Transfer balance cap and TBAR reporting

CLASSIFIFICATION – Transfer balance cap and TBAR reporting 1

Presented by: Helen Morgan, Superannuation Director

CLASSIFIFICATION - Transfer balance cap and TBAR reporting 2

Aims of this session

• An overview of the transfer balance cap.

• What events need to be reported, by who and when (including rectifying

errors).

• What transfer balance cap information individuals can see online.

• Understand the excess transfer balance (ETB) determination and ETB tax

notice of assessment processes.

• Understand the Commutation Authority process.

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Transfer balance cap overview • What is the transfer balance cap?

• Essentially a limit on the amount of capital an individual can transfer into

retirement phase and use to start a retirement phase income stream.

• The concept of debits and credits in a transfer balance account.

• An individual:

• starts to have a transfer balance account the later of 1 July 2017 or the

day they first start to be a retirement phase income stream recipient

• has a transfer balance at the end of a day i.e. the net amount of all of

their transfer balance account credits and debits at the end of any

particular day.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Consequences of exceeding the cap – Account-based pensions only

• If an individual’s transfer balance exceeds their transfer balance cap at

the end of a day, they will usually have an excess transfer balance

(ETB).

• Their excess transfer balance includes the ETB earnings credited to

their transfer balance account.

• We crystallise these earnings when we issue an ETB determination to

the individual.

• If the individual is rectifying before we issue an ETB determination, they

will need to calculate the ETB earnings themselves.

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Consequences of exceeding the cap – Account-based pensions only – cont.

• The individual will need to commute their excess transfer balance.

• If we have sent the individual an ETB determination and they do not

commute in full (including cents) by the due date, we will send their funds

commutation authorities to commute the excess until they are no longer in

excess.

• When an individual is no longer in excess, they will need to pay ETB tax on

the earnings that accrued for the whole of the time they were in excess.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Consequences of exceeding the cap – Capped defined benefit income streams

• If an individual has, or has had, a capped defined benefit income stream

they will only have an ETB if the balance of their transfer balance account

at the end of the day exceeds their:

• transfer balance cap; and

• capped defined benefit balance.

• “Capped defined benefit balance” is the sum of the transfer balance credits

and debits in their transfer balance account from capped defined benefit

income streams.

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Consequences of exceeding the cap – Capped defined benefit income streams only • If an individual only has events in their transfer balance account from capped

defined benefit income streams, they will never have an excess transfer balance.

• Where they are receiving income from a capped defined benefit income stream and

are over 60 or under 60 and the income stream is a death benefit income stream

where the member was over 60 at the time of death they may need to include more

pension income in their income tax return and have a reduced entitlement to the

10% pension tax offset.

• In these situations, the fund may have to withhold amounts from their pension and,

even if the amount withheld is nil, the fund has to provide the member and the ATO

with payment summary information. CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Consequences of exceeding the cap – Capped defined benefit income streams and account-based pensions

• If an individual has, or has had, a mix of capped defined benefit income

streams and account-based pensions that exceed their transfer balance

cap, then they will have an excess transfer balance and will need to fully or

partially commute the account-based pension to rectify the excess.

• They may also need to include more pension income in their income tax

return, and have a reduced entitlement to the 10% pension tax offset.

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Consequences of exceeding the cap – Account-based pensions and capped defined benefit income streams - Example • June is aged 65 and is receiving a:

• capped defined benefit income stream (special value of $1.5 m) and

• an account-based income stream (value of $500,000).

• June has exceeded her transfer balance cap by $400,000.

• June has an excess transfer balance because the balance of her transfer balance account ($2.0

m) exceeds her transfer balance cap ($1.6 m) and her capped defined benefit balance ($1.5 m).

• June will need to commute the ETB from her account-based income stream.

• If the income June receives from her capped defined benefit income stream exceeds her defined

benefit cap for the year, she may need to include amounts in her assessable income. Her

entitlement to an offset may also be affected. CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Transfer balance account credit events funds need to report

• Credit events funds should have already reported:

• Retirement phase income streams that were in existence just before 1

July 2017.

• Credit events that need to be reported:

• Starting a retirement phase income stream on or after 1 July 2017

(including a transition-to-retirement income stream (TRIS) when it

becomes a retirement phase income stream).

• Limited recourse borrowing arrangements (LRBA) loan repayments

where the LRBA was entered into on or after 1 July 2017 (essentially

SMSFs only).

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Transfer balance account credit events funds need to report – Death benefits • Where a deceased member’s interest is retained within the superannuation system and

cashed to a dependent beneficiary in the form of a death benefit income stream, a credit

arises in the dependent beneficiary’s transfer balance account.

