Q & As of the month

Find out what your peers are asking – based on real-life questions submitted to TechConnect.

Reversionary pensions and their impact on the total super balance

By Stuart Sheary, Senior Technical Manager

Q: My client’s spouse passed away on 30 June 2019 and my client who is age 60 is now in receipt of a reversionary account-based income stream. As at 30 June 2019, my client had $100,000 in her personal super account and a $1,700,000 reversionary account-based income stream. Can she make a non-concessional contribution (NCC) in the financial year ending 30 June 2020?

A: As your client’s total super balance (TSB) at 30 June 2019 was $1,800,000 your client’s NCC cap is nil. This means any NCC in the financial year ending June 2020 will exceed the NCC cap.

Your client’s TSB at 30 June 2019 includes the reversionary account-based income stream even though it is not recorded on the transfer balance account until 30 June 2020. The TSB should not be confused with the transfer balance cap which limits the amount that can be transferred into a retirement phase income stream, such as an account-based income stream.

Had the reversionary income stream not been an account-based income stream, for example if it was a defined benefit income stream, then the value recorded on the TSB would have been delayed until the time it is recorded on the transfer balance account. All reversionary income streams are recorded on the transfer balance account as a credit 12 months from the date of death. However, the value of a reversionary account-based income stream, including a reversionary term allocated pension, immediately counts towards their TSB which is measured on 30 June.

In relation to your client’s transfer balance account your client will need to commute $100,000 by taking a lump sum commutation out of the reversionary pension before 30 June 2020 to avoid excess transfer balance cap issues. Note death benefits cannot be rolled back into accumulation.

Q: I am a self-employed financial planner and I run my own self-managed super fund (SMSF). I am the fund’s single member and the sole director of the corporate trustee.

The SMSF has a portfolio of listed shares which I actively manage. Do I need to charge the SMSF a commercial fee for the services I provide? If I don’t will non-arm’s length income (NALI) provisions apply?

A: Whether you should charge for your professional services will depend on the capacity in which you provided the services. Services provided in an individual professional capacity should be remunerated and charged to the fund on an arm’s length basis. Services provided in the capacity of trustee cannot be remunerated and the fund should not pay for these trustee services.

The recently legislated Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 ensures that a superannuation entity’s NALI includes income where the expenditure in gaining or producing it was itself not at arm’s length. NALI is taxed at the top marginal tax rate, currently 45%.

The legislation states that an amount of ordinary or statutory income will be deemed NALI of a complying super fund where:

  • there is a scheme in which the parties were not dealing with each other at arm's length
  • the fund incurs a loss, outgoing or expenditure of an amount in gaining or producing the income, and
  • the amount of the loss, outgoing or expenditure is less than the amount that the fund might have been expected to incur had those parties been dealing with each other at arm's length in relation to the scheme.

An example of non-arm’s length expenditure might include a self-employed tax agent who prepares the accounts and annual return for their fund in their individual capacity. If fees are not charged on an arm’s length basis and these services are provided in the same way as they would for a commercial client, for example using office resources, such as IT equipment and staff, then this will be non-arm’s length expenditure. Alternatively, a trustee who is employed as a tax agent who prepares their fund’s accounts and tax return in their own time, at home and using personal resources in their capacity as trustee, should not have these services remunerated by their fund.

These examples are analogous to the services provided to a SMSF by a financial adviser. This means advisers will need to determine whether their services are being provided in their individual capacity or as a trustee. For further examples, please see the Australian Taxation Office’s (ATO) Law Companion Ruling 2019/D3.

The non-arm’s length expenses provisions were generally understood by industry to only apply where the expense could be mapped directly to the receipt of particular income, not all income generally. The ATO’s view that general non-arm's length expenditure may lead to all fund income being NALI was not widely understood. This means trustees will probably need more time to consider the treatment of general expenses.

This month the ATO confirmed in Practical Compliance Guideline 2019/D6 that they will not allocate compliance resources to determine whether the NALI provisions apply to a complying superannuation fund for the 2018/19 and 2019/20 financial years where the fund incurred NALI expenditure in respect to those years.

