The total superannuation balance component of the government’s 2017 super reforms has a significant impact on the activities one can undertake in their fund, writes Tim Miller.
The most significant impact of the superannuation changes introduced from 1 July 2017 will be felt through the introduction of the total superannuation balance (TSB). These three words will affect a far greater number of SMSF members than the other big-ticket, three-word concept, the transfer balance cap (TBC).
What is the TSB?
The TSB is a way to value an individual’s total superannuation interest across all funds they may be a member of, with the valuation being performed at a particular date, 30 June each year. It is used to work out an individual’s eligibility for the following contribution-linked measures:
- making non-concessional contributions (and the availability of the two or three-year bring-forward period),
- catch-up concessional contributions where the unused cap can be carried forward,
- government co-contribution,
- tax offset for spouse contributions, and
- post-age-65 work test exemption contributions (from 1 July 2019, subject to passage of legislation).
The TSB also affects the event-based reporting frequency of a fund for TBC purposes and eligibility to claim exempt current pension income (ECPI) under the segregated assets method.
How is it calculated?
In very simple terms, the TSB is the sum of all things superannuation, but of course in superannuation nothing is simple.
Accumulation phase
For pre-retirees, the TSB represents how much an individual has across all accumulation-phase interests. How much someone has is actually a reflection of how much they would be entitled to receive should they take their benefit out. Therefore, the accumulation-phase value, particularly when referencing SMSF members, should account for such things as deferred tax liabilities, but equally future income tax benefits. This is something not all SMSFs account for. However, given the amount affects eligibility for so many measures, it is worth considering these tax accounting items as they may prove useful.
It is also worth pointing out SMSFs, via their accounting requirements under the Superannuation Industry (Supervision) (SIS) Act, are required to reflect the market value of assets held at 30 June each year. This annual valuation does not incorporate the cost of selling the assets and, while brokerage on security trades may be inconsequential, the costs associated with selling a property may be significant and may warrant a manual adjustment to the TSB.
Under the standard process, the amount is reported as part of the SMSF annual return and the default calculation will reflect the member balances as attributable in that return. The capacity does exist to modify these amounts, within the return, to accommodate net market value and potentially deferred tax liabilities.
Retirement phase
In addition to the accumulation values, the TSB also includes the current-day value of any retirement-phase account-based pensions. Of course, as stated, nothing is ever that simple and the TSB when referencing retirement-phase pensions comes with complexities, and don’t forget any defined benefit income streams the client may have.
Rather than identify the TSB as the value of any account-based income stream, in actual fact the amount is calculated as an individual’s transfer balance, modified if the individual is in receipt of a prescribed account-based pension. Unsurprisingly, the prescribed account-based pensions incorporate every type of retirement-phase account-based pension an SMSF is likely to pay, so in every set of circumstances where an SMSF pays an account-based pension, the transfer balance account needs to be modified.
What are the modifications?
If we assume a normal scenario, that is, an SMSF without any structured settlement contributions, bankruptcy or relationship breakdown payment splits, then the modification requires you to disregard any credits associated with commencing an income stream and disregard any debits linked to commutations and failures to comply with commutation and pension standards.
You are then required to increase the transfer balance account by the value of the retirement-phase income stream if the amount was withdrawn in full. Therefore, with the exception of structured settlement payments, the only information from the transfer balance account that is considered in the TSB is any excess transfer balance earnings.
For capped defined benefit income streams, the TSB is the transfer balance account value. Importantly, market-linked pensions, regardless of when they are commenced, are account-based pensions for TSB purposes, even if they are capped defined benefit income streams for TBC purposes.
In addition to our accumulation and pension interests, the TSB also incorporates rollovers that are in transit, but excludes structured settlement amounts.
In very simple terms, the TSB is the sum of all things superannuation, but of course in superannuation nothing is simple.
Tim Miller
Strategic importance
As stated above, the TSB is important because it dictates an individual’s ability to use the non-concessional contribution cap and bring-forward provisions. Further, it impacts on the ability to make eligible spouse contributions and the entitlement to government co-contributions. From 1 July 2018, the capacity to carry forward unused concessional contributions has come into effect and the ability to use this is also measured against the TSB.
Non-concessional contributions and the bring-forward
An important distinction to be made when considering contribution caps post 1 July 2017 is that we no longer operate in an environment of fund-capped contributions and as such the caps don’t prohibit an individual from contributing to super or trigger a requirement to refund contributions. They only restrict how much can be contributed with tax concessions attached. If an individual exceeds their cap, they will need to engage with the ATO and pay tax on associated earnings and refund the excess amounts via the ATO. Alternatively, they can pay top marginal tax on the excess – neither process is appealing.
