With the indexation of the transfer balance beginning this new financial year, the ATO has updated the personal transfer balance cap available for members on 15 July 2021.
In a recent update, Smarter SMSF CEO Aaron Dunn said that with the ATO having information available on an individual’s personal transfer balance cap (personal cap) from 15 July, the reliance on such information is going to present significant problems due to the current transfer balance account reporting (TBAR) framework that exists for SMSFs.
“Much like the concept of ‘garbage in, garbage out’ (GIGO), unless accurate and up-to-date information is present, expect to see an increase in transfer balance cap breaches,” Mr Dunn said.
While APRA-regulated funds require reporting within 10 days after month’s end, Mr Dunn said that many funds report much more regularly than this. He noted SMSFs operate within a two-tier system based upon the fund member’s total super balances (TSB) and whether any member exceeds the $1.0 million TSB threshold when a retirement phase income stream commences for the first time.
Where if a member’s TSB is equal to or greater than $1.0 million, the fund is required to report events 28 days after the end of the quarter, and if a member’s TSB is less $1.0 million, the fund can report annually (by due date of the SMSF annual return).
“It is this time lag in reporting that creates the greatest challenge on reliance of this information currently available with the ATO,” Mr Dunn said.
In an example provided, consider Thomas (64) is a member/director of his SMSF. He started an ABP in October 2018 with $800,000 and reported this credit against his transfer balance cap by the prescribed due date of 28 January 2019.
“Since this time, Thomas has undertaken a number of partial commutations totalling $100,000. In April 2021, a lump sum of $200,000 was withdrawn as a partial commutation and a new ABP for $500,000 was also started shortly after in May,” Mr Dunn said.
“At 30 June 2021, the transfer balance account (TBA) for Thomas is $1,000,000. However, on the assumption that all reporting has been done within the prescribed time frames, ATO records would reflect the TBA for Thomas as $700,000, resulting in indexation of the personal cap to $1.65 million (being 50 per cent available cap space on $800,000/$1.6 million).
“Due to the reporting ‘lag’ of the commutation and new income stream events, the correct indexation is actually $1,638,000.”
| Debit | Credit |
Bal. |
|
|
Oct-18 |
$800,000 | $800,000 CR | |
| Various |
$100,000 |
$700,000 CR |
|
| Apr-21 |
$200,000 |
|
$500,000 CR |
|
May-21 |
$500,000 |
$1,000,000 CR |
Source: Smarter SMSF
Therefore, reliance on the current ATO information would be incorrect, according to Mr Dunn. This is because, while at the time this would not create an excess transfer balance amount, once the additional events have been reported, they will then trigger the excess issue and compound the excess transfer balance earnings that will form part of the release authority.
“This problem is only exacerbated where it includes the involvement of both SMSF and APRA-regulated fund records, in particular if assets have moved from an SMSF to an industry or retail super fund,” Mr Dunn noted.
“The annual reporting time frame also makes this time lag much worse, when the due date for reporting in the above example would stretch out to May 2022 (due date of the SMSF annual return).
“It is an important example of the need for more timely reporting and the challenges that are created in the SMSF landscape based upon the current concession that is in place.”
Don’t you round the cap space percentage to whole numbers? In the example, the indexation would have uplifted the TBC to $1.638m.
In any event, the number of transactions is not that voluminous that the highest balance wouldn’t be able to be ascertained.
Where the person doesn’t have good records or, seeks advice from a new provider, the balance in the TBA will be critical however, a little bit of questioning and due diligence could be undertaken to ascertain how many and what value pension have been commenced. As indexation eligibility is based on the highest every balance in the TBA, it is only (usually) pension commencements that are needed to be checked.
It would make sense for Financial Advisers to be made responsible for lodging the TBAR within a specified time frame as they are the ones giving the advice re pensions. The currency of the record would be greatly enhanced and thereby making the process less agricultural.
Sure there are other events that are recorded in the TBAR that complicate the process but these are more the exception than the run of the mill and therefore require advice providers to be undertaking appropriate due diligence.