Anthony Cullen, senior SMSF educator for Accurium, said in a recent SMSF update that when looking to start or commute pensions for clients, advisers need to understand what their TBC is and how much available space they might add in their transfer balance account.
Cullen said the transfer balance cap was introduced in 2017 to limit the amount of money transferred from accumulation phase into retirement phase.
“It’s not necessarily a limit on how much you can have in the retirement phase. The ATO keeps track of a person’s use of their personal TBC via transfer balance account (TBA), and TBA events are reported by the super fund to the ATO,” he said.
“We’re only talking about pensions in retirement phase, and it doesn’t include transition to retirement pensions until they convert to being in retirement phase. We know that there’s going to be an indexation to the general transfer balance cap to $2 million, but not everyone will be entitled to indexation of the general TBC. So, what does that mean for clients’ personal transfer balance caps?”
Cullen said section 294-40 of the Income Tax Assessment Act 1997 deals with proportional indexation, and to determine this, it is first necessary to determine a client’s unused cap percentage.
“To get the unused cap, the first thing you have to work on is what the used cap is. The steps in the legislation tell us that the first thing you need to do is identify the highest ever value that an individual has had in their transfer balance account, and to identify the earliest date that that highest ever value occurred,” he said.
“Once you’ve determined that highest value, you then determine that as a percentage of the person’s personal transfer balance cap on that day and calculate the highest ever balance as a percentage of the person’s PTBC on that day, then round that down to nearest whole number and subtract the percentage from 100 per cent.”
There can be complications in how the indexation applies when dealing with death benefits.
Cullen gave an example of George, 64, and his wife Mary, 56, who have an SMSF. George commenced a pension in May 2021 for $1.6 million and it was set up as reversionary to Mary, who is currently still working and doesn’t plan on retiring until at least 60.
Unfortunately, George died on 29 July 2024 and his account-based pension reverted to Mary on that day.
“At the time, you need to know what the value of that account is, which in this example is $1.72 million, but there are things you need to think about when it comes to the personal transfer balance caps for each individual,” Cullen said.
“The first question is: what is the TBA event to be reported? As soon as that pension reverts to Mary, that would be a reportable event for Mary and needs to be reported. The fact that George has died and the pension reverts to Mary does not create a reportable event for George. When you die, your transfer balance account dies with you. Nothing more to do in George’s transfer balance account, but certainly we’ve now got an event that needs to be reported for Mary.”
As SMSFs are quarterly reporters and as George died in the July to September 2024 quarter the super fund needs to report the transaction no later than 28 October.
“You need to differentiate the reporting obligations from when the credit may appear. The credit might appear 12 months down the track, and it may be subject to the balance on the date of death, but it doesn’t change the fact that you’ve got to report it in line with the reporting obligations,” Cullen added.
“In this example, what has to be reported is the value of the reversionary pension on the date of death, which is $1.72 million. When you’ve got indexation coming up, the question then becomes, from Mary’s point of view, is she entitled to indexation? And if she is, how much is she going to get?”
