Members warned on TBC risks with pension strategies

As an example, the ATO said if an individual has already started a pension worth $1.6 million or more, they generally cannot start a new pension without exceeding their transfer balance cap, even if the value of their current pension has significantly reduced.

The regulator added that their ability to top up their pension by rolling it back and adding funds before starting a new pension will be limited by the size of the debit they get when they commute their existing pension.

Tax agents have been advised to remind members to take into consideration any credits from reversionary income streams which will impact their transfer balance account in the next 12 months.

The ATO also told agents to be aware of the reporting obligations that are triggered when rolling back an existing pension and starting a new pension.

In these situations, the ATO reminded agents they will need to report the:

• commutation debit when your member commutes the existing pension,
• credit when your member starts the new pension.

ATO pension case studies

The ATO provided case studies to help members understand how topping up their pension may affect their transfer balance account before they and their adviser make any decisions.

Figuring the amount of space available in the TBC

In the case of Linda, she started a pension in her SMSF valued at $1.6 million on 1 July 2017. The pension is now worth $1 million due to pension payments and investment losses.

Linda would like to start an additional pension with $600,000 which she has in her accumulation account, but because Linda has already used up her transfer balance cap, she has no cap space to start a new pension.

“If Linda proceeds with the additional pension, she will exceed her personal transfer balance cap by $600,000 and will need to commute the excess (plus excess transfer balance earnings) and pay excess transfer balance tax,” the ATO said.

If Linda commuted her pension, the ATO noted she could get a debit in her transfer balance account of $1 million. After commuting her pension, the balance of her transfer balance account would be $600,000.

If Linda starts a new pension of $1.6 million (the $1 million she commuted plus the $600,000 in her accumulation account), she will get a credit in her transfer balance account of $1.6 million for the new pension.

“If Linda proceeds, she will exceed her personal transfer balance cap by $600,000 and will need to commute the excess (plus excess transfer balance earnings) and pay excess transfer balance tax,” the ATO said.

Looking for pending credits from reversionary income streams

In the case of Gilbert, he started a pension in his SMSF valued at $1.2 million on 1 July 2017. Due to pension payments and investment losses, the pension is now worth $900,000.

Gilbert would like to top up this pension by rolling it back and adding the $200,000 in his accumulation account. If Gilbert were to do this, he would get a debit of $900,000, bringing the balance of his account to $300,000.

When he starts the new pension, he would get a credit of $1.1 million in his transfer balance account, giving him an account balance of $1.4 million.

On 1 June 2019, Gilbert’s wife, Anne, passed away, and he started to receive a reversionary death benefit income stream on that date.

The value of the pension at the time of Anne’s death was $400,000. On 1 June 2020, a credit of $400,000 will apply to Gilbert’s transfer balance account, even though the value of the pension has reduced to $300,000 due to investment losses.

In Gilbert’s case, the ATO said he needs to take this into consideration when choosing what to do next.

“If Gilbert does nothing, he will be able to continue to receive the reversionary pension without exceeding his personal transfer balance cap,” the ATO said.

“However, if Gilbert tops up his pension, on 1 June 2020, he will exceed his personal transfer balance cap, by $200,000, unless he commutes either pension before 1 June 2020.

“If he exceeds his transfer balance cap, he will need to commute the excess, plus excess transfer balance earnings, and pay excess transfer balance tax.”