• Non-reversionary death benefit income streams:

• are reported to us in the same way as any other new pension

• the effective date will be the date the individual starts to receive it

• the value of the income stream when it begins to be paid to the individual.

• Reversionary death benefit income streams:

• are reported to us in the same way as any other new pension

• report the date the income stream commenced, i.e. the date of the death of the

member

• the value of the income stream on that day, but

• the credit arises in the individual’s transfer balance account 12 months after the

income stream commences.

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Transfer balance account debit events funds need to report

• The debit events funds need to report are:

• any commutation of a retirement phase income stream

• structured settlement contributions (funds also need to report a

structured settlement on or after 1 July 2017 on the TBAR as well as

on the MCS)

• if an income stream stops being in retirement phase.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Transfer balance account debit event - Partial commutations

• Partial commutations – what to remember.

• Decide what the payment is, a commutation or pension payment, before

the payment is made.

• Make sure this decision is documented.

• Ensure that the pension standards will be complied with.

• Partial commutations will no longer count towards the annual minimum

pension payment requirements.

• Failure to comply with pension standards, including annual minimum

pension payment requirements, will have tax consequences for the fund

and transfer balance cap consequences for the member.

• Report the commutation to the ATO on a TBAR. CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Transfer balance account debit event – Income stream stops being in retirement phase

• There are transfer balance cap consequences, and ECPI consequences if an

income stream stops being in the retirement phase.

Example

• A member commenced an account-based pension on 1 July 2017 and received a credit of $1.1 million.

• The fund fails to make the minimum pension payment for the superannuation income stream for that

income year.

• For transfer balance purposes:

• the member continues to have the credit of $1.1 million

• the pension stops being a superannuation income stream as at the end of 30 June 2018 (even

though it is considered to have ceased at the start of the income year for other purposes such as

eligibility for ECPI – see TR 2013/5), and

• a debit arises in the member’s transfer balance account on 30 June 2018 for the value of the

superannuation interest that supported the superannuation income stream just before it ceased to

be a superannuation income stream in the retirement phase.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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What funds do NOT need to report

• Pension payments made on or after 1 July 2017.

• Investment earnings, gains and losses that occurred on or after 1 July 2017.

• When a pension ceases because a member dies or the assets supporting the

income stream are exhausted.

• Payments made to a member from their accumulation interest.

• Other events that funds don’t need to report include information reported to the

ATO by an individual using a Transfer balance event notification form. This

includes family payment splits, structured settlement contributions made before 1

July 2007 and a debit event resulting from fraud, dishonesty or bankruptcy.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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When SMSFs need to report - most events • When do you test?

• This will be determined 30 June before the SMSF first starts to have a

pension in retirement phase.

• What is the test?

• when a member of the fund has a pre-existing income stream that continued

to be paid as a retirement phase income stream on or after 1 July 2017, the

TBAR due date was on or before 1 July 2018

• where all members of an SMSF have a total superannuation balance of less

than $1 million, report TBAR events annually - when the SAR is due

• if any member of an SMSF has a total superannuation balance of $1 million or

more, report TBAR events quarterly - 28 days after the end of quarter in

which the event happened. CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Due dates for reporting

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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When SMSFs must report earlier

• If a member exceeds their transfer balance cap, the following events

must be reported sooner:

• a commutation of an income steam in response to an ETB

determination issued to a member. This must be reported within 10

business days after the end of the month in which the commutation

occurred.

• a response to a commutation authority must be reported by the

legislated due date (as specified on the notice), i.e. within 60 days of

the date of issue of the commutation authority.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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When SMSFs are encouraged to report earlier

• We encourage SMSFs to report earlier in some circumstances, for

example:

• if you need to correct a reporting error

• if the transitional rules apply

• when a member is rolling their pension over to an APRA fund, or

• where the event significantly changes the risk of the individual

exceeding their transfer balance cap, e.g. they start to receive a

significant death benefit income stream.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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What happens if SMSFs report late?

• Late reporting of credit and debit events for SMSFs may cause adverse

consequences. In particular:

• the member may need to commute more and pay more ETB tax

• we may issue an incorrect ETB determination

• we may send a commutation authority to the fund and the member is at

significant risk of having the assets removed from retirement phase twice

• late lodgement penalties may apply

• the member and their advisors will be less able to rely on the information we

display on myGov regarding their transfer balance cap.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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How do SMSFs report

• Options currently available for TBAR lodgment (links are available on slide

59).