SMSF reporting of TBAR events

By Janet Manzanero-Caruana, Senior Technical Services Manager

Q: My client, who is aged 75, is winding up her self-managed super fund (SMSF). She has an account-based pension (ABP) which commenced on 1 July 2018 and reported as a credit of $1.6 million in her transfer balance account report (TBAR). The account-based pension balance is now $1.5 million. The pension will be commuted and the balance rolled over to an APRA regulated (retail) super fund where a new account-based pension will be commenced.

How will my client’s transfer balance account report be impacted?

A: The client used her transfer balance cap when she commenced her ABP in 1 July 2018. On commencing this pension, a $1,600,000 credit was recorded against the transfer balance account. When she subsequently commutes the SMSF’s ABP a $1,500,000 debit will be recorded on her transfer balance account report.

If the SMSF trustee reports the commutation within 28 days after the quarter in which the event happened, the $1.5 million debit may be recorded after the retail fund reports the credit for the commencement of the new $1.5 million ABP (within 10 business days after the event). This can result in the member being erroneously issued an excess transfer balance determination. The member can object to this determination.

If the SMSF reports the $1.5 million commutation as it occurs the $1.5 million debit is recorded prior to the credit for the new ABP and no excess transfer balance determination is issued.

Background - SMSFs and transfer balance cap reporting

Since 1 July 2018, self-managed super funds reported transfer balance account report events via the event-based reporting (EBR) framework which allows the Australian Taxation Office (ATO) to track a person’s transfer balance account and determine whether the transfer balance cap is exceeded.

Transfer balance account events and details that must be reported are:

  • the value and type of existing retirement phase (RP) pensions at the start of 1 July 2017
  • the value and type of new RP pensions including death benefit pensions (and if a death benefit pension is reversionary, the date on which the member died)
  • when a limited recourse borrowing arrangement (LRBA) commences on or after 1 July 2017, or refinanced on or after that date, the value and date of each relevant LRBA payment where the payment increases the value of the member's RP pension
  • compliance with a commutation authority issued by the ATO
  • the value of personal injury (structured settlement) contributions
  • the value of commutations of RP pensions made on or after 1 July 2017.

The deadlines for reporting TBAR events vary depending on the SMSF members’ total super balances (TSBs) and are shown below:

  • SMSFs with a member who has a TSB of $1 million, or more, at the 30 June of the financial year before the member starts their first RP pension, must report events within 28 days after the end of the quarter in which the event occurs. These dates are 28 July, 28 October, 28 January and 28 April.
  • SMSFs whose members all have TSBs of less than $1 million can report TBAR events together with its SMSF annual return (SAR) before the return is due.

A SMSF must report the voluntary commutation of an excess transfer balance in response to an excess transfer balance determination within 10 business days after the end of the month of commutation.

Should SMSFs report events as they occur?

SMSFs can report events as they occur, such as when a member commutes the excess transfer balance as soon as the member becomes aware of the excess (before an excess transfer balance determination is issued), to reduce the impact of the excess transfer balance.

Errors in excess transfer balance determinations can be prevented when a member commutes a RP pension with a significant balance which is then rolled over to a retail super fund to commence a RP pension.

Retail super funds must report events through the Member Account Transaction Service (MATS) within 10 business days after the event. This deadline may be earlier than the SMSF’s reporting deadline, for example, it could be 28 days after the quarter in which the event happens. The credit for the commencement of a RP pension in the retail super fund may be reported before the SMSF reports the debit for the commutation of the original RP pension, which may result in the ATO issuing an erroneous excess transfer balance determination.

A member or their representative can apply for an extension of time and object to an excess transfer balance determination.

The ATO has no discretion to waive penalties for excess transfer balances so it is essential for SMSF trustees and members to ensure they do not exceed their transfer balance cap. Reporting commutations of excess transfer balances and ABPs which will be rolled over to a retail super fund to commence new pensions should be reported as these occur to avoid or reduce excess transfer balances and the associated stress and time involved when lodging an objection.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Issued by IOOF Investment Management Limited (IIML), ABN 53 006 695 021, AFSL 230524. IIML is a company within the IOOF Group of companies, consisting of IOOF Holdings Limited ABN 49 100 103 722 and its related bodies corporate.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser.