Transfer balance account reporting revisited

Doug McBirnieMelanie Dunn

PRES

ENTE

RS

TBAR rules

What you need to report

Frequency of reporting

Working out TSB

Excess transfer balances

Technical questions

Q&A section on questions that we have received from our accounting clients

Today’s AgendaIntroduction

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TBAR

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The Rules

Transfer balance accounts started 1 July 2017, reporting was optional until 1 July 2018

Separate reports for each member

Need to report anything that impacts a member’s transfer balance account (TBA)

Common events you must report:

Commencing a retirement phase income stream including receiving a reversionary income stream or commencing a death benefit income stream

Full or partial commutation of a retirement phase income stream

Lump sum payments from a retirement phase income stream income stream

Full details of less common events you must report can be found here

An SMSF must report annually or quarterly

If no events occur the SMSF does not need to complete a report

Transfer balance account reporting (TBAR)What you need to report

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An SMSF must report annually or quarterly

Frequency is based on the total superannuation balance (TSB) of fund members at the later of:

30 June 2017 if a member had a pre-existing income stream or where the SMSF started its first retirement phase income stream during the 2017–18 year, or

30 June the year before the first member starts their first retirement phase income stream.

Where all members of SMSF have TSB < $1million report annually, else quarterly

Quarterly = within 28 days after the end of the quarter in which an event occurs

Annually = No later than the due date for lodging the annual return for the income year in which events occur, generally 15 May of the following year

ATO states that once reporting framework is set it is locked in for the life of the SMSF

Do not re-assess reporting frequency as member balances change over time

Frequency of reporting applies to all members in the SMSF

Can choose to report more frequently

One-off testFrequency of reporting obligations

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Jane’s TBAR for the

Meet John and JaneFrequency of reporting

SMSFat 1 July

2017

Jane had $560,000 in accumulation

Jane commenced a pension in June 2019and a TBAR needs to be completed.When does this event need to bereported?

John had $1,320,000 in an ABP

John had a pre-existing income streamat 1 July 2017 and total super balance > $1mill

Jane’s TBAR for the pension commencement must be submitted by 28 July 2019

SMSF must report quarterly (within 28days after the end of the quarter inwhich an event occurs)

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Meet FredFrequency of reporting

At 1 July2017

$895,000 in an ABP in SMSFand $50,000 in accumulationin a retail fund

2018-19 events:

Fred’s ABP balance 1 July 2018 in SMSF was $925,000 and in the retail fund he had an accumulation balance of $78,000

Fred rolled over $80,000 from the retail fund to the SMSF and commenced a new ABP on 23 September 2018

Minimum pension payments were taken in 2018-19

When does this Fred need to report the pension commencement?

Even though Fred’s TSB is now > $1million his SMSF still reports annually as frequency is based on what was set when first reported at 30 June 2017

Fred must complete a TBAR by the date his 2018-19 tax return is due

TBAR for credit of $80,000 due 15 May 2020

Fred had a pre-existing income stream at 1 July 2017 and total super balance less than $1 million => SMSF must report annually

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Meet Mark, Kylie and their daughter Katherine Frequency of reporting

SMSFat 1 July

2017

Mark had $1,500,000 innon-retirement phase

TRIS

Kylie had $650,000 in accumulation phase

Katherine has $320,000 inaccumulation phase

No other superannuationoutside SMSF

No pre-existing retirement phase income stream at 1 July 2017

Frequency of reporting for the SMSF has not yet been set

2018-19 events:

At 1 July 2018 Mark had $1,415,000 in a non-retirement phase TRIS, Kylie and Katherine had accumulation balances of $715,000 and $345,000 respectively

Mark turned 65 on 19 August 2018 and his TRIS converted to retirement phase

Kylie retired and commenced an account-based pension on 24 June 2019

Minimum pension payments were made by Mark and Kylie, and Katherine received concessional contributions

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The SMSF’s first retirement phase income stream was commenced in 2018-19 so the trustees must look back at 30 June 2018 and eachmember’s TSB to set the frequency of reporting:

Mark had TSB > $1million on 30 June 2018 and so the SMSF must report quarterly

SMSF must report all required events within 28 days after the end of each quarter

TBAR required timeframes:

Mark should already have completed a TBAR for a TBA credit equal to the balance of his TRIS at 19 August that converted to retirement phase – this was required by 28 October 2018

Kylie needs to complete a TBAR for a TBA credit equal to the value of the pension commenced on 24 June – this is required by 28 July 2019