Lodgement method SMSF trustee or administrator Tax agent

Online form Yes Not yet available

Bulk data exchange (BDE) Yes Yes

Spreadsheet version No Yes

Paper report Yes Yes

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Common errors with TBAR reporting

• Incorrect ABN or TFN for the fund or the member.

• Incorrect values.

• Missing information, particularly the date of birth for a member.

• Not including the details of each event reported for the member.

• Reporting that a commutation has been made in response to a

commutation authority even though we have not sent a commutation

authority to the SMSF. A commutation that occurs after we have sent the

member an excess transfer balance determination is NOT a

commutation that has occurred in response to a commutation authority

issued by us.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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How to correct reporting errors

• If you need to correct information you have reported to us on a TBAR,

you must cancel the original report and then lodge a separate report with

the correct information.

• If you need to re-report, ensure that you have sent the cancellation

report first.

• If an event was reported in error, you should cancel the event, rather

than reporting the “opposite” event.

• Cancelled events will no longer display on the individuals myGov

account.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Tips and tricks for cancelling incorrect information

• When reporting a cancellation it is critical that the TBAR is clearly a cancellation

of information. The information you provide in the cancellation TBAR must exactly

match the information previously provided on the TBAR.

• Paper:

• lodge a new paper TBAR indicating that this is a cancellation by marking ‘yes’

at section B

• lodge another paper TBAR to report the correct information.

• Spreadsheet:

• lodge a new spreadsheet with the cancellation indicator selected on row 39

• only include in the cancellation TBAR the events you want cancelled

• lodge a new spreadsheet with the correct events and information.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Tips and tricks for cancelling incorrect information – cont.

• Do NOT:

• Lodge a second TBAR just reporting the correct value of the income

stream you have reported to us.

• Lodge a TBAR “ticking” the cancellation indicator on the paper form and

include the correct value of an income stream already reported rather

than cancelling the incorrect information and then reporting the correct

information.

• Report an individual has fully commuted a pension, rather than

cancelling the incorrect information.

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Viewing an individual’s transfer balance account on myGov

• An individual can:

• View all the events that have been taken into consideration when calculating the

balance of their transfer balance account.

• Identify if they have exceeded their transfer balance cap.

• Identify which fund to contact if they disagree with any of the transactions.

• Download their transfer balance account information to print or email to their advisor

or agent.

• In future, tax agents will be able to view this information for their clients through Online

services for agents.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Individual’s view online – Under the transfer balance cap

To display transfer balance cap information select: • Super • Information • Transfer

balance cap

To display event details click here

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Individual’s view online – Under the cap – event summary – single event

To download event details to print or email to an advisor or agent

To display more information

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Individual’s view online – Under the cap – event summary – multiple events

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Individual’s view online – Deferred reversionary credit

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Individual’s view online – Multiple income streams (including capped defined benefit income stream) event summary

Click on the chevron to display transaction details

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Individual’s view online – ETB determination

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Individual’s view online – ETB earnings credit applied

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The transfer balance cap process – Account-based pensions

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Individual has received an ETB determination

• An individual has 60 days to:

• understand why the ATO issued an ETB determination

• understand what they need to do after receiving an ETB determination

• act.

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Receiving an ETB determination – What needs to occur

• If an individual receives an ETB determination, they have 60 days in which

to act.

• Choice:

• commute the excess amount from a pension

• seek an extension of time in which to respond

• send an election to the ATO advising which pension to commute. We

will then send a commutation authority to that fund.

• If they commute the excess amount from a pension their fund must

report this to us on a TBAR no later than 10 business days after the end

of the month in which the commutation occurred. CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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ETB determination notice – page 1

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ETB determination notice – page 2

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ETB determination notice – Combination of accounts

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Default commutation notice overview

• The default commutation notice sets out which fund and income stream the

ATO will send a commutation authority to, if the individual does not:

• commute the required amount by the due date, or

• make an election by the due date, asking us to send a commutation

authority to a different fund (or funds) to that indicated at the top of the

commutation notice.

• We will not include a capped defined benefit income stream in the default

commutation notice.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Default commutation notice

We may also send commutation authorities to the other income stream providers if the primary provider is

unable to commute the full excess transfer balance amount.

This is the name of the

primary income stream

provider.

This is the account

number of the primary

income stream.

This is the amount (as shown on

the first page of the notice)

the individual must commute to

bring them under their cap

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Making an excess transfer balance election

• The individual can request us to send a commutation authority to a fund other than the primary

income stream provider shown on the default commutation authority.

