Administration, Compliance, Pensions

Beware excess TBC tax trap

Transfer balance cap Excess transfer balance cap Notional earnings Retirement phase Commutation Pension

Exceeding the personal transfer balance cap will raise an additional tax liability for trustees when they intend to take a pension income stream.

A technical specialist has reminded SMSF trustees they will be subject to additional earnings tax if they happen to exceed their transfer balance cap when electing to take a pension income stream.

“When you get issued an excess notice from the excess transfer balance determination from the ATO, that will include [notional] earnings,” BT Financial Group advice strategy and technical specialist Tim Howard told attendees of a webinar he hosted recently.

“Your excess transfer balance is the sum of not just the excess amount, [but] also the earnings on that excess, which yet again is a different calculation to the excess concessional or excess non-concessional contributions.

“Those earnings will continue to accrue until the point in time that the excess is actually removed from superannuation. And you will pay tax on those earnings right up until the time that the amount is removed, so while the continuing accumulation of earnings doesn’t need to be removed from retirement phase, it will still contribute to the amount that you have a tax liability on.

“[If] we’ve gone over our personal transfer balance cap by $100,000 and we just go and debit $100,000 out of retirement phase, that won’t necessarily fix the problem because we also need to debit out the notional earnings.”

Howard added there was a specific course of action trustees would need to take as soon as practicable to ensure the accumulation of earnings would not result in an increased tax bill.

“The SMSF needs to report the credit event to the transfer balance account via transfer balance account reporting that needs to be done by the 28th day of the month following the end of the quarter in which the event occurred. Once that is reported, the ATO will identify that there is an excess transfer balance issue,” he noted.

“It is the excess amount plus the earnings that needs to be removed from retirement phase by rolling that back to accumulation phase or taking it out as a member benefit lump sum. Taking a pension payment will not solve this problem; [it’s] got to be a lump sum that is commuted out.

“So it is important that we take that commutation event as soon as possible once we know that the client is in excess [because] once you’ve got that determination, there’s 60 days for the member to commute the amount out of retirement phase.”

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