Mark, Kylie and their daughter KatherineFrequency of reporting

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If a member exceeds their transfer balance cap the fund must report the following sooner than normal reporting obligations:

Value of voluntary member commutation in response to excess transfer balance determination within 10 business days from end of month of commutation

Value of commutation in response to commutation authority within 60 days of date of issue of commutation authority

ATO encourage earlier reporting of fund rollovers in/out of SMSF to avoid incorrect excess transfer balance determinations

Avoid double counting due to difference in timing of reporting by APRA-regulated fund and SMSF

Sometimes you mustReporting sooner

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Chris the sole member of his SMSF

Has a transfer balance account (TBA) of $970,000 from his ABP balance at 30 June 2017

SMSF has annual TBAR frequency of reporting obligations

The current value of ABP in the SMSF is $925,000

Chris decides to wind up the fund and rolls over his ABP to a retail fund on 28 July 2019

The retail fund receives the rollover and commences an ABP with the balance

Retail fund will report TBA credit for Chris of $925,000 within 10 business days after the end of the month (by COB 14 August 2019)

Chris does not need to report the commutation event in the SMSF until he completes the tax return for 2019-20, which might be as late as 15 May 2021

SMSF reports annually: TBA = 970,000 + 925,000 = 1,895,000 => Excess of $295,000

SMSF reports early: TBA = 970,000 - 925,000 + 925,000 = 970,000 => No excess

Example: avoiding double countingReporting sooner

Meet 78 y.o.Chris

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In order to assess how frequent an SMSF must report any TBAR events the trustees need to look at each member’s TSB

ATO say SMSF trustees must self-assess their members' total superannuation balances when determining what reporting framework applies

Expected to demonstrate have taken a fair and reasonable approach to assess members' TSB

Use principles set out in ATO valuation guidelines

Consistent valuations for all purposes e.g. TSB, TBC, CGT relief

Information may not yet be reported to ATO, or visible on MyGov - trustees are expected to find out value of non-SMSF superannuation interests

Could be spread across multiple providersWorking out TSB

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ATO’s webpage on TSB identifies it is calculated as:

accumulation phase value of a person’s super interests not in the retirement phase

+ 'transfer balance' or 'modified transfer balance' (not if it is less than nil) of retirement phase income streams

+ amount of any rollover super benefit not already reflected (in transit between funds on 30 June)

- personal injury or structured settlement contributions paid into the person’s super fund

Relatively straightforward except for the value of retirement phase income streams

Modified transfer balance is used where a person has account-based income streams

All TBA debits and credits are disregarded and instead the value for TSB is the current value of interest at 30 June

TSB value = the account balance for an account-based pension

Other types of super income streams retain the TBA value as the value for TSB purposes

Could be spread across multiple providersWorking out TSB

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Important to understand what types of income streams are ‘account based income stream’ and ‘other income streams’ in the TSB definition

ATO have confirmed that a market linked pension (MLP) is a retirement phase interest

Uses the modified transfer balance when calculating TSB even if it is a capped DB income stream

Subsection 307-230(4) of ITAA 1997

MLP is ‘account-based’ for purpose of TSB calculation and is valued based on account balance

Current TBA value is disregarded

Example: An SMSF member has an ABP and a MLP and is looking to assess their TSB at 30 June 2018

Their TSB retirement phase value will be the current account value of the pensions at 30 June

This will allow for growth in the accounts over time as well as any decreases in value due to payments, and is not likely to equal the original value applied to the member’s TBA

Allowing for different types of income streamsWorking out TSB

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‘Other income stream’ in an SMSF (e.g. DB pension) will retain its TBA value for TSB purposes

This is not likely to equal the account balance

TSB value = sum of all transfer balance credits in that account, less any transfer balance debits

Example:

A member had a lifetime complying pension at 30 June 2017 with initial TBA credit using the special value of $1million

The member is now working out their TSB at 30 June 2019

The current value of assets supporting the income stream at 30 June 2019 was $1.4million

TSB = current transfer balance relating to this income stream of $1million

Does not require a recalculation of the TBA value and so does not allow for growth in the account over time or any decreases due to regular payments

Allowing for different types of income streamsWorking out TSB

If more than one member needs to report an event will need to complete multiple reports

Lodge online

Trustees and administrators via Business Portal

Tax agents via Online services for agents: https://www.ato.gov.au/tax-professionals/online-services-for-agents/

Lodge a paper report

Can report up to four events for one member

PDF can be accessed here: https://www.ato.gov.au/forms/super-transfer-balance-account-report-instructions/?page=3#Lodging_a_paper_report