As we know, the non-concessional contribution cap is now $100,000, equating to a maximum bring-forward limit of $300,000.
Post-1 July 2017, a member’s ability to use the non-concessional cap and subsequent bring-forward amount will be subject to their TSB. Age restrictions still apply to the bring-forward rules. The rules require an assessment of a member’s TSB at the preceding 30 June (preceding the contribution) and will be determined as follows:
TSBooooooooooooooContribution
<$1.4moooooooooooooo$300,000 (3 years)
$1.4m to < $1.5moooooo$200,000 (2 years)
$1.5m to <$1.6moooooo$100,000
>$1.6mooooooooooooooNil
The current problem is that if an individual doesn’t fully use the bring-forward amount, then an assessment needs to be made in future years as well. Some clients may also have to deal with the issue of transitioning from the old cap to the new.
The bring-forward transitional trap
As the bring-forward is triggered in the first year that a contribution exceeds the standard cap, and is fixed for the following two financial years, the timing of previous large contributions is critical. Clients may have triggered the bring-forward prior to 30 June 2017, but not fully capitalised on the limit. For those clients that did trigger before 1 July 2017, their capacity to contribute is based on how much they originally contributed and what their TSB is.
Under the transitional rules, where the cap wasn’t fully used, the following three-year limit applies: contribution in 2016/17 – $380,000 limit.
The TSB has a major impact not just on the strategies that have been contemplated in the past, such as the re-contribution strategy, but also the timing of strategies to be implemented in the future.
Tim Miller
As an example, a 60-year-old client who contributed $400,000 during 2016/17 is unable to contribute further non-concessional contributions until the 2020 financial year. Then, of course, any further contributions will be linked to their TSB.
While any individual who contributed in 2015/16 is now outside the transitional rules, it’s important to recognise whether the bring-forward rules were applied as there could be a contribution made post 1 July 2017 that is linked to the transitional rules from that year. For example, if a client contributed $250,000 in 2015/16 and a further $210,000 in 2017/18, then their bring-forward resets from 1 July 2018. Some may be mistaken and think they are only entitled to a contribution of $90,000 up until 30 June 2020.
Non-concessional cap trap
One of the understated traps of the caps and the TSB is personally funding super fund expenses. Previously, it was widely accepted that meeting a fund expense could be treated as a contribution. This is still the case, but now the capacity to do so will be linked to a member’s TSB. So if an expense is paid personally, it will be necessary to check the balance before determining if it is possible to treat it as a contribution.
Catch-up concessional contributions and other measures
The real impact of the catch-up concessional contributions will start to be felt from 2019/20, but for the purposes of the TSB the ability to use the rules only applies to members with a TSB of less than $500,000.
When we get to a position of determining an individual’s TSB at 30 June 2019, members with less than $500,000 have the ability to access an increased concessional contribution cap the following year where they haven’t fully used the concessional cap in the previous year. Further, as time progresses, this measure will allow for any unused cap to be carried forward for up to five years and then anything not used after five years will expire. This measure only applies to unused amounts accrued from 1 July 2018.
Table 1 demonstrates an example of how the carry-forward rules apply (the example assumes no movement in the concessional contribution cap).
You will note in 2023/24 the carry-forward amount drops significantly. This is because the unused amount from 2018/19 has dropped off. The new amount represents $5000 (19/20) + $0 (20/21) + $15,000 (21/22) + $0 (22/23) + $0 (23/24).
While the mechanics of the carry-forward occur automatically, access to the measure is subject to the TSB immediately prior to the year in which the larger amount is to be contributed.
This catch-up measure highlights just how far the impact of the TSB will extend; it’s not just affecting those with higher balances.
Table 1: Example of how the carry-forward rules apply
Government co-contribution and spouse contributions
Individuals will not be eligible for the government co-contribution if their TSB is equal to or greater than the general TBC of $1.6 million or if they exceed the non-concessional contributions cap in that financial year.
Similarly, individuals will not be eligible for the tax offset for spouse contributions if their spouse’s balance is equal to or greater than the general TBC of $1.6 million or their spouse exceeds their non-concessional contributions cap in that financial year.
Post-age-65 work test exemption (draft legislation)
While this proposal is still in draft format, if it passes into law, then the ability for an individual to access the measure and make contributions in the year after they turn 65 or cease working, whichever is the latter, will be reliant on the member having a TSB of less than $300,000.
Overall, the TSB has a major impact not just on the strategies that have been contemplated in the past, such as the re-contribution strategy, but also the timing of strategies to be implemented in the future. To be sure of a member’s TSB requires that the fund is up to date as early as possible.