• We encourage individuals to voluntarily commute the excess amount as:

• even if they choose to make an early election, we cannot send a commutation authority to a

fund until after the due date. Waiting for us to act will mean they pay more tax.

• they can engage with their fund to determine if they want to retain this amount in super in

accumulation phase or cash it out of the system.

• The individual should lodge an excess transfer balance election form by the due date on the ETB

determination.

• Note: Once an election has been made it is irrevocable and cannot be withdrawn or amended.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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CLASSIFICATION – Transfer balance cap and TBAR reporting

If an individual disagrees with their ETB determination

• Firstly, check their transfer balance account details online through myGov.

• They may lodge an objection, however:

• the Commissioner has no discretion for “special circumstances”

• if the individual is contending that the information we have relied on is wrong

or incomplete, we encourage them to talk to their fund

• if information has been reported incorrectly, the fund will need to correct the

information reported to us promptly.

Note: An individual may object to their ETB tax assessment, however if they choose to

object to both the determination and the assessment, they cannot object to the assessment

on grounds they relied on, or could have relied on, when objecting to the determination.

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Commutation authorities

• We will issue a commutation authority when we have not received

notification in response to an ETB determination that:

• an election form has been lodged within the 60 day period, OR

• the excess has been voluntarily commuted for the full amount as set out

in the determination, including cents.

• The commutation authority will detail:

• the amount the provider must commute from a specified income stream

• the issue date and the due date

• the income stream that must be commuted.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting

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Commutation authorities – cont. • The fund must:

• action the commutation authority unless the member is deceased or the pension

is a capped defined benefit income stream

• report to us by the due date on the commutation authority that it has:

• commuted the amount set out in the authority

• commuted as much as possible, even if it is not the full amount

• not actioned the commutation authority because the member is

deceased

• not actioned the commutation authority because it relates to a capped

defined benefit income stream

• advise the member of its actions.

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Responding to a commutation authority – Commuting an amount

• When the fund can commute an amount, the trustee should make

reasonable efforts to contact the member and discuss their options.

• If the fund cannot contact the member, they should commute the amount

in a way that is judged to be in the member's best interests.

• Funds DO NOT have authority to commute the member’s income stream

after the due date on the commutation authority.

CLASSIFICATION – Transfer balance cap and TBAR reporting

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Responding to a commutation authority – Commuting the full amount

• Funds must commute the full amount set out in the commutation

authority, including cents, when it is possible to do so.

• Funds must do this by the due date on the commutation authority.

• Funds must also lodge a TBAR to tell us they have complied in full.

• Advise the member of the action taken.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting 48

Responding to a commutation authority – Commuting a partial amount

• If a fund can’t commute the full amount stated on the commutation authority

because the amount is higher than the value of the interest supporting the income

stream, they must commute the value of the interest and close the account.

• As part of calculating the value of the interest that can be commuted, they must

take into account any pro-rata minimum pension payments that need to be met.

• They must also lodge a TBAR to tell us they have complied in part.

• If the income stream stated in the commutation authority has already ceased then

they will need to lodge a TBAR by the due date to tell us they have complied in

part, the commutation amount is nil and the account is closed.

CLASSIFIFICATION - Transfer balance cap and TBAR reporting 49

Commuting an amount and the pension payment standards

• It is important to ensure that the pension payment standards are met when partially or

fully commuting an income stream.

A member is receiving an income stream valued at $70,000 on 1 July 2018.

On 1 October 2018 we issue the SMSF with a commutation authority for $100,000. The fund is required to commute the amount by 30

November 2018 (within 60 days of issue date).

The member is receiving monthly payments (of $525) and have received $1,575 to date.

The trustee decides to commute the amount on 15 October 2018 and will need to pay the minimum pension amount before making the

commutation.

The minimum annual amount is $6,300 (The member is 86 so their minimum pension payment is 9% of the balance on 1 July 2018)

Therefore the pro-rata amount is: $6,300 (annual amount) x 107 (days in payment period) = $1,850

365 (days in financial year)

The trustee makes another minimum pension payment amount of $275 to ensure that the minimum pension payment standards have

been met up to the date of the commutation.

The remaining $68,150 is commuted and retained in an accumulation account in the SMSF.

The trustee lodges a TBAR reporting that they have complied with the commutation authority in part, a commutation value of $68,150 and

that the account is closed by 30 November 2019.

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Commutation authority - A market linked pension that isn’t a capped defined benefit income stream

• A market-linked pension isn’t a capped defined benefit income stream if

it commenced on or after 1 July 2017.

