Jargon bust: ‘Total super balance’
By Mark Ellem
We know that the upcoming superannuation changes are the largest in over a decade – and for many people, understanding them all is becoming not only time consuming but also confusing. So, for this article, let’s just focus on one of the new measures – ‘total superannuation balance’ (TSB).
Why is TSB so important?
TSB is important as it can affect a member’s contribution cap, both for concessional and non-concessional contributions, as well as entitlements to tax offsets. A member’s TSB is relevant for determining:
- Eligibility to carry forward unused concessional contributions (staring from 1 July 2018)
- Eligibility for the non-concessional contributions cap and for the bring forward of non-concessional contributions
- Eligibility for the government co-contribution
- Eligibility for the tax offset for spouse contributions
- For SMSFs and small APRA funds, eligibility to use the segregated assets method to determine their exempt current pension income
In order to be confident about contribution decisions, fund members need to know their TSB as at 30 June prior. In some cases, they’ll need to know their TSB as soon as possible after 30 June to make the relevant contribution decision, for example, a contribution to complete an asset purchase by the super fund.
TSB is not as simple as adding up the member’s benefits
An individual’s TSB is the sum of the following amounts, reduced by the sum of any structured settlement contributions:
- The accumulation phase value of interests that are not in the retirement phase
- If they are in the retirement phase, the balance of their transfer balance account, or their modified transfer balance
- The amount of any roll-over superannuation benefit not already reflected in the accumulation phase value of their super interests or their transfer balance
A member’s transfer balance account is modified where they have a credit that has arisen from any of the following account based pensions (ABPs):
- Allocated annuities and pensions
- Account-based annuities and pensions
- Market-linked annuities and pensions
If the pension is not one of the above ABPs, the member’s transfer balance account balance is not modified. For example, if the pension is a lifetime complying pension with an annual entitlement of $100,000 as at 1 July 2017, the ‘special value’ credit to the member’s transfer balance account would be $1.6m. If this was their only superannuation balance, it would also be their TSB.
For a member with one of the above ABPs, the modification rule means that you cannot simply look at a member’s transfer account balance to determine their TSB at 30 June. Let’s consider the following example.
Fiona, aged 63, commenced an ABP on 1 April 2018 with $1.8m, representing all of her accumulation interest. As a result, she has exceeded the $1.6m transfer balance cap.
Realising her mistake, Fiona partially commutes her ABP by $210,000 and withdraws this amount from her super fund. Unfortunately, Fiona had the belief that any excess amount needed to be withdrawn from her fund and that she did not have the option to leave it in superannuation as part of her accumulation interest.
Fiona receives a notice from the ATO advising of notional earnings of $3,036, which has been credited to her transfer balance account, as at 15 June 2018. Further, Fiona will be subject to tax at 15% of the $3,036 notional earnings (assuming this is her first offence of exceeding the transfer balance cap).
Fiona’s ABP balance at 30 June 2018 is $1,598,000. It is now the 2017/18 income year and she wishes to contribute back the amount she partially commuted from her ABP to comply with the transfer balance cap. To be eligible for a non-concessional contribution cap in 2017/18, Fiona must have a TSB of less than $1.6m as at 30 June 2018. Fiona’s only superannuation account is her ABP, which has a 30 June 2018 balance of $1,598,000. Consequently, on the face of it, Fiona can make a non-concessional contribution on $100,000 in 2017/18. However, is this the case? As Fiona has an ABP, she needs to calculate her modified transfer balance account amount, as follows:
Fiona’s transfer balance account will be:
The following debits and credits must be removed:
- The credit representing the commencement of her ABP of $1,800,000, and
- The debit representing the commutation of her ABP of $210,000.
This leaves a modified transfer balance account amount of $3,036.
Fiona’s TSB is therefore:
Accumulation phase ($Nil) + Modified Transfer Balance ($3,036) + ABP Surrender Value ($1,598,000) + Rollovers in Transit ($Nil) – Structured Settlements ($Nil) = $1,601,036
Consequently, as Fiona’s TSB exceeds $1.6m as at 30 June 2018, her non-concessional contribution cap for 2018/19 is $Nil.
Will SMSF members know their TSB in time?
The new TSB measure is another factor that SMSF trustees and administrators will need to consider.
For affected members, the traditional end-of-year approach to fund administration will not meet decision making requirements. Together with the SMSF penalty regime, tax agent on-time lodgement requirements and client demand for up-to-date information, the TSB measure points to a need for more frequent processing and reporting. For SMSF accountants, there is technology to assist which I write about in my Leveraging Technology White Paper.