ATO outlines guidance on preparing for transfer balance cap indexation

ATO superannuation director Helen Morgan said there is no doubt that complexities will pile up once the changes roll in, and she advised all accountants, individuals, financial planners and SMSF professionals to start making preparations now. 

“The indexation of the general transfer balance cap won’t always mean an individual’s personal transfer balance cap will be indexed to $1.7 million. We suggest you check if the individual is currently considered to be entitled to have their personal transfer balance cap indexed, which you can do in ATO online and use ATO’s TBC table and guide to give an indication of what their cap is likely to be,” Ms Morgan said in a recent webinar.

“This is especially important if your client has already started a pension and still has accumulation phase assets or are likely to be eligible for a death benefit income stream, particularly in the near future.

“We also suggest that you consider reviewing the events which make up an individual’s transfer balance account and discuss any concerns with the fund.” 

Ms Morgan also flagged the importance of preparing for knock-on effects of any pending reversionary income stream credits which may impact an SMSF’s highest-ever balance between now and at the end of the day on 30 June 2021.

“Make allowances for any other event, especially credit events, which may occur between now and 1 July 2021 which have not yet been reported to us and, especially if the individual is a member of an SMSF, may not be reported to us until some time after 1 July 2021,” she said.

Ms Morgan noted that it will also be useful to understand the impacts that late reporting or re-reporting may have on the individual circumstances, not just on the balance of their transfer balance account.

“Beyond the immediate transfer balance cap changes, it may be necessary for you to understand how the taxation of the individual’s pension may change if they are receiving income from a cap defined benefit income stream,” Ms Morgan explained.

“You may want to review your procedures, guidance and other support you have for your staff and your clients and ensure you know how to support an individual who may exceed their transfer balance cap.”

Although what APRA funds need to be aware of will generally apply to SMSFs, Ms Morgan said SMSF professionals will need to consider the special risks indexation poses.

“To help you manage these, we are encouraging you to report all events which occur up to and on 30 June 2021 to us as soon as possible,” Ms Morgan said.

“You may also see impacts from some TBAR reporting myths and misunderstandings which may mean we don’t have a full and proper understanding of your members’ transfer balance account at the time of indexation.

“To help you manage these, we encourage you to ensure that you understand your TBAR obligations and can confidently use any reporting solutions that your practice uses.”

CASE STUDY: Being aware of unique risk scenarios

The ATO stated that there will be a variety of risk scenarios to be aware of, with the need for SMSFs to better prepare for pending reversionary credits that may impact clients. 

In a case study provided, on 1 July 2019, Rowan started a pension valued at $960,000. During March 2021, the $440,000 credit arising from the reversionary income stream Rowan has been receiving since the death of his spouse is applied to Rowan’s transfer balance account.

“The highest-ever balance of Rowan’s transfer balance account before 1 July 2021 is $1.4 million and his personal transfer balance cap from 1 July 2021 will be $1.613 million,” Ms Morgan explained.

“Rowan does not check his transfer balance account and forgets this credit will be applied to his transfer balance account when planning his affairs.

“Rowan calculates that his transfer balance cap from 1 July 2021 will be $1.64 million and, based on this, arranges to start a new pension on 1 July 2021 valued at $680 000.”

Ms Morgan said when Rowan’s SMSF reports the credit for his new pension to the ATO on the 28th of October, it is determined that the balance of Rowan’s transfer balance account on 1 July 2021 is $2.08 million and Rowan has exceeded his $1.613 million transfer balance cap by $467,000.

“Rowan will need to commute the excess plus the earnings which occurred between 1 July 2021 and whenever we make the determination and pay excess transfer balance tax on the earnings which occurred between 1 July 2021 and the day the excess is rectified,” she said.

Deeper consequences for funds falling behind in reporting obligation 

It will also be crucial for SMSFs to stay on top of reporting obligations, with falling behind set to have consequences come the indexation changes, according to Ms Morgan.

Ms Morgan provided an example where Joan is a member of an SMSF which reported the $1.4 million dollar credit arising in Joan’s transfer balance account when she started a pension on 1 July 2019.

“Joan’s SMSF should be reporting in most events to us no later than 28 days after the end of the quarter in which they occur but has since fallen behind in their obligation and no other events have been reported to us by July 2021,” she said.

“Based on the reporting received, we will initially calculate Joan’s personal transfer balance cap as $1.613 million and display this all online.

“In actuality, Joan’s been in the habit of rolling back her pension each year, topping it up and starting a new one, so Joan commuted the pension in full on 30 June 2020, creating a debit of $1.35 million and started a new pension valued at $1.55 million on the 1st of July 2020.

“Consequently, on 1 July 2021, the highest-ever balance of Joan’s transfer balance account is $1.6 million and Joan’s personal transfer balance cap will remain $1.6 million from 1 July 2021.”

Before Joan’s SMSF brings their reporting up to date, Ms Morgan said it is also important that Joan also commuted that pension again on 30 June 2021, creating a debit of $1.52 million and starting a new pension valued at $1.53 million on 1 July 2021.

“This makes the balance of her transfer balance account on 1 July 2021 $1.61 million prior to bringing the SMSF lodgements up to date, and Joan compares this against the personal transfer balance caps you can see in ATO online and doesn’t think she’s exceeded her personal transfer balance cap.

“As a result, Joan’s SMSF reports all outstanding events to us when the SMSF lodges two SARs for the year in May 2023.”

Ms Morgan said when this occurs, the ATO will recalculate Joan’s personal transfer balance cap on July 2021 as $1.6 million and will also determine that Joan exceeded their personal transfer balance cap on that day. 

“Joan will need to commute at $10,000 plus the excess transfer balance earnings which have accrued between 1 July 2021 and May 2023 when the commissioner makes the excess transfer balance determination,” she said.

“Joan will also need to pay excess transfer balance tax on the earnings accrued between 1 July 2021 and whenever the excess is rectified.”