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Transfer balance account reporting and family law payments

The implementation of transfer balance account reporting (TBAR) has not been without its confusion. Overlay this with timing options and it has become a complex maze of potential anomalies.

Family law payments fall into this category. Under Part VIIIB of the Family Law Act 1975, superannuation interests may be split as part of the division of matrimonial property and may occur as a result of a court order or by the agreement of the parties. There are two ways in which a family law payment can affect a person’s transfer balance account (TBA).

The first is under the general debit rule. The common scenario is where a member spouse will partially commute their superannuation income stream and then transfer the lump sum to the non-member, who then commences their own superannuation income stream.

Let’s consider an example:

At 1 July 2017, Ben had an existing account-based pension with a value of $1.2 million in his SMSF. Therefore, at this date, Ben’s TBA was credited with this value. On finalising his divorce with his ex-wife, Mary, the court order, with an operative date of 30 March 2019, requires the trustees of the fund to transfer $700,000 from Ben’s superannuation income stream to Mary. Ben’s TBA is debited by $700,000. Mary then commences her own superannuation income stream with the $700,000, to which her TBA is credited with the same amount.

It is important to note the reporting of family law payments is not done via the standard TBAR. Rather, the ATO requires the completion and lodgement of a Transfer Balance Event Notification Form. Section E of the form specifically relates to family law payments.

In uncommon scenarios, the member spouse is unable to partially or fully commute a superannuation income stream that is subject to a family law payment split (that is, a lifetime pension). Rather, the non-member spouse is entitled to a proportionate share of each pension payment until the commutation restriction is lifted. Application of the replenishment debit rules applies to this situation.

The replenishment debit rules operate in such a way that the member spouse is initially entitled to a debit to their TBA for the value of the superannuation interest to which the non-member spouse is entitled. The non-member spouse then receives a corresponding credit to their TBA with the full value of the superannuation interest in question. A replenishment debit then applies to the non-member spouse so as to address the overvaluation of the credit and place the value to the correct retained entitlement.

It is important to note the reporting of family law payments is not done via the standard TBAR. Rather, the ATO requires the completion and lodgement of a Transfer Balance Event Notification Form. Section E of the form specifically relates to family law payments.

Julie Dolan

Confusing I know, so let’s look at an example:

Simon is a member of Pot of Gold Super Fund and is in receipt of a lifetime pension. The value as at 30 June 2017 was $1.5 million and hence his TBA was credited with this amount on 1 July 2017. This is the only superannuation he has.

Simon and his ex-wife, Allie, are in the middle of divorce proceedings. A court order requires that Simon apportion half of his lifetime pension to Allie with an operative date of 1 June 2019. Allie has not retired and does not have a TBA. Simon’s lifetime pension cannot be commuted for another five years, therefore the family law split is to apply to each monthly pension payment of $7000.

Simon would then need to notify the ATO via the Transfer Balance Notification Form that 50 per cent of the pension payments is to be paid to Allie. Simon’s TBA would then be debited by $750,000, which is the proportionate interest of all pension payments to be paid to Allie. As Allie would have started to receive an income stream as at 1 June 2019, she will then have a credit value to her TBA of $1.5 million. To correct the overstated credit value, a replenishment debit would be applied to Allie’s TBA of $750,000.

The reporting of this event only needs to be reported once by Simon. The ATO will then process the credit and corresponding replenishment debit on behalf of Allie (non-member spouse).

In five years’ time, the pension becomes commutable and Simon decides to proceed with the full commutation and payout Allie’s 50 per cent entitlement (now worth $1.8 million). Both Simon’s and Allie’s TBA would be debited with $900,000, giving them both a negative value of $150,000 ($750,000 – $900,000).

They both may recommence a pension worth up to $1.75 million.

Family law payments are one of many examples that the ATO is providing further clarification around so as to try and curb the confusion. Lodging an incorrect TBAR can trigger a lengthy process to get it reinstated to the correct position.

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