New reporting obligations for SMSFs
To support the introduction of the transfer balance cap (TBC), the Australian Taxation Office (ATO) has today announced new reporting obligations for SMSFs.
Commencing from 1 July 2018, SMSFs will be required to report events to the ATO which impact on an individual’s transfer balance account (TBA). This reporting is required to assist the ATO to track an individual’s TBA and to administer the tax consequences if the individual’s TBC is exceeded.
Relaxed reporting rules will apply to SMSFs with member balances under $1 million.
SMSFs will need to report the requisite events using a transfer balance account report (TBAR).
What events need to be reported?
An SMSF is only required to report if one of its members has an event that impacts their TBA. Events which impact a member’s TBA and are therefore required to be reported are as follows:
- The commencement of a new superannuation income stream
- Pension commutations
- The cessation of a superannuation income stream
- Structured settlement contributions received on or after 1 July 2017
Super funds are also required to report the value of existing superannuation income streams as at 30 June 2017, and in most cases have up until 1 July 2018 to do so.
SMSFs with members who only have an accumulation interest in the fund will not be required to report transfer balance events, other than structured settlement contributions, until a superannuation income stream is commenced, which in some cases may be a number of years away.
Reporting will generally need to occur at the income stream level. Therefore, if a member had two or more income streams within a fund just before 1 July 2017, the fund will need to report the value and account details of each of these income streams.
When do these events need to be reported?
It depends on whether the SMSF had one or members in the fund at 30 June 2017 with a total superannuation balance equal to or greater than $1 million.*
If at the prescribed time, the SMSF had no members with a total superannuation balance equal to or greater than $1 million, the above listed events are only required to be reported to the ATO at the same time the SMSF lodges its SMSF annual return. Otherwise the above listed events will be required to be reported to the ATO within 28 days after the end of the financial quarter in which the event occurred.
Note: SMSFs will still be required to abide by legislated TBC reporting timeframes specified within a Commutation Authority issued by the Commissioner.
Example: Reporting commutations post 30 June 2018
Jane commenced her income stream in her SMSF back in October 2016. As at 30 June 2017, Jane’s total superannuation balance was $800,000. Jane makes a lump sum withdrawal (commutation) in November 2018. Jane’s SMSF is only required to report the lump sum pension withdrawal to the ATO at the same time Jane lodges her 2018/19 SMSF annual return.
If Jane’s total superannuation balance as at 30 June 2017 was instead $1,100,000, Jane’s SMSF would be required to report the lump sum pension withdrawal to the ATO by 28 January 2019.
Valuation of new income streams
As SMSFs generally align the valuation of their assets with the completion of the fund’s end of year financial accounts, it is possible that an SMSF that is required to report the commencement value of a pension to the ATO within 28 days after the financial quarter in which the pension commenced, will not know the exact value of a pension on the date of commencement.
SMSFs should continue to apply the ATO’s Valuation guidelines for self-managed super funds which specify that: “it is accepted that a reasonable estimate of the value of the account balance can be used when a pension is started part way through the year”.
Consistent with these guidelines, the ATO would accept a ‘reasonable estimate’ of the starting value of an income stream. The fund should record this value in its accounting records at the time of commencement.
In making this estimate, the general valuation principles would apply. A valuation is generally considered fair and reasonable when:
- It takes into account all relevant factors and considerations likely to affect the value of the asset
- It has been undertaken in good faith
- It uses a rational and reasoned process
- It is capable of explanation to a third party
How do these events need to be reported?
All super funds, including SMSFs, will be required to report transfer balance cap events via the TBAR, which must be submitted via one of the three following channels:
- Bulk data exchange
- An online form
- A paper form
All three channels are available to SMSFs. The bulk data exchange channel will generally be more appropriate for large providers and online reporting more appropriate for smaller providers.
What are the penalties for not reporting?
If a super fund fails to report by the required date, a ‘failure to lodge’ penalty may be imposed by the ATO. Generally, for SMSFs, this penalty is calculated at the rate of one penalty unit for each period of 28 days (or part thereof) that the event remains unreported, up to a maximum of 5 penalty units (one penalty unit is currently equal to $210).
Potential adverse consequences of deferred reporting
It’s worth noting that fund members are subject to tax on excess transfer balance earnings, and these earnings will continue to accrue until the member’s excess pension balance is removed. Therefore, SMSF members who exceed their TBC, and who have events reported close to, or on, the relaxed statutory reporting date, may end up paying substantially higher rates of excess transfer tax then would have been the case if the event had been reported earlier, and the excess amount identified and removed sooner.
For SMSF members who are close to their TBC, or are likely to have an excess transfer balance, it will generally be in the member’s best interest to ensure events which impact their TBA are reported to the ATO as soon as practical and before the required reporting date.
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