By Anthony Cullen
It used to be the case that SMSF clients would bundle their paperwork into a so-called shoebox and hand it to an accountant for EOFY processing.
With advances in technology such as data feeds, and with the introduction of 'transfer balance accounts' and 'total super balance', is there a future for the once-a-year shoebox model? Like the tape cassette, will it fade into obscurity?
A member’s ability to make non-concessional contributions, catch-up concessional contributions or receive spouse contributions are all impacted by their TSB. As is their ability to receive government co-contributions and make contributions in the year immediately after retiring (depending on age). A fund’s reporting requirements for transfer balance account purposes, along with whether they are prohibited from applying the segregated method for exempt current pension income, is also determined by the TSB of its members.
In most cases, TSB is measured annually and is based on the member’s 30 June details from the prior year. If we are only completing accounts on an annual basis – and bearing in mind SMSFs generally need to lodge their annual return by 15 May following the end of the financial year – when will their 30 June details be available? If a retired client turning 65 in a weeks’ time wants to make their final NCC before their birthday, will you know what their cap is in time?
Let’s assume a fund is reporting quarterly for TBA purposes, will you know if there are any reporting requirements during the year? As this is a relatively new requirement, we appear to still be in an education phase, with the ATO opting to not issue late lodgement penalties. How long will this last though?
In fact, late transfer balance account reports can result in penalties, not unlike penalties for late activity statements and tax returns. The penalty is one unit per 28 days, up to a maximum of five penalty units, with one unit currently equal to $210.
For pension commencements, the ATO have expressed that an estimate can be reported. But, shouldn’t the mantra be to try and get it right first time round. The idea of reporting an estimate and trying to correct it later requires double handling and increases the chances of errors being made.
While this may be an option for pension commencements, what options are available for commutations – whether they be roll backs to accumulation phase or a payment out of the system? If you, as an adviser or accountant, aren’t aware of the withdrawal to purchase a new caravan until well after the fact, then you’ve probably failed to report it in time.
We recently processed the 2019 financial accounts for an annual client. One of the members passed away early in the financial year with a reversionary pension in place. The spouse was made aware of their minimum pension requirements. In relation to TBAR requirements, the fund is an annual reporter so there was nothing here that could not wait until the annual accounts were completed.
What we weren’t aware of, before processing the annual accounts, was that the deceased member also had separate superannuation interests outside of the SMSF. These were rolled over to the SMSF as death benefits during the 2019 financial year. This is not a problem as death benefits can be rolled for immediate cashing. This would, however, require the receiving fund to immediately start a death benefit pension or arrange a lump sum payment out of the system. It would be safe to assume that in most cases, the purpose of rolling over a death benefit would be to commence a new pension, rather than to make a lump sum payment.
Only becoming aware of the rollovers after the end of the financial year resulted in the benefits remaining in accumulation phase, rather than be converted to a death benefit pension. Given there were insufficient pension payments made to satisfy the annual minimum pension payment requirements (with the exception of the existing reverted pension), it was clear new pensions were not considered as part of the rollover strategy.
The fund now finds itself in the position that it is in breach of the compulsory cashing requirements associated with death benefits. Further to this, as these rollover amounts had not been converted to retirement phase, the fund has lost the opportunity to claim ‘exempt current pension income’ on some of its income.
More frequent reporting would have identified the rollovers in a timelier manner and allowed for appropriate action to be taken. Greater communication between the adviser/client and the accountant/administrator may have also helped in avoiding any breaches.
In recent weeks the ATO has responded to queries in relation to what the consequences are of not meeting the pension standards for a death benefit. This has invoked several responses from the industry and calls for further clarification on the matter.
According to an article on the ATO website, where a pension ceases due to the minimum amount not being paid, there may be a breach of the regulations. The ATO also expect trustees to act swiftly to prevent further possible contraventions. And, more importantly, they state that if “…action is taken immediately, the Commissioner will accept that the trustee is meeting on a going forward basis the requirements to cash the benefits ‘as soon as practicable’ and will not therefore have further contravened the SISR...”.
One of the issues causing concern for the industry is an update to the ATO article that stated: “Note: We have updated this article to clarify that this is in relation to reversionary pensions only”.
In the above scenario, by rolling over the death benefits, the original fund satisfied its requirements to deal with them as soon as practicable. By not immediately cashing the benefits when received by the SMSF, the trustees have likely breached the regulations. But, similar to the language used by the ATO, the trustees have acted swiftly to rectify the issue as soon as it was brought to their attention. However, as we are not dealing with a reversionary pension, there is still some uncertainty as to whether the trustees have taken enough action or whether further action is required.
It is one thing to have your contribution strategies limited due to a lack of information, but when compliance with the law is compromised can the status quo remain? With so many different matters relying on up-to-date information, it should only be a matter of time before annual accounting for SMSFs becomes the exception rather than the norm. Thus relegating the shoebox model to the same fate as the tape cassette.