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  • Administration issues under the transfer balance cap

    Tara McLachlan, Assistant Commissioner, Superannuation, ATO

    Panel session 6B

    Tax Institute Sixth National Superannuation Conference

    The Langham, Melbourne

    Thursday 30 August 2018

    Check against delivery

    Introduction

    Thank you for inviting me to speak at your sixth national superannuation conference. Six years has seen a lot of change, significant reform and some major milestones met. As ATO Deputy Commissioner James O’Halloran has observed, ‘… the current phase of reform started with the Cooper Review in 2010’. By this stage in our journey we’re concentrating on the ‘nuts and bolts’ of implementation and working together to create the efficiencies we all expect in a world class super system. I think we can all agree that reliable data and good reporting systems are essential to achieving this goal.

    Today, I’m going to discuss administration issues under the transfer balance cap – from the regulator’s point of view.

    What events should be reported?

    The introduction of the transfer balance cap (TBC) is designed around limiting the amount of capital that can be transferred into the tax exempt retirement phase. As such, certain events that track the movement of capital in and out of retirement phase, and other events prescribed by law must now be reported.

    Trustees should have already reported pre-existing pensions, ie pensions members were receiving just before 1 July 2017 that they have continued to receive and which are in retirement phase on or after 1 July 2017.

    Moving forward, common events that will need to be reported include:

    • the start of new pensions, which began to be in retirement phase on or after 1 July 2017
    • full and partial commutation of a pension on or after 1 July 2017 regardless of whether or not the commutation was paid out as a lump sum, retained in accumulation phase or rolled over to another super fund.

    Other events include:

    • certain limited recourse borrowing arrangement (LRBA) payments that result in an increase of the value of the interest that supports the member’s pension where the LRBA was entered into on or after 1 July 2017
    • commutations in compliance with a commutation authority issued by the Commissioner
    • structured settlement contributions.

    Capped defined-benefit pensions – life expectancy and market-linked

    There is a different approach for reporting commutations and new pensions arising from certain capped defined-benefit income streams: life expectancy pensions, and market-linked pensions. This is because the special value rules for the commutation debit currently results in a nil value.

    If an individual had one of these pensions just before 1 July 2017, commuted it in full and started a new market-linked pension, they may exceed their TBC because the nil debit means they’re effectively double-counting the pension.

    The government recognises the unintended consequences associated with the current law and is committed to ensuring smooth implementation of the 2016 super reform measures.

    SMSF News-Alert-2018/3: advice for funds where members have a market-linked pension stated we won’t take compliance action at this stage if a fund doesn’t report the commutation of the original pension or the start of the new market-linked pension or they have reported the transfer balance debit for the commutation as other than nil.

    The fund is still required to report the pre-existing capped defined-benefit income stream though.

    What events should not be reported?

    Events an SMSF doesn’t need to report, commonly include:

    • pension payments made on or after 1 July 2017
    • investment earnings and losses that occurred on or after 1 July 2017
    • when an income stream ceases because the capital has been exhausted
    • the death of a member (although if the member’s pension was reversionary you may be required to report the reversionary pension).

    Other events that SMSFs don’t need to report include information reported to us by an individual using a Transfer balance event notification form (NAT 74919). Typically, this is when the following events occur:

    • family law payment split
    • debit event from fraud, dishonesty, or bankruptcy
    • structured settlement contributions made before 1 July 2007.

    When to report, depends on whether the SMSF is on an annual or quarterly cycle. This is determined by when the SMSF first starts to have a pension in the retirement phase. This will either be 30 June 2017 (where there was a pre-existing income stream, or a member started their first retirement-phase income stream during the 2017–18 year) or 30 June the year before the first member starts their first retirement-phase income stream.

    Once the reporting framework is set, it’s locked in for the life of the SMSF.

    Where each member’s total super balance (TSB) is under $1 million, the SMSF must report transfer balance events annually – when the SMSF annual return is due.

    If any member has a TSB of $1 million or more, the SMSF must report transfer balance events 28 days after the end of the quarter in which the event occurs.

