By Mark Ellem
Passions have been unleashed in the normally buttoned-up world of superannuation, with much fervour, giddiness and debate focused around event based reporting. Some lament that it’s “bureaucracy gone mad” while others believe it’s just another compliance burden for SMSFs. However, now that the ATO has settled on a reporting framework, we can lift the fog and look beyond the rhetoric to see what it’ll mean in the real world.
It’s a new reporting regime that requires superannuation funds, including SMSFs, to report certain events which impact on a person’s transfer balance cap (TBC). The TBC is a limit on the total value of pensions that can be transferred to retirement phase and for most the TBC is $1.6 million.
An SMSF is only required to report if one of its members has an event that impacts their TBC. Events which impact a member’s TBC and are therefore required to be reported include:
SMSFs are also required to report the value of existing retirement phase pensions as at 30 June 2017.
Funds will be required to report the relevant events to the ATO using the new transfer balance account report (TBAR), separate to an SMSF’s annual return.
Reporting is required only when a fund has a member commencing a retirement phase pension, or the fund has retirement phase pensions in place already. It is not, as some maintain, a huge compliance burden, as most SMSFs will not be impacted.
Take my own SMSF for example. My wife and I have another 15 years before we retire and commence pensions – that’s 15 years where event based reporting will have no effect on our SMSF whatsoever. For my SMSF, the only reporting requirement will be when my wife or I commence a pension, and unless there are any pension commutations or one of us dies, the fund will have no further reporting obligations to the ATO.
For those SMSFs with retirement phase pension members at 1 July 2017, pension balances are to be reported to the ATO by 1 July 2018. That’s another seven months before the relevant report must be submitted, not exactly a great rush or huge pressure to get the form prepared and lodged. And remember, it’s only those SMSFs that had retirement phase pensions at 1 July 2017 – that’s not every SMSF by a long way.
Compared to other types of superannuation funds, which will generally be required to report relevant events on a monthly basis, the following relaxed reporting rules will apply to an SMSF.
One of the new strategies that has emerged following the introduction of the transfer balance cap is to treat any withdrawal from a pension account above the required minimum as a partial commutation. A commutation reduces the amount of the TBC used by a member, whereas a pension payment has no effect on the TBC. Commutations are an event that must be reported to the ATO on a TBAR. Consequently, where this strategy is implemented and the SMSF is required to lodge the TBAR quarterly, regular processing of fund data will enable the TBAR to be lodged within the required time period.
Further, for an SMSF that must report quarterly, the commencement of a retirement phase pension must be reported within 28 days after the end of the quarter that it started. Again, to report correct balances, up to date figures will be required. Processing the full 12 months of fund data and discovering a pension was commenced could lead to late lodgement penalties ($210 per month late). The ATO will allow estimated pension commencement balances to be used and you will be able to lodge an amended TBAR, but wouldn’t it be a better outcome to get the commencement amount correct in the first place?
In support of these strategies it is worth noting that SuperConcepts offers administration services with daily fund-processing.
There is benefit in reporting as soon as possible, not just by the due date, whether that be quarterly or annually.
Where a person exceeds their TBC, early lodgement of the TBAR will limit the amount of notional earnings calculated, which is subject to tax at 15% or 30%, depending upon whether it is a person’s first or subsequent breach of their TBC. It could also be as simple as identifying the excess soon after it occurs and arranging for the relevant partial commutation of the pension either back to accumulation or as a lump sum out of the fund. But the question is, how quickly would this excess be identified if the fund is being processed on an annual rather than a daily basis?
Deferred reporting could also potentially lead to an incorrect excess TBC determination being issued by the ATO, that then would have to be dealt with. Let’s consider the following scenario.
Mick has an account based pension with a balance of $900,000 at 30 June 2017. The latest his SMSF can lodge the TBAR to report his pension’s 30 June 2017 value is 1 July 2018. Mick only takes pension payments in the 2017/18 financial year, so no TBAR reporting obligations. Also, as his total super balance at 30 June 2017 is less than $1m, his fund can lodge TBARs on an annual basis.
In October 2018, Mick decides to rollover his pension to an APRA regulated fund and wind up his SMSF. The rollover of his pension is a commutation and an event that must be reported. The commutation value of his pension at that time is $919,530. However, the SMSF can lodge the TBAR at the same time as the 2018/19 SMSF annual return – as late as 15 May 2020.
The APRA regulated fund commences Mick’s new pension in October 2018. This is a commencement of a new account based pension and must be reported on a TBAR. For the APRA regulated fund this TBAR must be lodged by 10 business days after the end of October 2018, much earlier than the due date for lodgement of the SMSF’s TBAR in respect of the pension commutation.
If the SMSF defers lodgement of the TBAR for the commutation until 15 May 2020, Mick’s TBA could go into excess, as follows:
| Date | Event | Credit | Debit | Balance |
| 01/07/2018 | Existing 30 June 2017 pension | $900,000 | $900,000 | |
| 15/11/2018 | New pension commenced | $919,530 | $1,819,530 |
Effectively, there is a double count of Mick’s pension, as the commutation in the SMSF is not required to be reported for another 18 months. Based on the TBARs lodged with the ATO, Mick has an excess TBC amount and will likely be issued with an excess determination. The excess determination will include the excess amount plus notional earnings, which must be commuted from Mick’s pension. Further, notional earnings will be taxed at 15%, payable by Mick and if Mick fails to report the pension commutation from his SMSF within 60 days of receiving the determination, the APRA fund will be required to reduce his pension balance by the excess amount stipulated on the determination.
Now we know this is not correct, as the TBAR with the commutation from Mick’s SMSF will reduce his TBA balance back to $900,000. However, to avoid the excess determination being issued and the subsequent time spent on rectifying, the SMSF must lodge the TBAR for the commutation no later than the APRA regulated fund lodges the TBAR for the commencement of the new pension. This scenario could occur to any SMSF member who has a pension with a TBC count of at least $800,000.
So, in taking a closer look we can see that event based reporting isn’t as bad as some of the critics maintain.
SMSFs can be well placed to deal with the reporting requirements where they adopt a more frequent approach to fund processing compared to the traditional year-end model. With up to date data and reports, fund members and their advisers will be able to make more timely and accurate decisions and avoid instances of incorrect excess pension determinations being issued by the ATO.
