Reporting mismatch with reversionary pensions causing excess TBCs

While this may seem simple, an excess TBC determination can issue even where the reversioner has commuted one or more pensions to stay within their $1.6 million TBC and has reported the commutation to the ATO in time, he cautioned.

“No matter how early it is reported, the problem still arises even when it is reported on the day of the commutation,” he explained in an online article.

This stems from a mismatch with the SMSF TBAR reporting cycles which may result in a pension commutation not being reported before the ATO has already made the excess TBC determination on the anniversary date of the death of the deceased, he said.

Mr Colley gave an example of two SMSF members, Mark and Lyn, who were receiving account-based pensions on 1 July 2017 which provided reversions to the surviving spouse.

“Each pension had an account balance of $1 million at that time which was reported to the ATO for TBC purposes,” he said.

“On 31 May 2018, Mark passes away and the balance in his account-based pension account at that time is $800,000. This is payable to Lyn as the surviving spouse.”

If Lyn doesn’t do anything, he said, the balance of the reversionary pension at the time of Mark’s death will be counted against her TBC on 31 May 2019, the anniversary of Mark’s death, and will create an excess TBC determination of $200k ($1.8 million less $1.6 million).

“The excess TBC determination will require Lyn to commute $200k out of pension phase by either commuting $200k from her existing account-based pension and transferring it to accumulation phase or cashed out as a lump sum, or she could commute $200k from the reversionary pension and cash it out as a lump sum when the anniversary occurs,” he said.

In order to get the best of all possible options, the commutation should take place on 31 May 2019.

“This strategy would maximise the tax exemption on income from investments supporting Lyn’s account-based pension and the reversionary pension,” he said.

“It would also ensure that the value of the pensions calculated for TBC purposes remain within her TBC. Of course, during the year Lyn would be required to draw at least the minimum account-based pension and reversionary pension.”

If Lyn was to commute $200,000 of one of the pensions on 31 May 2019, he said, there should be no issues, as the combined value of the pensions counted for TBC purposes has been reduced to $1.6 million. 

“For TBC reporting purposes, there is no mandatory requirement to report the commutation of the pension until the time the compliance and tax return for the fund has been lodged, possibly in May 2020,” he explained.

“Waiting to report Lyn’s commutation in May 2020 is certainly not the best strategy for Lyn’s TBC, as the ATO will issue an excess TBC determination to her. But reporting the commutation as soon as it has occurred may provide no better outcome, as the ATO will still issue an excess TBC determination as we will see.”

What would happen in practice, Mr Colley explained, is that on the anniversary of the commencement of the reversionary pension to Lyn which is 31 May 2019, the ATO will issue the excess TBC determination to her. 

“Even if she was to report the commutation of one of her pensions on the day it took place, the excess TBC would issue as the commencement of the reversionary pension would have been reported previously to the ATO after Lyn became entitled to it,” he said.

If the fund was to do nothing about reporting the commutation to the ATO, Lyn could be worse off, he warned.

“The reason is that after the excess TBC determination has issued, she has 60 days to comply with the commutation authority issued as part of the determination. This will result in a double commutation, the first when one of the pensions is commuted on 31 May 2019, and the second made to comply with the commutation authority so that the determination will be satisfied,” he said.

“Ideally, this should not happen, but it is more unfortunate to occur where a surviving spouse is in receipt of a reversionary pension.”

Mr Colley said a slight delay in issuing the excess TBC determination or notifying the reversionary that an excess TBC determination is to issue may help the surviving spouse experiencing any undue anxiety.