TBAR, TBC impacts to affect timing of winding up SMSFs in 2021

In a recent Heffron technical blog, managing director Meg Heffron said that in addition to being aware of the traps around the wind-up process, unique circumstances this year will require careful considerations especially around the timing of commutations and its impact on the transfer balance account.

“Remember that for pension funds where the money is being transferred to another fund, the process will be to commute the pension (watching out for the tips and traps in this process from our earlier article), and wind up the fund and transfer the money to a new fund and start a new pension in the new fund,” Ms Heffron said.

“This should not have any impact on a member’s transfer balance account. If someone was previously within their transfer balance cap, this process should not make them exceed it now.

“This is because the commutation will be deducted from their transfer balance account and then precisely the same amount will be added back again — a zero-sum game. And the law is smart enough to make sure this happens even if the pension now is much bigger than when it started. The member’s transfer balance cap might just be negative for a while (until the new pension starts).”

But Ms Heffron reminded that this only works if the new pension starts quickly. If there is a delay and the balance goes up in the meantime, the new pension will be bigger than the old one, possibly creating an excess if the member had already reached their $1.6 million limit.

“The same applies if new contributions are added to the balance before the pension recommences,” she noted.

“Watch situations where the SMSF pension is commuted and added to an existing APRA fund balance rather than taken directly to a new pension account in the APRA fund.

“Remember also that APRA funds have much tighter deadlines for reporting transfer balance account events than SMSFs. We would normally recommend that the TBAR for the commutation is lodged earlier than the usual deadline, so that the ATO has this information to hand when they process the APRA fund’s TBAR reporting the new pension.

“And finally, remember that when it comes to the indexation of the transfer balance cap on 1 July 2021, there’s nothing cute that can be done around moving to new funds to increase the amount of indexation.”

For example, consider a client who started a pension with $1.6 million in 2017 and it’s now worth $1.75 million. Ms Heffron noted they fully commute it in their SMSF on 25 June (and at that point their transfer balance account is -$150,000, being $1.6 million less $1.75 million) and don’t immediately start a new pension. At 1 July 2021, their transfer balance account is still -$150,000.

“Unfortunately, they still don’t get any indexation on 1 July 2021 because this is based on the ‘highest ever’ value of their transfer balance account. Hence, their transfer balance cap remains at $1.6 million,” she explained.

“As soon as they commence their new pension (value of $1.75 million), they will be back to exactly the same position as before, they will have fully utilised their transfer balance cap (-$150,000 plus $1.75 million is $1.6 million).

“We are often asked if winding up a fund (and commuting pensions) means that pension and accumulation balances in the SMSF will automatically mix. The short answer is no, but the paperwork is important.

“A lump sum can be paid directly from a pension account (and a commutation that is rolled over is just one type of lump sum). But it is important that the paperwork identifies that the commutation is to be paid directly to the new fund rather than saying it will be rolled back to accumulation phase and then rolled over.”