The changes to superannuation in 2017 introduced additional administrative requirements for self-managed superannuation funds ('SMSFs'). These changes came into effect from 1 July 2018.
Under new reporting obligations, SMSFs in pension phase are required to inform the ATO of events which impact on the member's Transfer Balance Cap.
Those not yet drawing a pension from their SMSF don't have to worry about the reporting requirements for now.
The Transfer Balance Cap applies from 1 July 2017 and limits the amount of superannuation that an individual can transfer into pension phase over their lifetime to $1.6 million. Transfer Balance Account Reporting ('TBAR') is a mechanism (a very complicated one) which the ATO use to track people's Transfer Balance Account ("TBA").
Planning for and managing these obligations may enable members to take full advantage of pension concessions over their lifetime. Effective management of this could result in meaningful tax savings.
The team at Redwood have been working with accountants to help manage TBAR obligations.
When is a report required?
TBAR applies to all superannuation funds with benefits in pension phase (excluding transition to retirement income streams).
A report is required when an event has occurred which impacts upon a member's TBA, for example:
- A credit will arise on the commencement of a new pension.
- A debit will arise on a full or partial commutation (conversion of a pension to accumulation phase).
Reporting deadlines for TBAR events will be determined by the total superannuation balances ('TSB') of the SMSF's members. If all members of a fund have a TSB of less than $1 million, reporting is generally only required annually. All other superannuation funds report quarterly.
||Highest member TSB
|Existing Income Streams as at 30 June 2017
||1 July 2018
|Reportable events for the 2018 financial year
||< $1 million
||Due date of the SMSF's 2018 annual return
||> $1 million
||28 October 2018
|Reportable events for subsequent financial years
||< $1 million
||Due date of the annual return for the applicable year
||> $1 million
||Within 28 days after the end of the quarter in which the event occurs
Our key considerations
We may consider commuting part of a member's pension, where they require drawings well in excess of their required minimum pension. It may be beneficial to treat the excess as a commutation, rather than a large pension payment, freeing up some room in the Transfer Balance Cap for future use.
We have been conducting a cost-benefit analysis to determine whether potential tax benefits outweigh the additional administrative costs of reporting on commutations. Our aim is to achieve the best overall outcome.
The below example highlights this situation:
- Dom used his entire superannuation balance of $1.6 million to commence a pension in July 2017. In doing so he used his full Transfer Balance Cap.
- He has already met his minimum pension, and plans to draw an additional $300,000.
- In the future Dom anticipates that he will have an additional $300,000 to contribute to superannuation.
- By electing to commute the $300,000 and draw the funds as a lump sum, Dom frees up $300,000 in his Transfer Balance Cap.
- When Dom makes his $300,000 contribution he should be able to commence a pension with this amount.
- If Dom instead treated the withdrawal as a pension, when he makes the contribution he would not be able to commence a new pension eligible for tax concessions.
- Over Dom's life, this saving may be material.
- Assuming Dom also had an accumulation balance we may consider treating part or all of the $300,000 as a lump sum withdrawal from accumulation to preserve his benefit in pension.
- If Dom only required $10,000 over his required minimum pension, it is unlikely that the tax benefits of commuting this amount would outweigh the additional administrative costs and therefore we may treat this as a pension payment.
Our proactive approach allows us to plan for the most effective outcome for our clients.
If you have any questions about TBAR or the impact it may have on your superannuation fund, we encourage you to contact the Redwood team.