Because the reality is that the transfer balance cap will affect less than 1% of fund members, whereas the total superannuation balance potentially impacts up to 50% of fund members.
The best way to understand both concepts is to ignore the $1.6million limit (for the moment) and focus on their meaning. The ATO has clarified how the total super balance and the transfer balance cap work:
- The total super balanceis essentially the sum of the accumulation and retirement phase interests across all of a member’s superannuation funds and life insurance companies
- The transfer balance capis a point-in-time calculation of the assets supporting an income stream paid to a member, for which the SMSF claims a tax exemption
In essence, where a member has a $1.6million total superannuation balance they will no longer be able to:
- make non-concessional contributions without exceeding their non-concessional cap or;
- access the concessional contribution cap bring-forward
As a result, the door to transferring assets into the fund by way of an in-specie contribution will be closed to fund members forever.
Also, where the SMSF is in pension mode and the member has exceeded their total super balance, the fund must use the unsegregated (proportional) method to calculate exempt current pension income.
One of the most serious consequences of the new total super balance is where members exceed the $1.6million limit yet continue to pay for fund expenses out of their pockets.
Under this scenario, there is no ‘wiggle room’ to take up the payment as a non-concessional contribution.
And without the ability to use contribution caps in this manner, the fund will have no option but to book the payment as a borrowing – resulting in a breach of s67 of SIS.
Where the ‘borrowing’ is more than $30,000 or 5% of fund assets (in line with the financial threshold test), the SMSF auditor has no discretion and will be obliged to lodge an auditor contravention report with the ATO. Any repeated or unrectified breaches will also be reported, regardless of materiality.
It’s also important to realise the vital role that asset valuations will have in the administration of both the total super balance and transfer balance caps.
Property and unlisted assets, in particular, are under the intense scrutiny of the ATO and SMSF auditors to ensure that valuations are substantiated and correctly reflected in fund financials.
Without the correct documentation in place, the ATO may question the value of these assets to ensure there’s no circumvention of the $1.6 million limits.
The legislation places additional work and responsibilities on SMSF auditors and advisers alike, with SMSF auditors playing an augmented role as gatekeepers of the superannuation industry.
One questions how the business model of a low-cost SMSF auditor can continue to be profitable given the complexities of the new compliance measures.
Making mistakes in the future is going to be costly. With litigation touted as the next problem facing SMSF advisers, working with an SMSF auditor who rubber stamps their audit reports has become a high-risk decision.
Multiply this situation by the number of clients administered by an SMSF adviser, and it’s easy to see how the false economy of saving a few dollars can lead to a disastrous financial outcome in the future.
The answer is, as always, to partner with a long-standing SMSF audit firm you trust to provide a quality service.
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