By Monica Rule
Courtesy of Cuffelinks
November 2018

We asked Monica to respond to this comment in response to Noel Whittaker’s article last week:

Monica’s comments on the $1.6 million TBC no longer being relevant (provided documentation was done properly as at 30 June 2017) seem incredible. Can this be explained in a bit more detail?

Most SMSF members who are receiving a retirement pension from their SMSF are aware of the transfer balance cap (TBC) of $1.6 million. It limits the amount an SMSF member or member of an institutional super fund can hold in their retirement pension account from 1 July 2017.

The starting point for the $1.6 million

If an SMSF member was already accessing a retirement pension and their pension account balance was in excess of $1.6 million, they needed to reduce the balance to $1.6 million by 30 June 2017. Any new retirement pension that commences on or from 1 July 2017 cannot have its net assets value in excess of $1.6 million.

Once a retirement pension commences, new contributions cannot be added to the pension account. Any new contributions made into the SMSF must go into the accumulation account. If at a later date, the member wants to combine money in the accumulation account with money in the pension account, they will need to cease the pension and transfer the balance of the pension account into the accumulation account. They can then commence a new pension with the funds in the accumulation account, as long as it does not exceed the TBC.

How does the Tax Office know the balance of retirement pension accounts?

SMSF trustees are required to report each member’s retirement pension account balance to the Tax Office using the Tax Office’s form NAT 74923 “Super transfer balance account report”. The reporting timing depends on their members’ total superannuation balance. A member’s total superannuation balance is the sum of all their accumulation accounts and retirement accounts across all of their superannuation funds subtracting any personal injury (structured settlement) contributions that have been made into any of these funds.

Where an SMSF member is receiving a retirement pension that commenced prior to 1 July 2017, their pension account balance as at 30 June 2017 must be reported to the Tax Office on or before 1 July 2018. For all other situations, the reporting requirement is based on the member’s total superannuation balance.

If all members of an SMSF have a total superannuation balance of less than $1 million, then their SMSF can report on an annual basis when it lodges its income tax return.

For example, an SMSF has one member who is receiving a retirement pension on or after 1 July 2017 and all members of the SMSF have a total superannuation balance of less than $1 million as at 30 June 2017.

If any members of an SMSF have a total superannuation balance of $1 million or more, then the SMSF must report within 28 days after the end of the quarter in which the TBC event occurs.

For example, an SMSF has only one member with a total superannuation balance of $1 million or more, then it must report all events affecting members’ TBC within 28 days after the end of the relevant quarter, even if the balance of the first member to start a retirement pension is below $1 million.

Once the reporting framework is set, SMSF trustees will not be expected to move between annual and quarterly reporting due dates, regardless of fluctuations in any of their members’ total superannuation balances.

Exceeding the TBC

Where an SMSF member has exceeded their TBC, the reporting must be done sooner:

• A voluntary member commutation of their pension in response to an excess transfer balance determination must be reported within 10 business days after the end of the month in which the commutation occurs.
• Responses to commutation authorities must be reported within 60 days of the date the commutation authority was issued.
  The reporting requirements for APRA-regulated funds is 10 business days after the end of the month in which the event occurred. For example, if an APRA pension commenced on 2 January 2018, it must be reported by 14 February 2018.

In a situation where an SMSF member rolls their superannuation into an APRA-regulated superannuation fund and commences a retirement pension from the APRA fund, they may want to report the commutation of their pension earlier. This is because there will be a mismatch in timing of the reporting done by the APRA fund (i.e. a new pension being commenced) and the SMSF (commutation of the pension). This may amount to the member exceeding their TBC due to double counting of the member’s pension.

Where an SMSF has exceeded the TBC by no more than $100,000 and had rectified the excess no later than 31 December 2017, they should report this earlier. Otherwise the Tax Office will not know that the member has rectified the excess.

No problem if pension balance grows

SMSF members that are in receipt of a retirement pension where their pension account balance does not exceed $1.6 million either on 30 June 2017 or upon the commencement of their pension, do not need to be concerned if their balance grows beyond the TBC at a later date. Also, once the reporting requirements are satisfied, their SMSF does not need to report anything further unless a TBC event occurs, such as a commutation of their pension.

Remember that pension withdrawals and investment earnings do not reduce or increase a member’s TBC and therefore do not need to be reported.