TSB: Getting ready for 30 June
As we reach the pointy end of the financial year, it’s worth turning our minds to Total Superannuation Balance (TSB) as this will be a key number for many clients at 30 June 2023.
Having a TSB under particular thresholds is relevant for a great many things. For some, these thresholds will change from 1 July 2023 while for others, the same value applies:
|Measure||TSB at 30 June 2023 must be:||What’s changed?|
|Using ‘catch up’ concessional contributions||Less than $500,000||No change|
|Non-concessional contribution (NCC) cap of $110,000||Less than $1.9m||In 2022/23 this was $1.7m|
|Triggering ‘bring forward’ rules to make up to $220k of NCCs||Less than $1.79m||In 2022/23 this was $1.59m|
|Triggering ‘bring forward’ rules to make up to $330k of NCCs||Less than $1.68m||In 2022/23 this was $1.48m|
And don’t forget, these days members can make contributions until they reach 75 (or more technically, the 28th day of the month after their 75th birthday). While those aged 67–74 can only claim a personal tax deduction for their contributions if they meet a work test, many clients are now looking to make non-concessional contributions at later ages than ever before.
That means more clients care about their TSB falling within a particular threshold.
If you have a client who would really like to be below a particular threshold, there are steps that can be taken to lower their balance ahead of 30 June 2023:
- Splitting eligible concessional contributions to a spouse. Don’t forget that contribution splitting is always a year behind – in other words, clients can split their 2021–22 contributions up until 30 June 2023 but normally they can’t split their 2022–23 contributions until next year.
The maximum splittable amount is the lesser of 85 per cent of concessional contributions or the member’s concessional contributions cap for that year (including any additional amounts available because of the carry forward rules). Note that the receiving spouse must not yet be retired or reached age 65.
Watch the timing as well – since it’s only concessional contributions that can be split in this way, it’s important that if personal contributions are to be split, the paperwork needed to claim a tax deduction is done first. That’s because a personal contribution is automatically treated as a non-concessional contribution until this paperwork is complete. Of course, it’s also important that the split happens before 30 June 2023.
- Withdrawing benefits. If a member is eligible to withdraw super benefits, it might even be worth taking money out of super before 30 June 2023 just to scrape in under a key threshold. Take for example, retired couple Ben (age 73) and Jerry (age 71).
Ben and Jerry each have account based pensions (predominantly consisting of taxable components), with balances of $2 million and $1.2 million respectively. If Ben takes a partial commutation of $660,000 prior to 30 June 2023, both Ben and Jerry will have TSBs of less than $1.68 million at 30 June 2023.
This means that in July 2023, both Ben and Jerry will be eligible to make a non-concessional contribution of $330,000 each and commence new account based pensions. (In Jerry’s case it would be important to check that he hasn’t used up all his transfer balance cap in the past – since this would mean an extra $330,000 is checked against that cap).
Making the withdrawal ahead of 30 June 2023 is critical for Ben’s contribution. Without that, only Jerry will be able to make non-concessional contributions within his cap in 2023–24.
- Adjusting for ‘closure costs’. The ATO has previously recognised that a member’s TSB will not necessarily be the same as the amount shown in an SMSF’s annual financial statements.
Rather, there are a number of costs that could reasonably be considered for the specific purpose of determining an appropriate TSB value. For example, the costs of disposing of fund assets and the tax on any unrealised capital gains. If it appears likely a client will exceed a relevant threshold by a small amount, it may be worth reviewing their TSB calculation and reporting a revised amount in the SMSF Annual Return at the special labels X1 and X2. Whilst this adjustment can occur ‘off balance sheet’, it’s important to ensure suitable evidence is retained to support the calculation.
Don’t overlook the fact that a member’s TSB can be more than just their member entitlements or a different amount altogether. For example, special rules apply if a member has lifetime or life expectancy pensions. Similarly, there is a special calculation for some members of funds that have entered into new limited recourse borrowing arrangements since 1 July 2018.
If the lender is a related party of the fund or the member has met a full condition of release (even if the lender is a third party), a proportionate share of the outstanding loan balance at 30 June 2023 will be added back to the member’s normal super balance at 30 June 2023. If that makes their TSB go over a key threshold (say $1.9 million) it might disrupt their plans to use cash flow from non-concessional contributions to meet loan repayments.
Finally, be careful if using strategies that involve deferring the allocation of contributions made in June until July. In our view, a member’s TSB will include unallocated contributions at 30 June 2023.That’s because any member’s TSB is essentially whatever amount the trustee would have paid to them had they left the Fund on 30 June 2023. If that happened in practice, the trustee would naturally be obliged to immediately allocate the contributions before the member left.
TSB will also be important for a whole new cohort of clients from 2025–26 if the proposed new tax on those with balances over $3 million comes into effect. Remember this is a tax on the “earnings” on super accounts for those with a TSB over $3 million. While we don’t yet have draft legislation detailing exactly how the new tax would work, it seems that it is likely to be something along the lines we’ve discussed in our previous article here.
If it comes in as proposed, TSB will be critical for this tax in three ways:
- It is a threshold – those with balances under $3 million won’t be subject to the tax. Unlike all the thresholds above, though, it will be TSB at the end of the year that will be relevant, not the start of the year (or end of the previous year). In other words, the balance at 30 June 2026 would be relevant for the first year of operation (2025–26) not the TSB at 30 June 2025.
- The tax itself is based on a proportion of the member’s superannuation “earnings”. The higher their TSB (over $3 million at the end of the year), the higher that proportion. Hence there is some value in keeping it as low as possible as it means a smaller proportion of the earnings will be subject to tax.
- The “earnings” amount itself will be based on movements in the member’s TSB (adjusted for contributions and withdrawals). This requires slightly more nuanced planning. For example, let’s say an asset grows a lot during 2025–26. It might be tempting to keep the balance at 30 June 2026 as low as possible (by allowing for all the tax and disposal costs that would be paid if the asset was actually sold). Not only would this suppress the proportion of the earnings that is subject to the tax (point 2 above) but it would also reduce the earnings amount itself. But what if the asset was sold the very next year and the tax and disposal costs were lower than expected? This would actually flow through to a higher earnings amount (and TSB) at 30 June 2027.
We’ll cover more on TSB for this new tax once draft legislation is released.
Whatever happens, it’s definitely going to remain an important number.