SMSF practitioners do not have to accept the automatic valuation of a client’s total super balance (TSB) as being locked down, but can factor in internal fund costs, which in turn can bring a member under a particular threshold, according to a technical expert.
Heffron head of SMSF technical and education services Lyn Formica said the prevalence of the TSB meant it was used as a common measure within SMSFs, with many people assuming its value was locked down and unchangeable.
“Everyone’s got a TSB, so its relevance is that it acts as an eligibility threshold for certain things, such as contributions that are linked to the general transfer balance cap, as well as fixed amounts that aren’t indexed, such as the cap on carried forward unused concessional contributions,” Formica said during a Heffron webinar today.
“The tax law gives us a methodology for working out what somebody’s TSB is, but in a lot of cases we can’t control what that is because it is made up of fixed, locked down components.”
She said these components were the value of any accumulation interests, non-pension defined benefit interests, account-based/market-linked pensions and transition-to-retirement income streams plus any outstanding loan balances under a limited recourse borrowing arrangement, as well as some parts of a complying lifetime or life expectancy pension, rollovers in transit and excess transfer balance cap earnings.
Out of these components, she noted members still had control over the value of any accumulation interests and this value could be adjusted at 30 June.
“What the tax law says is a TSB at 30 June is the amount of money a member would get in their pocket if they voluntarily left that fund and we call that a termination value,” she said.
“In setting that value there is also nothing wrong with allowing for things like disposal costs on assets, such as brokerage of property sales costs, wind-up costs and capital gains tax.
“When we’re trying to work out somebody’s TSB, there’s absolutely nothing wrong with taking these costs into consideration.”
She said for this revised value to be accepted, SMSF advisers and members needed to make specific entries on the SMSF annual return to notify the ATO of the new value.
“When you lodge the SAR, the numbers that go into it are basically taken off the member statements for the client and that’s what the ATO will use by default unless administrators or accountants override that number by putting in this termination value,” she said.
“The things you would need to watch out for here if adopting this strategy is not to adjust financial statements for disposal costs, but just do them like normal and keep evidence of what these disposal costs would be, so put your client in a defendable position, and then manually adjust the relevant sections of the annual return.
“This is a legitimate strategy to adjust the TSB using these special boxes and while we don’t tend to see it very often in practice, it can be useful if you’ve got somebody just over a particular threshold and you might be able to get them under it so they can take another action elsewhere in the fund.”