Lodge via Bulk data exchange (BDE)

Report multiple events for multiple members

Generally done via a software provider e.g. BGL, Class

Lodge via spreadsheet

Tax agents only, interim solution – now encouraged to use the online option

Allowing for different types of income streamsHow to lodge a TBAR

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Original event needs to be cancelled before a new TBAR is lodged with correct information

Do not report an ‘opposite event’

Clearly indicate TBAR is a cancellation and information exactly matches that previously reported

For non-SMSF events contact the fund to have information corrected

You may need to request an extension of time prior to the due date to allow for the new information to be processed

ATO will issue a revoked or amended determination once they have received and processed the new information

Amending a previous reportHow to lodge a TBAR

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An excess transfer balance (ETB) will occur if a member exceeds their transfer balance cap

ETB = amount that exceeds their transfer balance cap + earnings on excess amount

If an ETB occurs the member will need to rectify the excess

Commute the excess transfer balance from retirement phase as soon as possible to limit the amount of excess transfer balance tax payable

Pay excess transfer balance tax

ATO may issue a ETB determination which will set out the amount the member needs to commute

Excess transfer balance tax

ATO will determine notional earnings on the ETB for the period from when started to have excess to when the TBA is no longer in excess

Notional earnings are determined based on general interest charge, currently 8.54% pa

Tax rate is 15% for first excess, and 30% for any future excess

Tax is due and payable 21 days after assessment is issued, general interest charge will accrue if amount remains unpaid

ImplicationsExcess transfer balance

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If excess transfer balance is rectified prior to ATO issuing an ETB determination they won’t send it, but will issue an excess transfer balance tax assessment

Paper assessments sent to members or their tax agent not the SMSF

Up to the members to decide how to cover the liability, but shouldn’t be paid as a fund expense

Use assets outside super

Access super via pension payment, commutation of income stream, lump sum from accumulation

Payable 21 days after the assessment is issued, general interest charge will accrue if any amount remains unpaid after due date

May still receive ETB tax assessment if didn’t receive ETB determination because voluntarily rectified an excess, but still liable for ETB tax

How to complyExcess transfer balance tax assessment

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If an ETB determination is received don’t ignore it, action must be taken

Review for accuracy, client can view details of what has been credited to their TBA via myGov

Tax agents can review via ATO’s ‘Online services for agents’

Capped DB income streams will not be listed in the default commutation notice

Possible common causes:

Didn’t take into account all pensions, including capped defined benefit income streams or non SMSF pensions, when starting new income streams

Receiving a death benefit income stream or reversionary income streams without allowing for the impact on the member’s TBA

Commute the excess amount (including cents) by due date

Complete TBAR for commutation no later than 10 business days after end of month

Delays or not commuting full amount may cause ATO to send commutation authority

Complying with an ETB determinationExcess transfer balance

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Common issues causing incorrect ETB

Reporting commutations that occurred prior to 30 June 2017

Incorrect values reported

Capped DB income streams held outside the SMSF

Reporting pensions not paid by the SMSF leading to duplication

ATO has no discretion to disregard an excess or adjust information reported by a fund

If need more time contact ATO on 13 10 20 before due date to request an extension

If incorrect information was reported then cancel the incorrect event before reporting the correct information

If reporting was correct but you think ETB determination incorrect can lodge objection with ATO

If you think the determination is wrongExcess transfer balance determinations

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Capped defined benefit income stream can lead to a member having a TBA in excess of the $1.6million TBC

Do not need to commute (indeed cannot commute) the excess caused by a capped defined benefit income stream

Instead are subject to the defined benefit income cap

Defined benefit income cap

For members aged 60 or over, or where deceased member was aged 60 or over for a reversionary pension, 50% of excess of total tax free and taxed element of payment above a person’s defined benefit income cap (generally $100,000) is included in assessable income and not eligible for 15% pension tax offset

Income streams outside the SMSF may have an untaxed element and amount in excess of the cap will not be eligible for the 10% tax offset

SMSF trustee needs to complete PAYG withholding and payment summaries if

A member is in receipt of a life expectancy, lifetime or market linked income stream which commenced prior to 1 July 2017, and

The member is aged 60 or over, or for a reversionary income stream where the deceased was at least 60 years old when they passed away

Need to provide the member with a PAYG payment summary by 14 July following the end of the year in which the payments were made

Need to lodge PAYG withholding payment summary with the ATO, usually by 14 August, even if amount need to withhold is nil

