There are currently two options on the table as to how event-based reporting will be implemented for SMSFs in the interim and then in the future. Peter Burgess examines each option and assesses them against the ATO’s stated objectives of the initiative.
In August, the ATO released a position paper on the transfer balance cap (TBC) and SMSF event-based reporting. In it, the tax office presented the industry with two alternative options on how SMSFs will report under the new TBC measure in the 2018 financial year and onwards and invited the SMSF industry to provide feedback on each option.
The events required to be reported are exactly the same under both options. It is only the timing of reporting those events after 1 July 2018 that is different under the two alternative options.
What are the options?
Essentially, the two alternative options presented in the ATO’s position paper can be summarised as follows:
Reporting of events that impact on a member’s transfer balance account, 10 business days after the end of the month in which the event occurred, with the exception of income stream commencements and certain limited recourse borrowing arrangement (LRBA) events that would be required to be reported 28 days after the end of the relevant quarter.
Reporting of events that impact on a member’s transfer balance account, 28 days after the end of the relevant quarter, with the exception of commutations required as a result of an excess transfer balance determination, which would be required to be reported 10 business days after the end of the month. Then, after an appropriate transition period (say two years), all events would be required to be reported 10 business days after the end of the month in which the event occurred. Under both options, SMSFs would still be required to abide by legislated TBC reporting time frames as specified within a commutation authority issued by the commissioner of taxation. A commutation authority may be issued if the ATO has not been advised that a member’s excess transfer balance has been removed.
Key elements of an efficient TBC reporting framework
There are obviously advantages and disadvantages associated with each option. As outlined in the ATO’s position paper, the TBC reporting framework for the SMSF industry should:
- be clear and not overly complex,
- support a transitional on-boarding to more event-based reporting,
- enable the ATO to administer the TBC law effectively, and
- not significantly disadvantage or penalise members.
To get a clearer picture of which option may be best for the SMSF sector, it’s worth considering how the two alternative options measure up against these four key elements.
Clear and not overly complex
From 1 July 2018, the administrative concession available under option 1 will allow SMSFs to report the commencement of a pension, and certain LRBA repayment events, 28 days after the end of the relevant quarter rather than 10 business days after the end of the month. All other TBC events (other than compulsory commutation events, which must be reported within the time frames specified in the commutation authority) will be required to be reported within 10 business days after the end of the month.In contrast, after an appropriate transition period, option 2 will require all TBC events (other than compulsory commutations events, which must be reported within the time frames specified in the commutation authority) to be reported within 10 business days after the end of the month.
Post the transition period, requiring some TBC events to be reported monthly while requiring others to be reported quarterly adds complexity and potential confusion. The quarterly reporting of pension commencements under option 1 would also be a departure from the TBC reporting rules for the Australian Prudential Regulation Authority (APRA)-regulated funds, which are aligned with option 2. This lack of alignment with the APRA-regulated funds may also cause confusion for members and service providers and incorrect determinations being issued by the ATO. For these reasons, option 2, that is, requiring all funds to report TBC events within the same reporting time frame, appears to be the simpler approach to event-based reporting.
Supports a transitional on-boarding approach
During the transition period, option 2 will allow SMSFs to report all TBC events (other than compulsory commutation events, which must be reported within the time frames specified in the commutation authority) to be reported 28 days after the end of the relevant quarter. In contrast, option 1, will require all events (other than pension commencements, certain LRBA repayment events and compulsory commutation events) to be reported within 10 business days after the end of the month in which the relevant event occurs. By allowing a longer time frame to report pension commutations during the transition period, arguably option 2 better supports a transitional on-boarding approach to event-based reporting. However, for reasons outlined later, having to report pension commutations on a monthly rather than a quarterly basis is unlikely to be of significant benefit to the SMSF sector.
Enables the ATO to administer the TBC law effectively
As mentioned above, post the transition period, allowing the SMSF sector to report pension commencements on a quarterly basis under option 1 is a departure from the monthly reporting rules, which will apply to APRA-regulated funds. This lack of alignment between the two sectors is likely to make it more difficult for the ATO to administer the TBC law and may lead to delays and incorrect determinations being issued. As outlined in the ATO’s position paper, if timely reporting of transfer balance account report (TBAR) events is not received from all superannuation providers, the ATO may issue incorrect excess transfer balance determinations, causing additional workflow for funds and members.To avoid these issues, aligning all sectors under the same TBC reporting rules should be a primary ATO objective. Option 2 will achieve this alignment after an appropriate transition period.
Does not significantly disadvantage or penalise members
While allowing more time, post transition, under option 1 for SMSFs to report the commencement of a pension may appeal to some, the deferred reporting of events that impact on a member’s transfer balance will rarely be in the best interest of members. Allowing more time to report the commencement of a pension means SMSF members will be less able to rely on the information the ATO will display online regarding their TBC. As a result, SMSF members may be unable to determine their available TBC space and may inadvertently put themselves in excess. It may also take the ATO longer to issue an excess transfer balance determination, leading to larger excess transfer balance tax liabilities for members.
By requiring more frequent reporting post transition, option 2 reduces the risk of inadvertent breaches and unnecessary tax liabilities being incurred by SMSF members. It also reduces the burden on advice providers and trustees to appropriately track the TBC of members across all their retirement phases and funds.
Requiring pension commencements to be reported monthly rather than quarterly will impose a significant burden on trustees and the SMSF sector more broadly. SMSF members with fund balances far in excess of the TBC will in all likelihood be able to report a pension commencement value without the need to obtain up-to-date asset valuations or estimate the fund’s tax liabilities. That’s because these funds will simply report a value equal to the TBC as the commencement value of the pension. In these situations, having to report the commencement of a pension 14 business days after the end of the relevant month rather than 28 days after the end of the relevant quarter is unlikely to be a significant burden or concern to the SMSF sector.
For SMSF members who are likely to have a pension commencement value that is less than their TBC, the trustees will be required to determine a best estimate of the pension commencement value. This is likely to be the case regardless of whether the pension commencement is required to be reported monthly or quarterly.
If the fund’s tax liabilities are unknown at the time the pension is commenced, which will be the case for the vast majority of pensions commenced during the income year, allowing an extra few months for this best estimate value to be determined would be of little practical benefit to the sector. Regardless of whether the pension commencement is required to be reported monthly or quarterly, the commencement value will still be a best estimate and can be adjusted at a later date by reporting a revised pension commencement value. The exception to this is pensions commenced very late in the income year if the fund’s end-of-year tax liabilities can be determined and financial accounts finalised in time for the pension commencement value to be calculated and reported by 28 July.
Similarly, the administration concession that will allow SMSFs with segregated current and non-current pension assets to report certain LRBA repayment events 28 days after the end of the relevant quarter will have little practical application in the SMSF sector. Segregated SMSFs with LRBAs are uncommon and the tax restrictions that now apply to segregated funds with member pension balances in excess of $1.6 million mean instances of LRBA repayment events that may be entitled to this administration concession will be extremely rare.
An assessment of the two alternative options against the four key elements of simplicity, ability to support an appropriate transitional on-boarding period, effectiveness and risk of disadvantaging SMSF members suggests option 2 as presented in the ATO’s position paper should be the preferred option for the SMSF sector. Compared to option 1, this is the simplest option, better enables the ATO to administer the TBC law and presents the lowest risk to SMSF members.