    The first quarterly transfer balance account report (TBAR) is 28 October 2018.

    However, the SMSF only has to lodge a TBAR if there is a transfer balance event to report. If there’s no event to report the SMSF isn’t required to lodge a TBAR, regardless of whether they report quarterly or annually.

    SMSF trustees must report earlier if a member has exceeded their TBC:

    • if a member commutes an income stream after we’ve sent them an ETB determination, the commutation must be reported 10 business days after the end of the month in which it occurs
    • if a fund receives a commutation authority, they must act and report by the date specified on the authority.

    However, you can choose to lodge a TBAR earlier and in many instances it will be in the client’s/member’s best interest to do so as this gives them a clear line of sight on their transfer balance position.

    For example we would encourage you to report early if a member is rolling their pension over to an APRA fund. The commutation should be reported as soon as practical to prevent duplication and incorrect TBC balances due to the differences in reporting times between APRA funds and SMSFs.

    If we receive the credit information from the APRA fund before we receive the debit information from the SMSF, a member’s transfer balance account (TBA) could be artificially inflated, resulting in an ETB determination.

    Even if only one member of an SMSF has a TSB of $1 million or more, the SMSF must report all events for all members within 28 days after the end of the relevant quarter.

    Reporting errors should be corrected as soon as possible after being identified.

    How to see what’s reported

    Individuals can view all events we’ve considered when determining their transfer balance account by checking the account online via myGov. We update the information after we’ve processed it.

    The information will also change depending on whether the individual:

    • is under their cap
    • is close to their cap
    • has exceeded their cap and been sent an ETB determination
    • has rectified their excess and been sent an ETB tax assessment
    • it will also change if we have sent a commutation authority to a member’s fund.

    Clicking on the ‘transfer balance’ hyperlink will reveal the events that have been reported to us; the arrows on the display screen can been expanded to show more information about each event reported.

    Individuals can download this information to print or email it to their agent or adviser.

    Agents of the individual will be able to view this client information online when it’s made available for public beta testing.

    More details on our online services for agents, including when the public testing will begin is available on our website.

    If a client is unsure how to access or download from their myGov account, they or their authorised agents can contact us on 13 10 20 for help.

    Information reported to us that we haven’t processed won’t be displayed online. This most commonly includes:

    • a paper form that hasn’t been keyed
    • where there is an issue with what the fund has reported and the form has suspended
    • information reported that we haven’t yet been able to match to the individual member; this usually occurs when a fund doesn’t provide a member’s TFN or provides an incorrect TFN.

    Funds rather than the individual should contact us if they think they’ve reported information that we haven’t considered and isn’t displayed online.

    How to correct different types of reporting errors

    Because individuals can have multiple pensions paid from the same fund and therefore there can be multiple transfer balance events - the transfer balance system treats each new report as a new event. Therefore the important thing to remember about correcting previously reported transfer balance events is to cancel the incorrect event before reporting the correct information. If you don’t cancel the previously reported incorrect information we won’t know it’s wrong and will treat the ‘amendment’ as a new event – thus resulting in duplication.

    If you reported an event in error, cancel the event, rather than reporting the ’opposite’ event. For example, if you accidently reported a pension twice you need to lodge a TBAR cancelling the duplicate pension – not a TBAR reporting the duplicate pension as being commuted in full.

    Tips and tricks for cancelling incorrect information:

    When reporting a cancellation it’s critical the TBAR is clearly a cancellation of information and that the information in the cancellation exactly matches the information previously provided that you want cancelled. This allows us to match the previous information with what you want cancelled.

    For paper forms you need to indicate the TBAR is a cancellation by marking ‘yes’ at section B. If you then need to report correct information you need to lodge another paper TBAR for with the correct event and correct information.