• This type of pension can generally only be commuted to start another

market-linked pension.

• If we issue a commutation authority in relation to one of these income

streams, the maximum commutable release amount will be nil.

• The fund needs to lodge a TBAR by the due date to tell us they have

complied in part, the commutation amount is nil and the account is open.

• This may have consequences for the member.

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Choosing not to comply with a commutation authority

• A fund can choose not to comply with a commutation authority if:

• it relates to a capped defined benefit income steam, or

• the member is deceased.

• The fund must still lodge a TBAR by the due date to tell us you’re choosing

not to comply and your reasons.

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Commutation authority – The account number for the pension has changed

• The reference used to identify an income stream may have changed

since the income stream was reported to us.

• In these instances we may send a commutation authority identifying the

income stream that needs to be commuted, which uses the account

number initially reported to us.

• Funds are still required to commute the identified income stream, even

though the reference you use has changed.

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Commutation authority – What funds need to tell their member

• Funds must notify their member in writing (within 60 days of the issue

date of the commutation authority) when:

• complying with a commutation authority or

• you have chosen not to comply with the commutation authority

because it was in relation to a capped defined benefit income stream.

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Commutation authority – What funds need to tell their member – cont.

• Funds must include the following information:

• the member's name and address

• the income stream account number in the commutation authority

• the issue date and due date of the commutation authority

• the amount you were required to commute.

• Funds that have commuted an amount in response to the commutation authority

must also include:

• the amount you commuted

• the date of the commutation.

• Funds must also sign the notice you provide your member and declare that the

information it contains is 'true and correct'. CLASSIFICATION – Transfer balance cap and TBAR reporting

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Commutation authority – Consequences of non-compliance

• If funds do not commute the amount by the due date or tell us why:

• the income stream will stop being in the retirement phase. This will

affect the fund's entitlement to exempt current pension income.

• You may be liable for penalties or subject to compliance action.

• You may be subject to an administrative penalty.

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Excess transfer balance (ETB) Tax Assessment

• An individual is liable to pay ETB tax if they have an excess transfer

balance at the end of one or more days.

• If an individual is liable for ETB tax, the ATO will issue them with an ETB

tax assessment.

• A individual may NOT have received an ETB determination but may still

receive an ETB tax assessment. This is because they have rectified the

excess before they were assessed for a determination, BUT they are still

liable for ETB tax.

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Useful information • Webinars for professionals including

• SMSF Professionals - Event-based reporting webinar - November 2017

• Helping clients who have exceeded their Transfer balance cap - April 2018

• Transfer balance cap event-based reporting webinar: How to complete the Transfer Balance Account

Report (TBAR)

•

• SMSF News and Alerts (search QC55645)

• SMSF News Alert 2018/3: advice for funds where members have a market-linked pension (search

QC56009)

• Defined benefit income (search QC56368)

• What to do when your member has received an ETB determination (search QC56487)

• What to do if you receive a commutation authority (search QC 56943)

• First quarterly TBARs due 28 October for some SMSFs (search QC 56996)

• Changes to the treatment of partial commutation payments (search QC 57298)

• Transfer balance cap -Tax time 18 changes

• PAYG payment summary – superannuation income stream (search QC19550)

• Defined benefit income cap tool (search QC55642)

• Transfer balance cap – defined benefit income streams (search QC 54353)

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Useful information – cont.

• Law companion rulings search (search QC 51933)

• Transfer Balance Cap (search QC50880)

• Transfer Balance Account (search QC54354)

• Super Transfer balance account report instructions (search QC 53363)

• Event Based reporting for SMSF’s (search QC 54088)

• Excess transfer balance (search QC 54355)

• Election Form (search QC 54196)

• Lodging an objection (search QC 18128)

• SMSF event-based reporting framework starts 1 July (search QC56064)

• Super FAQs (search: QC 51875)

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Useful information – cont.

• Reporting lodgement options

• Lodging an online report – if you are an SMSF trustee or administrator, lodge

a report electronically by completing an interactive online form via the Business

Portal. This method allows you to report unlimited events per member.

• BDE – submit through the file transfer facility in the Business Portal or Tax

Agent Portal. This method allows you to report multiple events for multiple

members. The file must meet our bulk data entry specifications and you will

generally need support from a software provider to do this. For more

information refer to the electronic reporting specifications.

• Spreadsheet version – if you are a tax agent, you can report multiple events for

multiple members via a recognised spreadsheet.

• Paper report – you can lodge a paper report by mailing to the address provided

on your form. You can report up to four events per member on each form.

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Questions?