By Mark Ellem
Total super balance (TSB) is a concept that affects many caps and entitlements. It’s important to understand how it’s calculated, with an SMSF’s accounting approach being an influential factor.
SMSFs are required to prepare a statement of financial position and an operating statement. And in doing so there’s the requirement to disclose assets at their ‘market value’.
The process of adjusting asset values to ‘market value’ will give rise to unrealised gains and losses – and consideration should be given to bringing to account a provision for deferred income tax (PDIT), where the ‘market value’ of the asset is greater than cost. This amount represents the estimated amount of capital gains tax that would have been payable had the asset been disposed of for the stated 30 June ‘market value’. By bringing to account a PDIT, the members are being provided with a more accurate indication of their withdrawal benefits.
Further, as the PDIT is a liability account (an amount owing by the fund), it will decrease the net assets of the SMSF and as a consequence, decrease member funds. This means a lower member balance that will be reported in the member information section in the SMSF annual return.
From the 2017/18 SMSF annual return onwards, the total of the member’s accounts held in the SMSF will be reported at items S1, S2 and S3 in the member information section of the return. These will be used by the ATO to calculate a member’s TSB. Where the member’s withdrawal amount would be less than the value per the financial statements, for example due to selling costs, this can be reported at X1 and X2, in the same section (X1 and X2 will then substitute for S1 and S2, respectively).
Where the ‘market value’ of fund assets are less than cost, from an accounting perspective, this would give rise to a future income tax benefit (FITB). However, an FITB would be an asset and therefore would need to be disclosed at ‘market value’. Providing an auditor with sufficient evidence of the FITB’s ‘market value’ and certainty of recoverability could prove difficult. Consequently it should be an SMSFs policy to bring a PDIT to account, but not an FITB.
An SMSF has two members, both under 65 and working, with benefits all in accumulation and with no other super. The fund does not adopt the policy of bringing to account a PDIT and has the following statement of financial position:
| Statement of Financial Position | |
| Assets | |
| Listed shares | $1,900,000 |
| Cash at bank | $45,000 |
| Total assets | $1,945,000 |
| Liabilities | |
| Provision for tax | $12,500 |
| Sundry creditors | $1,500 |
| Total liabilities | $14,000 |
| Net assets | $1,931,000 |
| Member Funds | |
| Member 1 | $507,000 |
| Member 2 | $1,424,000 |
| Total member funds | $1,931,000 |
The above member balances will be reported to the ATO in the SMSF’s annual return. Based on these amounts, Member 1 just misses out on increasing their concessional cap under the catch up concessional contribution rule as their TSB is not less than $500,000, and Member 2 can only bring forward one year of non-concessional cap, rather than two years, as their TSB is at least $1.4m.
The member balances are represented by net assets, being gross assets of $1,945,000, less liabilities of $14,000. The gross assets are disclosed at market value, as required, however, their cost for CGT purposes is $1,595,000, meaning there is an unrealised gain of $350,000.
If the assets were disposed of at year end for their market value, after taking into consideration the one-third CGT discount (all assets held for at least 12 months), the tax on the capital gain would be $35,000. Effectively, the $35,000 represents the PDIT – the “paper tax on the paper gain”.
If the SMSF adopted an accounting policy of bringing to account a PDIT, the statement of financial position would be reported as:
| Statement of Financial Position | |
| Assets | |
| Listed shares | $1,900,000 |
| Cash at bank | $45,000 |
| Total assets | $1,945,000 |
| Liabilities | |
| Provision for tax | $12,500 |
| PDIT | $35,000 |
| Sundry creditors | $1,500 |
| Total liabilities | $49,000 |
| Net assets | $1,896,000 |
| Member Funds | |
| Member 1 | $497,810 |
| Member 2 | $1,398,190 |
| Total member funds | $1,896,000 |
Based on these revised member balances, which would be reported in the SMSF annual return, Member 1 would be eligible to use the catch up concessional contribution rule in the following financial year and Member 2 could bring forward two years of non-concessional contribution cap when making such a contribution in the following financial year.
Of course, these reduced amounts could have been reported at X1 for each member. However, as the calculation would need to be done, why not simply include it as an accounting policy for the SMSF, so its effect is included in each annual set of financial statements?
Finally, the adoption of a PDIT should be disclosed in the summary of significant accounting policies note in the financial statements.
Given the calculations required for the PDIT, it’s a good idea to ensure you’re using an administration platform that accommodates the calculations and provides the necessary reporting – rather doing it all manually.
The platform should also adjust for any exempt current pension income (ECPI) that the fund claims in respect of retirement phase pensions.
SuperConcepts’ leading cloud based SMSF administration and compliance platform, ‘SuperMate’, has this functionality.
