an SMSF member has exceeded their transfer balance account and been issued an excess transfer balance determination. The authority means they need to commute the excess amount. If the transfer balance event was in response to a commutation authority a TBAR needs to be lodged within 60 days of the commutation authority being received.
Also, if a member voluntarily commutes a pension in response to an excess transfer balance determination being issued, their TBAR is due within ten business days after the end of the month in which the commutation occurs.
Changes to market-linked and complying life expectancy pension calculations
In some good news for holders of these types of pensions, their treatment when it comes to super TBAs has been amended and backdated to apply from 1 July 2017 in the Treasury Laws Amendment (2019 Measures No.3) Act 2019.
Prior to the legislation being passed, if a market-linked pension in existence at 30 June 2017 and referred to as a defined benefit income stream was commuted, the debit that was applied to an individual’s TBA was zero. This would mean that if the pensioner wanted to commute that pension and start another one, the pension would end up incorrectly being double counted. This could result in the person exceeding their TBC.
The changes now mean that the original TBC credit will be taken into account and applied, subject to some deductions, which will avoid the double-counting issue.
The ATO says that under the new approach, where one of these pensions is commuted in full, the value of the debit will be calculated as the amount of the original TBC credit – less the sum of the following amounts:
- The amount of any transfer balance debits (other than a debit arising from a family law income split) relating to the income stream
- The total amount of super income stream benefits the person was entitled to receive before the start of the financial year in which the commutation took place
- The greater of:
- The sum of the super income stream benefits paid during the financial year in which the commutation takes place OR
- The minimum amount required to be paid under regulations 1.07B and 1.07C of the Superannuation Industry (Supervision) Regulations 1994 or regulation 1.08 of the Retirement Savings Account Regulations 1997 during the financial year in which the commutation takes place.
When to report
SMSFs are required to report transfer balance events if any member (even if they are in accumulation phase) has a balance of more than $1 million in the year prior to any other member starting a pension, even if the member starting a pension does not have a balance of $1 million or more.
To illustrate this, here’s an example from an ATO case study.
If an SMSF member has started a pension and nobody in the fund has balances of $1 million or more, then that SMSF only needs to report transfer balance events with the SMSF’s annual return. If anyone has a balance of $1 million or more then they need to report 28 days after the end of the quarter in which the TBAR event occurred.
Another example that the ATO uses shows what needs to be done when somebody in retirement phase commutes existing pensions and starts a new one.
Limited recourse borrowing arrangements repayments are also TBAR events if they were taken out post 30 June 2017. This is illustrated in the following case study.
As for events that do not need to be reported, the ATO lists the following:
- Any pension payments made on or after 1 July 2017
- Investment earnings and losses that occurred on or after 1 July 2017
- When an income stream ceases because the interest has been exhausted
- The death of a member
- Information that individuals report to us directly using a Transfer balance event notification form (NAT 74919). Typically, this is when the following events occur
- Family law payment split
- Debit event from fraud, dishonesty or bankruptcy
- Structured settlement contributions made before 1 July 2007
- Information other funds will report to us, such as a member’s interest in an APRA fund.
How to report
As a trustee you can lodge a TBAR yourself by downloading and completing a hard copy of the report. The ATO provides some directions on how to complete the form but they are basically a series of quite complex multiple-choice questions around the event and its value.
You can report up to four events on one hard copy report. But you need to answer all the event-based questions for each event.
SMSF administrators and tax agents can lodge reports on your behalf. Administration platforms can also notify you when an event occurs for which a TBAR needs to happen and arrange for these reports to be lodged on your behalf.
An SMSF administrator or tax agent can complete the form on behalf of your SMSF electronically.
Transfer balance account reporting can seem complex if you haven’t done it before, but once you understand what events need to be reported and when, it is just another administration task that you need to do for your SMSF.