Expert SMSF insights
Problems I’ve seen with ‘total super balance’
By Anthony Cullen
It’s been over two years since major superannuation reform took effect. Memories of CGT relief are thankfully fading, while the then-new-concepts of transfer balance cap (TBC), transfer balance account (TBA) and total super balance (TSB) are now part of our everyday vernacular.
These newish measures are now also revealing some challenges, which may be due to a lack of planning, a lack of understanding or unintended consequences.
Most people are aware of the interaction between a member’s TBA and TSB. Obtaining the information necessary to make decisions can be difficult in the early stages of a new financial year, particularly for annual clients. Strategies around non-concessional contributions (NCC), catch up concessional contributions amongst others, all rely on knowing a member’s TSB as at 30 June in the year prior.
Which leads to questions. When it comes to making NCC in the 2018 financial year, how was TSB measured at 30 June 2017 when the TBA only came into existence the next day? And why are we only asking the question now? Is it something that we even need to concern ourselves with given we are now in the 2019/20 financial year?
Although it did get a mention in the Law Companion Ruling dealing with TSB (LCR 2016/12), you would have been forgiven for missing the fact there were transitional rules for calculating an individual’s TSB just before 1 July 2017. Example 7 attempted to highlight how this worked. However, it’s not uncommon that such examples are simple in their nature and attempt to provide a theoretical application. More often than not, the practical application is different to the theoretical.
Consider this scenario. On 30 June 2017 Member A had the following interests in their SMSF:
- Accumulation: $250,000
- Account based pension (ABP): $700,000
Additional relevant information:
- On 1 July 2017, they commuted their ABP, combined it with their accumulation account and commenced a new pension with the entire balance
- In June 2018 they made a $100,000 NCC
- The fund’s 2018 SMSF annual return was lodged in April 2019
So far so good, nothing seems out of place, right? Imagine the surprise of the member, adviser and accountant when the member received an excess NCC notice in May 2019. According to the notice, Member A had a TSB of $1,900,000 as at 30 June 2017 and therefore had a NCC cap of zero for the 2017/18 financial year.
Section 307.230 of the Income Tax Assessment Act 1997 (ITAA 1997) defines how TSB is measured. In additional to this, Section 307.230 of the Income Tax (Transitional Provisions) Act 1997 also needs to be read when considering a member’s TSB just before 1 July 2017. It states:
Total superannuation balance--modification for transfer balance just before 1 July 2017
- This section applies for the purposes of working out the amount of your total superannuation balance just before 1 July 2017.
- The transfer balance mentioned in paragraph 307-230(1)(b) of the Income Tax Assessment Act 1997 just before 1 July 2017 is taken to be equal to:
- the sum of the transfer balance credits (if any) in your transfer balance account just after the start of 1 July 2017; less
- the sum of the transfer balance debits (if any) arising in your transfer balance account on 1 July 2017 under item 4 of the table in subsection 294-80(1) of that Act (about payment splits).
This has effectively resulted in doubling counting for both the accumulation account and pension account that existed as at 30 June 2017. How? Per the above provisions, the details of the TBA will be derived at the end of the day of 1 July 2017. As it does not appear to affect the outcome, we can ignore the concept of a modified TBA for TSB purposes in this situation.
TSB = accumulation account as at 30 June ($250,000) + transitional TBA ($700,000 (existing pension) + $950,000 (new pension)) = $1,900,000. As you can see the accumulated interest is firstly counted as accumulation and then again when it forms part of the newly created pension interest, which commenced on 1 July 2017. With no provisions to account for the debit that would arise from the commutation of the original pension, this value has also been double counted (as part of original pension + as part of the newly created pension).
Funnily enough, if the existing pension was not commuted until 2 July 2017 and the new pension commenced immediately after that, there would not have been a problem for Member A. What’s not funny, is that this is not the case. Starting a pension on the first day of the financial year is fairly common, the second day, not so much.
Calls from the client and their accountant to the ATO have resulted in the administrator being blamed for incorrectly reporting information in relation to the TBA and suggestions that this be corrected. The only problem is, there is nothing wrong with the reporting and there is nothing to be corrected, as they have been prepared in accordance with TBA reporting requirements. It would appear that some ATO staff are also not aware of these transitional arrangements and are therefore not providing concerned members with suitable guidance to deal with these excess NCC notices that, in a fair and reasonable world, should not exist.
Was Member A’s circumstance the perfect storm that just happened to result in a TSB in excess of $1.6M? If we haven’t heard about other clients who also started pensions on 1 July 2017, does that mean the matter is now behind us?
Imagine a slight change in the circumstances. Let’s say, as at 30 June 2017, Member B had $250,000 in accumulation and $950,000 in an ABP. On 1 July 2017 they converted their accumulation account into a second ABP. Based on the transitional rules, they will have a TSB of $1,450,000 ($250,000 accumulation + $950,000 existing pension + $250,000 new pension). Most would be forgiven for thinking that they would have a TSB of only $1,200,000 ($250,000 accumulation + $950,000 existing pension). Based on this lower TSB, Member B makes a $150,000 NCC in the 2018 financial year. They believe they have triggered a three year, $300,000 bring forward rule provision. They assess that, based on their TSB as at 30 June 2018, they are still eligible to make additional NCC in the 2019 year. A further $100,000 NCC is made in the 2019 financial year.
I half expect that, based on our experiences thus far, Member B will receive an excess NCC notice for the 2019 financial year to the tune of $50,000. If the ATO determined that Member B’s TSB at 30 June 2017 is $1,450,000 they will only be eligible for a 2 year, $200,000 bring forward provision.
This issue has only just come to our attention and we are still in discussions with the impacted member to determine the best way to deal with this. One option is that the member should object to the excess NCC determination. As mentioned above, another suggestion has been to correct the transfer balance account report (TBAR) causing the problem. Contacting the ATO to discuss either option is problematic when you are the tax agent for the SMSF and not the individual. Although we are responsible for lodging the TBAR the ATO will still cite privacy reasons for not discussing the matter with us. This is another example where being the tax agent for the SMSF and not the individual hampers our ability to deal with the ATO directly on a matter.
Stay ahead of the game. Know the best strategies and how the latest regulatory changes affect your SMSF compliance. Sign up for SMSF news and insights from Australia’s top experts. A must for advisers and accountants.
Receive regular insights from our experts
Please complete all fields