Capped Defined Benefit Income streamsOther reporting requirements

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Know and comply with TBAR frequency of reporting requirements

Deal with excess transfer balances promptly

If an event may lead to double counting in a member’s TBA then report sooner

Conclusions

TBAR

Technical questions

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You can (and should) lodge TBAR reports even if the due date has passed

Consequences of late lodgement

If TBAR not lodged by the due date it could be subject to compliance action and penalties

$210 penalty may apply for each period of 28 days that a TBAR is lodged late subject to a maximum of $1,050

Member may inadvertently exceed the TBC and face excess transfer balance tax liability

ATO still taking a ‘educative and supportive approach’

Won’t be seeking to impose late lodgement penalties unnecessarily

Will not deny ECPI on basis a fund has not reported TBC events on time

What are the penalties for failing to lodge a TBAR report? on time?Q1

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The ATO’s FAQ on super reforms identifies that a foreign pension does not count towards a person’s transfer balance as it is not a superannuation income stream

As the pension does not impact a member’s TBA there are no TBAR requirements for events relating to that income stream

Are overseas pensions required to be included in any TBA event reporting? time?Q2

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If a person in receipt of a retirement phase income stream passes away you do not need to report that event under TBAR

If the person had an outstanding commutation authority must lodge a TBAR by the due date to tell ATO not complying with commutation authority due to member being deceased

TBAR reporting for beneficiary of a deceased member

If receive a death benefit income stream the beneficiary must report a credit of the value of the new death benefit income stream with effective date the day they become entitled to it

If receive a reversionary income stream then a credit equal to the value of the income stream at the date of death must be reported with effective date of the date of death

If the income stream is paid as a lump sum out of superannuation no reporting required

Is there an exemption from TBAR following the death of a member??Q3

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If an account-based income stream fails to comply with the minimum pension standards

Consider whether Commissioner of Taxation’s GPA concession could apply

The income stream will be taken to have ceased for tax purposes at the start of that income year for tax purposes and not be eligible for ECPI

Any payments treated as lump sums from accumulation

Need to commence a new income stream in following year to continue having an income stream (re-calculate tax components)

For TBAR purposes income stream is taken to have ceased at end of the year

A TBA debit will apply at 30 June equal to the market value of the income stream at that time

Don’t need to cancel TBAR events which occurred in year e.g. lump sum, partial commutation

When start new income stream, generally 1 July of the next year and complete TBAR for that event should not breach TBC

What must be reported under TBAR when a pension does not meet the minimum pension standards?Q4

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Example: Paul’s SMSF, single member with annual TBAR requirements (due 15 May 2020)

ABP valued at $800,000 at 1 July 2018, Paul’s current TBA is $820,000

Minimum pension requirement for 2018-19 was $40,000

Made $30,000 in pension payments in 2018-19 = pension standards not met

Value of ABP on 30 June 2019 was $780,000

ABP ceased at 1 July 2018 for tax purposes and payments taxed as lump sums from accumulation

Paul commenced new ABP 1 July 2019 and will ensure pension standards are met going forward

Paul will report the following TBAR events

Debit of $780,000 with date 30 June 2019 by 15 May 2020 at the latest

Credit of $780,000 with date 1 July 2019 by 15 May 2021 at the latest

If was reporting quarterly, debit and credit would need to be reported by 28 July 2019 and 28 October 2019 respectively

What must be reported under TBAR when a pension does not meet the minimum pension standards?Q5

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If 2018-19 accounts have not yet been finalised, and 1 July 2019 opening balances are not known

Does not remove the quarterly reporting requirement

If TBAR not lodged by due date could be subject to compliance action and penalties

The trustee needs to determine the value of the income stream at commencement

Pension documentation and minimum pension requirements

But we know might have completed documentation to commence pension with entire balance and will define exact purchase price once known

Complete a TBAR for the member who commenced the income stream by 28 October 2019

Credit equal to the pension commencement value

Trustee may choose to use a ‘reasonable estimate’ of the value to meet TBAR obligations.

