Pension estimates gain importance

pension commencement value

The ability to estimate a pension commencement value will be critical given the new shorter TBAR timeframe taking effect from 1 July 2023.

Advisers must remember trustees have the ability to estimate the value of a pension upon commencement should an SMSF’s financial statements be unavailable at the time this action is to be taken, a technical specialist has said.

Accurium head of education Mark Ellem issued this reminder in the wake of the new timeframe to be applied to transfer balance account reporting (TBAR) to be introduced from 1 July 2023, whereby all SMSFs will have to complete this obligation 28 days after the end of the quarter in which a change to a pension has taken place.

Ellem pointed out using an estimated commencement value for a pension will be particularly relevant for individuals looking to start an income stream on 1 July for any given year, which will have to be reported by 28 October in the new income year.

“If we’re starting a pension on 1 July, say 1 July 2022, we want to prepare the accounts for the year ended 30 June 2022 and to finalise those accounts we need [the relevant] tax statements. [But] a lot of those tax statements don’t come in until September, [and] some even October, and so it [will put] a lot of pressure on, particularly [in light of] where we’re all moving [regarding TBAR],” he acknowledged during a quarterly Q&A session held last week.

“[So] those annual [financial] statements don’t always come in in a timely manner and [this] obviously will affect the member’s [asset] balance [and] that [will be] a 30 June balance [and] of course [for] members commencing a pension the next day, it will be the same balance.”

He pointed out advisers and trustees will need to refer to the ATO valuation guidelines accessed via quick code QC26343 on the regulator’s website in these situations.

“They state that the SMSF trustee may choose to use a reasonable estimate of the value of the income stream to meet their transfer balance account reporting obligations when the SMSF has an obligation to report events no later than 28 days after the end of the quarter,” he said.

“So we can use a reasonable estimate. We don’t have to wait until those annual tax statements come in.”

If the process results in a difference between the pension’s estimated value and actual value, he noted advisers and trustees had two options to choose from to address the situation.

“One, we [can] leave it as is and start the pension at the amount reported, but that may not be in accordance with the member’s instructions,” he said.

“The other option is to cancel that original TBAR that you lodged on time by 28 October and you would then lodge a new TBAR with the revised amount. That might be a bit cumbersome, but unfortunately they are the rules.”

The new TBAR timeframe was announced in June.

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