By Mark Ellem
Pension accounts in place at 30 June 2017, which include an amount that was contributed from a structured settlement sourced from a personal injury compensation, are effectively excluded from the transfer balance cap (TBC).
The reason: while the 30 June 2017 pension value is recorded as a credit in the person’s transfer balance account (TBA), attributable to their $1.6m TBC, a corresponding debit is recorded in the TBA.
Let’s consider the following example:
In 2010, Steven, then aged 42, is in an accident and receives a payment of $2m because of a personal injury claim. This amount is contributed to his SMSF and satisfies the personal injury contribution rules. As Steven is totally and permanently disabled, he commences an account-based pension with his accumulation balance, plus the personal injury contribution, being $2,275,000 on 1 July 2010.
At 30 June 2017, the balance of his account-based pension is $2,613,260. Generally, the TBC would have required Steven to partially commute his pension by $1,013,260, back to accumulation, as at 30 June 2017, to bring his pension balance back to $1.6m. However, as his pension included a structured settlement of $2m, his entire 30 June 2017 pension balance of $2,613,260 will effectively not count towards his $1.6m TBC.
Provided the correct forms are lodged with the ATO, Steven’s TBA will appear as follows:
|1/7/2017||Existing 30 June 2017 pension||$2,613,260||$2,613,260|
|1/7/2017||Pre-1 July 2017 structured settlement contribution offset||$2,613,260||$Nil|
A pre-1 July 2017 structured settlement contribution will give rise to a debit either for the actual amount of the contribution or equal to the person’s 30 June 2017 pension TBA value, where the amount of the pre-1 July 2017 structured settlement contribution is less than the 30 June 2017 pension TBA value. So, for example, even if Steven’s pre-1 July 2017 structured settlement contribution was only $100,000 and he still had a pension TBA value at 30 June 2017 of $2,613,260, a TBA debit of $2,613,260 would still arise, resulting in a TBA balance of nil, that is, he would still have his $1.6m TBC available.
Consequently, it is important to know if a person has made a structured settlement contribution. These contributions may not be identifiable in the SMSF’s records, particularly if the contribution was made many years ago or made to another super fund and the benefits subsequently rolled over to an SMSF.
To be a structured settlement contribution, the contribution must arise from:
There also must be certification by two legally qualified medical practitioners that because of the personal injury, it is unlikely that the person can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training, and the contribution must be made within 90 days of receipt, unless it was contributed prior to 10 May 2006.
Where the structured settlement contribution was made after 1 July 2007, the contributor would have supplied an approved ATO form to indicate the nature of the contribution. Further, for such contributions made to an SMSF, the SMSF should have reported the contribution, as a personal injury contribution, in the SMSF annual return ‘member information’ section. Consequently, the ATO should have a record of any structured settlement/personal injury contribution made by an individual during the 10 years, 1 July 2007 to 30 June 2017 to an SMSF. Similar reporting requirements applied to APRA regulated funds.
Unfortunately, no such reporting mechanism for structured settlement contributions existed prior to 1 July 2007 so, it will be up to fund members to review their records and ensure such contributions are reported to the ATO for TBA purposes (see below – ‘How do I report a pre-1 July 2007 structured settlement contribution?’).
In the previous example of Steven, his structured settlement contribution was made after 30 June 2007 and consequently it should have been reported to the ATO. However, Steven should review his TBA to ensure that a debit has been raised equal to the credit from the value of his existing pension at 30 June 2017, as illustrated above.
For pre-1 July 2007 structured settlement contributions, the required reporting is via a ‘Transfer balance event notification’ (TBEN) form and is lodged by the individual. This contrasts to the reporting of the individual’s existing 30 June 2017 retirement phase pension balance, which is via the ‘Transfer balance account report’ (TBAR) form and is lodged by the superannuation fund.
From 1 July 2017, any structured settlement contributions received by a fund from a member will be reported by the superannuation fund on the TBAR form.
Another reason to ensure your superannuation fund records any structured settlement contributions is that such contributions are not included in the calculation of total superannuation balance, which is relevant when determining eligibility for:
If you believe a structured settlement contribution has been made to any superannuation fund prior to 1 July 2017, contact your fund’s accountant/administrator immediately so it can be investigated further. It may have a significant impact of the amount of benefits you can retain in a retirement phase pension under the $1.6m TBC.