If you submit TBAR and later find amount reported significantly changes you can correct the value initially reported to the ATO

Submit a TBAR to cancel previous event, include event exactly as it was reported originally

Submit new TBAR with correct information

How do we treat a fund which is reporting quarterly but started a pension 1 July 2019 and accounts not yet finalised?Q6

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An SMSF trustee only needs to report information about events that impact their members’ transfer balance account

Only need to report events relating to the SMSF

If a member has no events which require reporting under TBAR then no TBAR report is required to be submitted for that member

Unlike a tax return there is no ‘Nil TBAR report’

Is there ever a requirement to lodge a ‘nil’ TBAR?Q7

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A lump sum paid from pension is technically done so by way of a partial commutation of the income stream to a lump sum

It is this partial commutation that is reportable under TBAR as it is an event that reduces a member’s transfer balance account

If no documentation is completed to take payment as a lump sum, and amount not reported for TBAR, then would not be a lump sum

The payment would be a pension payment and count towards meeting minimum pension standards

If you want a payment to be treated as a lump sum need to report for TBAR

Will not count towards meeting minimum pension standards

Taxed as a lump sum

Remember an income stream must make a minimum payment each financial year

At least one payment in a year must be a pension payment

If a client draws their pension once a year in a lump sum is the payment a lump sum for TBAR or is it a pension payment?Q8

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A trustee does not have to treat payments from an income stream as lump sums

It is ok to treat all payments as pension payments even if a member draws a payment above the minimum requirement

A trustee may elect to treat payments from an income stream in excess of the minimum payment requirement as lump sums, and complete a TBAR report for the associated debit, in order to

Open up space in the member’s TBA for future income stream credits

For taxation purposes especially if the member is under age 60

If a client draws above their minimum pension for a year, do they have to treat the excess as a lump sum and report a debit to their TBA?Q9

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No, if a lump sum is paid from accumulation phase that event is not impacting a member’s transfer balance account and does not need to be reported

If the lump sum is paid as a result of a full or partial commutation of a retirement phase income stream to accumulation phase, then the commutation of the income stream must be reported

If we pay a lump sum from a fund fully in accumulation, do we have TBAR requirements?Q10

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The TBAR due date where the SMSF is an annual reporter is the lodgment due date for the SMSF annual return (SAR)

For 2018-19 year events this may generally be 15 May 2020

Confirmed with ATO that if a trustee decides to lodge the SAR earlier this does not change the due date for TBAR purposes

Can choose to lodge the TBAR earlier as well but the due date doesn’t change

Example:

SMSF with annual TBAR obligations

SMSF 2018-19 annual return and TBAR due 15 May 2020

Trustee lodges annual return 15 October 2019 for the 2018-19 financial year

TBAR due date for 2018-19 events remains 15 May 2020

For a fund with annual TBAR obligations, does submitting the SMSF annual return earlier bring forward the TBAR lodgment due date?Q11

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To determine the required frequency of reporting for an SMSF we look back at the prior 30 June TSB of all members in the SMSF at the time the trigger event occurred

Example:

Cameron and Cassie had balances in accumulation in the SMSF at 1 July 2017

Their daughter Carol joined the fund on 18 October 2018 in accumulation

Cameron passed away 15 November 2018 and Cassie commenced a death benefit income stream on 20 November 2018

Carol’s husband Charles joined the fund on 11 December 2018 in accumulation

To determine the frequency of reporting we examine the TSB of members in the fund at the ‘trigger event’ which is the new death benefit income stream at 20 November 2018

We would look at TSB of Cassie and Carol at 30 June 2018 to determine the frequency of reporting for this SMSF

If members join or exit the fund in the first year an income stream is paid which members are included in the TBAR frequency test?Q12

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LRBA entered into prior to 1 July 2017 do not need to be reported

Transfer balance credit will arise when:

LRBA entered into (or re-financed) on or after 1 July 2017, and

LRBA repayment increases the value of a member’s retirement phase interest, and

LRBA repayment sourced from assets not in retirement phase

TBAR of LRBA payment

Credit is the increase in value of the retirement phase interest as a result of LRBA repayment

Date is the date of the loan repayment

Where LRBA repayment increases more than one member's retirement phase interest must apportion on a fair and reasonable basis to calculate TBA credit

A retirement phase interest won’t increase when repayments are made from a retirement phase interest

If all members in an SMSF have only ABPs then LRBA repayments do not need to be reported

Both members in an SMSF have only ABPs, how is a monthly $10,000 principle plus interest LRBA payment reported for TBAR?Q13

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Payments on an LRBA are not reportable unless a payment made from an accumulation interest results in an increase in the value of a retirement phase income stream

If the fund does not have a retirement phase income stream then there is no requirement to report payments under TBAR

Where a fund is not paying retirement phase income streams do you need to report LRBA payments under TBAR? Q14

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The information in this presentation has been prepared by Accurium Pty Ltd ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

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Questions?