From 1 July 2017 the Federal government introduced the transfer balance cap, which currently sits at $1.6 million and which will be indexed periodically in $100,000 increments.
The transfer balance cap is the limit on the amount that can be used to commence a pension in retirement phase. It is the total amount that can be kept in a tax-free retirement phase account (see our guide here ). Any amount above the transfer balance cap can be removed from superannuation or kept in an accumulation account where earnings are taxed at 15%.
Your indexed amount will be calculated proportionally based on the remainder of your cap. If you meet or exceed that $1.6 million, or future limits, there will be no gap to index.
Although it is estimated to only impact 1% of Australian superannuants, many in the industry have labelled it to the biggest change to self-managed superannuation funds in decades. This is because while it seems a simple rule – and was introduced to improve the fairness of the system so that people with large balances are not unfairly advantaged – the monitoring of it is not so simple.
Transfer balance account (TBA)
To monitor pension account balances the government introduced the transfer balance account. Upon retirement, if you decide to receive your superannuation as an income stream, you will have a transfer balance account commence in your name with the Australian Taxation Office on the date you accessed your superannuation. 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 will be aggregated in the one TBA. This account remains active to your death and you can access its balance at the ATO 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 of all the superannuation interests that were used to commence the retirement income stream. You can always talk to your pension fund if don’t agree with the amount reported on your transfer balance account.
If you have a self managed superannuation fund, as the trustee of that fund you are responsible for reporting the initial amount supporting 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 per the below example.
1 Jan 2018
Superannuation Income stream
1 Jun 2018
Partial commutation of the income stream to a lump sum
Transfer balance account reporting for SMSFs
From 1 July 2018, whenever a transfer balance event occurs – i.e. an event that could affect the balance supporting the pension – you need to report this via a transfer balance account report.
For SMSFs, reporting depends on the size of the balance of the pension account and the total superannuation balances of members. For a fund with member superannuation 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 member balances of more than $1 million, reporting must be done within 28 days of the end of the quarter the event occurred in.
This reporting schedule for a fund will not change even though total superannuation balances may increase or decrease over time.
The reporting is obviously another administration burden for SMSF trustees although the ATO says they only have to report information about the member’s interest in the SMSF.
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 10 business days after the end of the month in which the commutation occurs.
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.
Here’s an example to illustrate this from an ATO case study.
Fiona is a member of Seagull SMSF and has a total superannuation balance at 30 June 2018 of $500,000. Jimmy has a total superannuation balance on the same date of $500,000 in Seagull SMSF and $1.5 million in an APRA super fund. All of his superannuation interests are in accumulation phase.
Fiona starts an income stream valued at $500,000 on 1 July 2018. As Jimmy has a total superannuation balance of more than $1 million ($500,000 in Seagull SMSF and $1.5 million in an APRA super fund), and is also a member of Seagull SMSF, Seagull SMSF must report the start of Fiona’s income stream by the end of the first quarter of the financial year i.e. 28 October 2018.
Another example that the ATO uses shows what needs to be done when somebody in pension phase commutes existing pensions and starts a new one.
Gary has a total superannuation balance of $900,000 – comprising two pre-existing income streams of $500,000 and $400,000 respectively – as at 30 June 2017.
He continues to make contributions to superannuation and, as at the end of the next financial year – 30 June 2018, his total superannuation balance is $1.1 million. Then on 1 July 2018 he commutes the two income streams and starts a new income stream valued at $1.1 million. As Gary’s balance at the end of the previous financial year was less than $1 million he is only required to report any transfer balance events annually (not quarterly) with the SMSF annual report.
He would have to report the new income stream in the SMSF’s annual income return for 2018-19, along with each debit resulting from the commutation of the two pre-existing income streams.
Limited recourse borrowing arrangements repayments are also TBAR events if they were taken out post 30 June 2017.
In this case study, ABC SMSF has taken out a limited recourse borrowing arrangement to buy a commercial property for $750,000 on 1 July 2018. The fund makes loan repayments of $5000 a month for a loan of $400,000 on an interest rate of 4.5% over a period of 15 years. The SMSF has three members, Jack and Jill in accumulation and Bill in retirement phase with an income stream. They have equal ownership of the property. Each loan repayment reduces the mortgage by approximately $2500 and boosts Bill’s retirement balance by around $500.
The fund’s balance is $3 million and Bill had more than $1 million in his pension account when the pension started so he needs to lodge transfer balance account reports quarterly. Each quarter he has three TBA events to report for the loan repayments and the value for which the business property increased as a result.
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 here. 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.
However, as the legislation so new, in most cases SMSF administrators and tax agents have been lodging reports on behalf of their clients. Administration platforms can also notify members when an event occurs for which a TBAR needs to happen and arrange for these reports to be lodged on their behalf.
An SMSF administrator or tax agent can complete the form on behalf of the SMSF electronically.