There has been a lot of information published in relation to the transfer balance account report (TBAR) requirements for account-based pensions (ABP), which, while certainly onerous, are reasonably simple in theory. Capped defined benefit income stream (CDBIS), however, are not quite as simple, with additional reporting requirements coming to light now, more than a year after the introduction of the transfer balance cap (TBC).
In this article, we will focus on how the introduction of the TBC works practically in relation to a CDBIS, specifically a market-linked income stream (MLIS).
What do I need to report?
The new TBAR regime requires all superannuation funds providing an MLIS to a member to report the balance of that MLIS in accordance with the ATO TBAR due dates.
Unlike an ABP, the value of an MLIS must be calculated using a formula to determine the reporting amount, known as the special value.
The formula for valuing an MLIS is as follows:
Number of years remaining in the term x Annual entitlement.
In many circumstances, the special value of an MLIS may actually be higher than the $1.6 million TBC. As MLISs are non-commutable, the MLIS must continue and the member will be required to commute all other available income streams (that is, ABPs).
Tax consequences for the SMSF
In the above situation we have mentioned a member with an MLIS account balance of less than $1.6 million and a special value above $1.6 million. From a tax perspective, the MLIS would attract exempt current pension income (ECPI) proportionately for the fund, just as it did pre-30 June 2017.
What about an MLIS that has an account balance of $4 million as at 30 June 2017, when it first reported for TBAR? From a TBAR perspective, the special value would be reported accordingly. From an accounting and tax perspective, the fund enjoys a higher proportion of ECPI than a fund with other pension types as the $4 million is non-commutable. Had this particular member previously commenced an ABP instead of a market-linked pension, they would have been required to commute all amounts above $1.6 million back into accumulation phase and pay 15 per cent tax on a proportion of the earnings.
Tax consequences for the member
Legislation was introduced in order to ensure tax was paid fairly on these types of income streams. Before 30 June 2017, generally, a member over the age of 60 receiving an MLIS or ABP of any value would not have any tax consequences personally. Since the introduction of the TBC, members in receipt of an MLIS of more than $100,000 a year are required to pay tax at their marginal rate on 50 per cent of the MLIS amount over $100,000.
For some members, the above changes to legislation actually provide for a tax advantage. Consider a member with a large MLIS (that is, substantially more than $1.6 million), who may have little personal taxable income and/or carried-forward tax losses. It’s possible the tax saved within the superannuation environment by having a larger proportion entitled to ECPI could significantly outweigh the tax payable personally due to the taxable portion of the MLIS payment.
MLISs have always been complex in nature and now, following the introduction of the TBC regime, an additional level of complexity has been added for trustees and advisers. While a small group of superannuation members may enjoy a tax benefit as shown above, most superannuants will notice an increased burden in administering and reporting their TBCs accurately, and, by extension, an increase in administrative costs. While the current legislation ensures these income streams remain non-commutable, there’s nothing superannuation members and trustees can do to avoid the complexities involved in receiving an MLIS.
The $1.6 million TBC
Effective 1 July 2017, the federal government introduced a limit to the amount of superannuation savings any single member can have in what is now called retirement phase. Referred to as the TBC, this limit has been set at $1.6 million, to be indexed in line with the consumer price index and rounded down to the nearest $100,000.
All retirement-phase pension balances as at 30 June 2017 were required to be reported to the ATO via a TBAR on or before 30 June 2018 by your clients’ superannuation fund/s.
Going forward, the ATO requires all events that affect a transfer balance account to be reported on a timely basis. These events include, but are not limited to:
· commencing a retirement-phase income stream,
· commencing a death benefit income stream,
· commuting a retirement-phase income stream,
· turning 65 while in receipt of a transition-to-retirement income stream that is not in retirement phase, and
· personal injury (structured settlement) contributions.
Retirement phase – what’s included?
The following are classified as retirement-phase income streams and are included in the balance of a member’s TBC:
· capped defined benefit income streams,
· Transition-to-retirement income streams that are in retirement phase, and
· death benefit income streams, including reversionary income streams.
Yvette Cree is a manager at BDO Australia.