    For spreadsheets, lodge a new spreadsheet with the cancellation indicator selected on row 39. Only include in the cancellation TBAR the incorrect events you want cancelled (not the original spreadsheet). If you then need to report correct information, lodge another spreadsheet with only the correct events and information. For example, if you lodged a spreadsheet with 10 events, and two of these events contained errors, you will need to lodge two more spreadsheets: the first spreadsheet cancelling the two events with errors, and the second spreadsheet with the two replacement events with the correct information.

    Don’t include the correct information you originally provided to us again in either the cancellation or replacement spreadsheets. Once you have cancelled an event it will no longer display in the member’s transfer balance account details online.

    Early/common issues in SMSF TBAR reporting:

    • reporting commutations that occurred on or before 30 June 2017 (only events from 30 June 2017 need to be reported)
    • including the incorrect ABN or TFN for the fund or member
    • incorrect values
    • missing information, particularly the date of birth for a member
    • reporting pensions not paid by the SMSF, for example a lifetime pension a member received from a defined benefit fund; the SMSF only needs to report the pensions it pays, otherwise there will be duplication.

    These issues can cause the form to suspend and we’ll need to contact you to resolve the matter. They can also lead to us considering information twice, ie duplicate reporting.

    What to do if an ETB determination is received

    ETB determinations are generally made up of pension amounts in excess of the TBC, and excess transfer balance earnings – from the date of excess to the date the ETB determination is issued.

    The easiest way for an individual to see what’s been credited to their transfer balance account is to go to ATO online via their myGov account. A common confusion, and reason for an ETB determination, is that the individual also holds a capped defined-benefit income stream outside their SMSF. These types of pensions won’t be listed in the default commutation notice included with the member’s determination as we don't send commutation authorities to funds in relation to super income streams we know are capped defined-benefit pensions.

    If you think the determination is wrong because we've relied on incorrect or incomplete information, your client should contact their fund to have the information corrected. You can also seek an extension of time by calling us on 13 10 20 before the due date on the determination. If this you don’t do this, we may issue a commutation authority.

    If the reporting is correct but you still think the ETB determination is incorrect you can lodge an objection on behalf of your client.

    If an individual receives an ETB determination we encourage them to commute the excess amount (including cents) by the due date. The SMSF needs to report the commutation to us no later than 10 business days after the end of the month in which it occurs. Delays in either commuting or reporting the commutation will mean we may not know the member has rectified their excess and we will send a commutation authority to the fund.

    If the amount can be commuted in full and it isn’t, we’ll send a commutation authority; even if the remaining amount is very small we don’t have the capacity to disregard any of these small excess amounts.

    An individual can make an election for us to send a commutation authority to a fund/account other than the one included in the default commutation notice. However we can’t send the authority until after the end of the 60-day period, so under this option members will usually be in excess for longer and pay more ETB tax.

    If an individual can't commute the amount in full because they don't have sufficient assets in their account-based pensions and only have capped defined-benefit income streams left, they should commute as much as they can and close the pension accounts. At the end of the 60-day period stated in the ETB determination, we'll send them a notice of non-commutable excess which will mean they are no longer in excess.

    An individual can lodge an objection to an ETB determination and also lodge an objection to an ETB tax assessment, but the objection to the tax assessment can’t be on the same grounds they relied on when objecting to the determination.

    What to do if a commutation authority is received

    In short: action and report by the due date. The SMSF must action the commutation authority unless the member is deceased or we’ve issued the authority to an income stream that is a capped defined-benefit income stream.

    The SMSF must report to us by the due date in the commutation authority that it has:

    • commuted the amount set out in the authority
    • commuted as much as possible, even if that is not the full amount
    • not actioned the commutation authority because the member is deceased
    • not actioned the commutation authority because it related to a capped defined-benefit income stream.

    The SMSF can’t object to the commutation authority and the member can’t direct you not to comply with it. If you’re concerned that information, especially commutations, that the SMSF or another fund may have reported hasn’t been considered, contact us as soon as possible. The most likely reason for this is a delay in the member commutation being reported to us.

    While we may be able to vary or revoke a commutation authority if we receive late reporting, we have limited ability to do so; and we can't do so if a fund has already complied with the authority.

