Transfer balance account reporting will be introduced for SMSFs at the end of this financial year, but debate still remains as to how onerous and extensive the regime should be, says Tony Greco.
The tumultuous changes that took effect on 1 July 2017 are now being worked through, keeping everyone associated with superannuation very busy. One of the less talked about issues that has now come to the fore is the reporting of transfer balance information for members in pension phase. Essentially, the reporting is required to enable the ATO to manage the newly introduced $1.6 million pension cap. The new super rules have now placed a limit on the total amount an individual can transfer into retirement income stream accounts, such as pensions and annuities. This is known as the transfer balance cap (TBC).
From 1 July 2018, SMSF trustees will be required to report matters impacting on an individual member’s transfer balance on an events basis. Events-based reporting will not require all SMSFs to report every quarter or every month. SMSFs without any members in pension phase (which is around 52 per cent of the SMSF population) will not be required to report anything additional until their members commence a pension, which for some funds may not be for many years. The ATO has canvassed two possible alternative options in its discussion paper on how often SMSFs with members in pension phase are required to report events impacting on an individual member’s transfer balance. The two alternative options for reporting are set out below. Under option 1, subject to a few exceptions, SMSFs will be required to report events 10 business days after the end of the month in which the relevant event occurs.
Option 2 requires that SMSFs will have 28 days after the end of the relevant quarter to report, with two exceptions. Further, under option 2, the ATO contemplates that an appropriate transition period for SMSFs to move from quarterly to monthly reporting of all TBC events may be two years (that is, until the end of 30 June 2020). This represents a systemic shift from the current rules.
Events that do not need to be reported include:
- pension payments,
- investment earnings and losses, and
- when an income stream is closed because the interest has been exhausted.
We understand this reporting mechanism is vital for the ATO to minimise the taxation consequences for individual members in instances where the TBC is exceeded. The taxation consequences for individual members if they exceed the cap is to incur an excess transfer balance tax payable on the notional earnings associated with any overage. The notional earnings continue to compound daily until the member takes action to remove the excess or the ATO issues an excess transfer balance tax determination.
We understand without visibility of an individual’s position in relation to the TBC, the individual is at risk of a continually accruing and increasing taxation liability. Unless a member knows they have exceeded the cap, they are not in a position to take action to remove the excess. Similarly, if the ATO does not have visibility and is not aware an individual has exceeded the cap, they cannot issue an excess TBC determination.
Current reporting arrangements often mean a large majority of SMSF trustees only visit their tax agent or accountant once a year to have their financial accounts and SMSF annual return prepared. Often this does not occur until some 10 months after the end of the financial year, and it is not until then that the relevant amounts and values are determined. The majority of SMSF reporting is done on an annual basis. It is estimated close to 70 per cent of intermediaries who provide superannuation compliance services do so on an annual basis.
The magnitude of what is being proposed cannot be understated as it entails changes in well-entrenched behaviours. In addition, there will be additional compliance costs on all trustees associated with transfer balance account reporting (TBAR), which should not be underestimated. There will need to be greater interactions between SMSF members and their accountants. While the ATO does not consider a large number of reportable events for most SMSFs, this assumption may not be the case if trustees commute pension amounts beyond the minimum as part of a strategy to manage transfer balance accounts.
The commutation of a pension counts as a debit against the current $1.6 million tax-exempt pension limit, thereby allowing future super top-ups. Where an SMSF member needs to draw above their minimum pension for a particular financial year, by treating any amount over the minimum as partial commutations, the member can, in effect, top up their pension account in the future by the same amount. If this strategy proves popular, it may lead to a dramatic increase in reportable events under the transfer balance reporting regime.
The main issue raised in the Institute of Public Accountants’ (IPA) submission in response to the ATO’s discussion paper is the fact there is no distinction on who is targeted as part of the TBAR regime. The discussion paper takes a whole-of-industry reporting approach. While we fully understand the ATO has an obligation to monitor the $1.6 million cap, it is imposing additional compliance costs on all trustees regardless of whether the cap has application.
The ATO’s intention in the position paper is for it to have the ability to warn fund members approaching the cap and issue notices when it is breached. For trustees with relatively modest superannuation interests, it will be highly unlikely they will ever get anywhere near the $1.6 million cap. Regardless of the superannuation interest, the position paper still wants these members to report.
The ATO is in a position to be able to determine fund members who may have or may end up with a superannuation interest of $1.6 million without having every fund member in the country report.
This whole-of-industry reporting adds substantial cost to fund members in pension mode for no little benefit to anyone. Already intermediaries are proposing to charge trustees in pension mode more for SMSF administration services to undertake these additional compliance requirements on behalf of trustees.
We believe a risk approach should be adopted to limit the compliance impact of the TBAR regime. Applying the regime to members who are more likely to exceed their transfer balance limit seems to be a better approach to take as it achieves the desired outcomes without imposing significant compliance costs on the entire pension-phase population. Members with smaller balances will incur additional costs, which will reduce their retirement benefits unnecessarily.
Industry experts have advocated a $1 million transfer balance before reporting becomes mandatory. The government made the point that the introduction of the $1.6 million transfer cap would only impact on a small minority of superannuants. If this is the case, then it makes sense a threshold balance for mandatory reporting is considered.
The other main concern in response to the discussion paper is the proposal to change from quarterly to monthly reporting in 2020 if quarterly reporting under option 2 is adopted. Monthly reporting is incredibly onerous and costly to fund members. There is a huge increase in cost to move from quarterly to monthly reporting.
We acknowledge the ATO is cognisant that events-based reporting represents a significant shift from the current annual reporting requirements that apply to SMSFs, not only in terms of SMSF trustees and members themselves, but also those in the SMSF profession who are supporting SMSF trustees and members in managing their retirement savings. In addition, the transition relief granted to this new model of reporting, which will not require anything additional to be reported until 1 July 2018, is commendable given the significant recent changes to superannuation that came into effect from 1 July 2017.
What needs to be remembered foremost is the greatest risk of not reporting on time is the risk of individual members inadvertently and unknowingly exceeding the cap and facing an increased tax liability. There is a need to balance administrative cost with the need to mitigate this risk of SMSF members being exposed to unexpected and increased excess transfer balance tax liabilities. For this reason, the IPA has recommended a risk-based approach be adopted for the TBAR regime to reduce the compliance burden on a significant portion of the pension member population.
Regardless of which option is adopted, the new reporting regime will drive SMSF members, their accountants and administrators to more highly efficient reporting and administration solutions to ensure investment and account balances in an SMSF are up to date and to be able to accurately and promptly report the required information to the ATO. Events-based reporting may force some accountants who only look after a small pool of SMSF clients to commit more resources required to deliver SMSF services into the future or outsource the provision of such services through the use of one of the many administrator solution providers.
