- Will the additional reporting requirements add to the cost of running an SMSF?
- Transfer balance cap and event-based reporting
- Why is event-based reporting necessary?
- What must SMSFs report to the ATO under the event-based model?
- What happens if an SMSF fails to report these events to the ATO?
- For more information…
Note: From 1 July 2018, SMSFs must report events that affect a fund member’s transfer balance to the ATO on an events basis (which the ATO has since confirmed must be reported quarterly if a SMSF has a fund member with a total superannuation balance of $1 million or more). The SMSF trustee must report this event using the Transfer Balance Account Report (TBAR).
In November 2017, the ATO announced that the quarterly event-based reporting regime, to commence from 1 July 2018, will only apply to self-managed super funds where a SMSF has at least one fund member with a total superannuation balance of $1 million or more.
ATO deputy commissioner, James O’Halloran said that those SMSFs with fund members who have total superannuation balances of less than $1 million, can choose to report events which affect their members’ transfer balance caps once a year, at the same time as the SMSF lodges the fund’s annual return.
O’Halloran predicts that this revised approach will mean that up to “85% of the SMSF population will not be required to undertake any additional reporting outside of current annual reporting timeframes for the foreseeable future”.
Even so, 15% of the SMSF population works out to be roughly 90,000 SMSFs that will be required to be part of the event-based reporting regime.
Important: From 1 July 2018, any SMSF with a fund member who has a total superannuation balance of $1 million or more will be required to report events affecting the fund member’s transfer balance, for example, starting a SMSF pension, “within 28 days after the end of the quarter in which the event occurs”.
The ATO promises it “will continue to engage and work closely with the SMSF sector over the coming weeks and months to support the sector in transitioning to the event-based reporting arrangements….”
Will the additional reporting requirements add to the cost of running an SMSF?
Of course, but at least the ATO is trying to minimise the senseless burden for SMSF trustees. Although I don’t blame the ATO for this ridiculous administrative burden, the reason SMSF trustees must comply with these new reporting requirements is that the ATO got stuck with administering the transfer balance cap regime, and maintaining “the integrity of the transfer balance cap measure”. According to the ATO, as the administrator and the regulator, the ATO needs to be in a position to know when it needs to issue an excess transfer balance determination to individuals who have exceeded the cap”.
Keep in mind that this reporting obligation applies to all SMSF members in retirement phase, including fund members with nowhere near $1.6 million in retirement phase. Such fund members would have very little chance of exceeding their transfer balance cap (which is why exempting 85% of SMSFs from quarterly reporting is a pragmatic approach).
Transfer balance cap and event-based reporting
In a recent speech at an industry conference, ATO assistant commissioner Kasey Macfarlane provided a very helpful explanation of what SMSF trustees can expect under the new SMSF event-based reporting regime. The proposed event-based reporting rules relate to the new $1.6 million transfer balance cap (which applies when transferring super money to retirement phase).
Under the proposed rules, from 1 July 2018, SMSFs must report events that affect a fund member’s transfer balance to the ATO on an events basis (which the ATO has since confirmed must be reported quarterly if a SMSF has a fund member with a total superannuation balance of $1 million or more). The SMSF trustee must report this event using the Transfer Balance Account Report (TBAR).
The event-based reporting model only applies to the transfer balance cap, and only relates to events affecting an individual member’s transfer balance. You only need to report under this model if your SMSF has one or more members in retirement phase (formerly known as pension phase) and one of those fund members has an event that affects their transfer balance in the relevant reporting period. You do not need to report under this regime, if your fund does not have a member in retirement phase.
Note: Under the new event-based reporting model, SMSFs will not be required to report investment earnings, or gains or losses, on a more regular basis. The event-based reporting model also will not require you to report member account balances more frequently, and will not require you to report contributions or pension payments more frequently. According to the ATO, the new event-based reporting model will not require you to undertake valuations of assets on a monthly or quarterly basis, or more frequently than you currently are required to do.
Important: Although reporting only relates to changes in the transfer balance, and ATO reporting for relevant SMSFs is to be quarterly (at least for a transitional period of 2 to 3 years, and then moving to monthly), SMSF trustees MUST track a person’s transfer balance on an ongoing and continuous basis.
Why is event-based reporting necessary?
According to the ATO, such an onerous responsibility is necessary because current ANNUAL SMSF reporting arrangements are not sufficient for what is needed for individuals to manage the transfer balance cap across all of their superannuation interests, or for the ATO to effectively administer the transfer balance cap.
Quoting directly from Ms Macfarlane’s speech: “Otherwise members will not be able to make informed financial decisions… and will be at risk of breaching the superannuation and taxation… The operation of the transfer balance simply does not contemplate retrospective construction of a person’s transfer balance account on an annual basis.”
If a fund member exceeds the transfer balance cap, excess transfer balance tax is payable on the notional earnings associated with any excess over the TBC, and the notional earnings accrue daily and compound daily, until the fund member takes action to remove the excess. Alternatively, the ATO issues an excess transfer balance tax determination. Due to the financial consequences when exceeding the TBC, the ATO is introducing the event-based reporting regime to minimise the risk of a fund member exceeding his or her TBC.
According to Ms Macfarlane, “without the additional visibility provided by the event-based reporting, the ATO will not be able to provide reliable services to warn people when they may be approaching the cap or at risk of exceeding the cap”.
What must SMSFs report to the ATO under the event-based model?
According to the ATO, the most common events SMSFs will need to report are:
- values of any retirement phase pension that an SMSF member is entitled to, including reversionary pensions
- value of any commutation of a super pension by an SMSF member
- any structured settlement payment that an SMSF member contributes to the SMSF
- certain limited recourse borrowing arrangement (LRBA) repayments that give rise to a transfer balance credit
What happens if an SMSF fails to report these events to the ATO?
Although the transfer balance account report (TBAR) is an approved form, and late lodgement penalties apply, the ATO has indicated for the first year of operation (that is, during the 2018/2019 year), it will not be imposing late lodgement penalties immediately, rather the ATO will focus on supporting and assisting SMSFs with reporting and transitioning to this more onerous model.
Note: The quarterly event-based reporting regime, taking effect from 1 July 2018, will only apply to self-managed super funds where a SMSF has at least one fund member with a total superannuation balances of $1 million or more. Annual reporting, via the SMSF annual return, will apply to all other applicable SMSFs.
By failing to report transfer balance events, Ms Macfarlane also notes that fund members may inadvertently exceed the cap and be faced with an unexpected tax liability.
Note: The ATO has no plans to deny an SMSF, exempt current pension income (ECPI), as a result of an SMSF not reporting transfer balance events on time.
For more information…
For more information about SMSF-specific compliance issues as a result of the July 2017 changes, see SuperGuide article Latest super changes: 25-point SMSF guide to ATO’s hot issues.
For more information about the July 2017 super changes, see SuperGuide article Latest superannuation changes: 2017/2018 guide.
For more information about the $1.6 million transfer balance cap, see the following SuperGuide articles:
- Retirement phase: A super guide to the $1.6 million transfer balance cap
- CGT relief and the $1.6 million transfer balance cap, and TRIPs
- Superannuation death benefits and the $1.6 million transfer balance cap
- Defined benefit pensions and the $1.6 million transfer balance cap
- Latest super changes: ATO Guidance Notes and Law Companion Rulings