    While we can issue a varied commutation authority when we receive and process information, this doesn’t change the due date – simply the amount that isn’t commuted. So, if you think there is an issue that needs addressing you should contact us as soon as possible.

    We won’t send a commutation authority if we’re aware the member is deceased. And we won’t send one in relation to an income stream we’re aware is a capped defined- benefit income stream. If we do, and you advise us you haven’t actioned the authority on this basis, we expect you to correct the information you’ve already reported to us.

    Partial commutations – what to remember

    Since the introduction of the TBC there’s been some discussion about taking amounts above the minimum pension requirements as a partial commutation lump sum so as to create space in a client’s transfer balance account. Ultimately, the decision whether to take extra amounts as a pension payment or a commuted lump sum depends on the individual and the pension rules, but if they choose a partial commutation there are some important points to remember:

    • the decision whether to take a pension payment or a partial commutation needs to be made before the payment is taken
    • each commutation must be reported to us in a TBAR – for some trustees this may mean more events to report 28 days after the end of the quarter in which the event happened
    • consider the costs and benefits for this strategy, especially if the member has a low TBA, as taking partial commutations comes with additional administration and reporting requirements.

    Minimum pension requirements

    Other important things trustees must remember include:

    • commutations can no longer count towards the annual minimum pension payment amount
    • when the partial commutation is made, the trustee needs to ensure they consider the minimum pension requirements for the rules; eg either by taking a pro-rata pension payment or ensuring that the balance of the pension is sufficient to meet the minimum pension payments.

    Failing to meet the minimum pension payment standards for an income stream now not only means the fund loses access to ECPI for the income stream, there are also transfer balance tax consequences:

    • the credit that arose when the member started the income stream still stands
    • a debit arises in the individual’s TBA at the time the super income stream stops being in retirement phase, which the trustee must report to us. The value of that debit is the value of the super interest which supports the income stream just before it stops being a super income stream. In most cases this won’t equal the original credit, due to payments made over time.

    Law Companion Ruling 2016/9 includes some useful examples of when and why a TBC credit and debit arises in a member’s TBA. For example: a member began an account-based pension on 1 July 2017 and receives a credit of $1.1 million; the fund fails to make the minimum payment amount for the super income stream for that income year. For TBC purposes, the member continues to have the credit of $1.1 million. The income stream stops being a super income stream at the end of 30 June 2018 (even though it’s considered to have stopped at the start of the income year for other purposes, such as ECPI eligibility; see TR2013/5) and a debit arises in the member’s TBA on 30 June 2018 for the value of the super interest that supported the super income stream just before it stopped being a super income stream in the retirement phase.

    Capped defined-benefit income

    From 1 July 2017, if an individual receives income from a capped defined-benefit income stream, they may have additional tax liabilities from the 2018 income year onwards if the income from all their capped defined-benefit income streams exceeds their defined-benefit income cap and they are: 60 or older, or under 60 and receiving a death-benefit income stream from a person who died aged 60 or over.

    For most individuals, the defined-benefit income cap will be $100,000 for the 2018 income year. It may be less in some circumstances, including if your client turned 60 during the year or was over 60 and started receiving income from a capped defined- benefit income stream for the first time partway through the year.

    To support the new way we tax defined-benefit income, we’ve made changes to payment summaries and created a new label, 7M, in the tax return for individuals.

    Super providers will no longer pre-populate payment summaries with your client's tax offset entitlement on an untaxed element as they can’t determine whether your client is in excess of the capped defined-benefit income cap. You will now need to calculate your client's tax offset and include this amount at label T2.

    If an individual lodges their return using myTax, a new integrated tool will prefill their data and provide a two-click experience to show the cap and fields required for the return and save the values to myTax. You can access a standalone version of the tool at defined benefit income cap tool on our website.

    Conclusion

    In the year ahead we’ll see many of our shared aspirations for the super system come to life. I hope what I’ve been able to share in this session will help you better assist your clients to comply with their obligations with ease and efficiency.

      Last modified: 24 Sep 2018QC 56823