TBAR for a pension that fails to meet the minimum pension standards | Accurium

TBAR for a pension that fails to meet the minimum pension standards

Since 1 July 2017 a pension commutation, whether partial or full, requires the fund to submit a transfer balance account report (TBAR). However, submitting a TBAR may be a little bit different than expected in the situation where the minimum pension standards are not met and the income stream is forced to commute.

Background

The superannuation reforms implemented from 1 July 2017 introduced a number of changes, with one of the biggest being a $1.6 million cap on the amount a member could transfer to a retirement phase income stream, known as the transfer balance cap (TBC). To keep track of this $1.6 million cap each fund member now has a transfer balance account (TBA). The TBA is where each transaction that impacts a member’s TBC is recorded as either a credit or debit amount (known as a ‘reporting event’) used up within the cap. Whenever one of these reporting events occurs it must be reported to ATO, who keep track of each individual’s TBA. A member failing to make their required minimum pension payments will trigger a reporting event.

When the minimum pension requirements aren’t met

When a member in receipt of an account-based income stream does not meet the minimum pension standards, the income stream will cease on 1 July of that financial year for tax purposes (or on the commencement date if commenced during the year). The fund will not be eligible for any tax exemption on an income stream which did not meet the minimum pension standards. Any pension payments which were made on that particular account during the year will instead be treated as lump sums from the accumulation account. This can be especially problematic for members with transition to retirement income streams who have not yet satisfied a condition of release.

However, while for tax purposes the income stream ceases on 1 July, this is not the date which will be reported on the member’s TBAR.

TBAR

SMSF trustees are required to submit a TBAR for every reportable event which occurs in their fund. How often a fund needs to submit their TBAR is based on the members’ balances as at 30 June 2017, or on 30 June of the year prior to the first reportable event of a fund member. If all members of an SMSF each had total super balances of less than $1 million then the fund is only required to report annually, in line with the fund’s Annual Return. If any single member had a total superannuation balance of $1 million or more then the fund will be reporting quarterly. A quarterly reporting requirement means that the TBAR must be submitted within 28 days of the end of the quarter in which the reporting event occurred. It should be remembered that pension payments and gains or losses on fund assets do not need to be reported under this change.

If a fund member does not meet the minimum pension standards during the relevant financial year then the income stream will cease, which will require a TBAR to be submitted. For tax purposes, the income stream is assumed to cease on 1 July meaning the pension is not eligible for exempt current pension income (ECPI). However, for TBAR purposes the commutation is assumed to occur at the end of the relevant year on 30 June. The amount which will be debited to the member’s TBA will be the market value of the income stream as at 30 June. This is also the case if a member chooses to commute their income stream during the financial year but does not meet the required minimums before the commutation. The debit to the member’s TBA will be the balance of the income stream as at the intended commutation date.

The ATO’s Law Companion Ruling 2016/9 includes an example of a member who fails to satisfy the minimum pension standards as well as some other examples of when and why a TBC credit and debit arises in a member’s TBA.

Example

On 1 July 2018, Mary commenced an account-based pension balance of $1,320,000. At 30 June 2019 Mary’s pension balance has increased to $1,350,000 after making pension payments and the allocation of income. However, it was realised that Mary had not met her required minimum pension payments during the year. For tax purposes Mary’s pension account will cease on 1 July 2018 and the fund will not be eligible to claim ECPI in the 2018-2019 financial year.

While for tax purposes the pension ceased on 1 July 2018, when it comes to TBAR reporting the commutation is deemed to occur on 30 June 2019. With Mary’s total superannuation balance being greater than $1 million on 30 June 2018, the fund will be reporting quarterly. In this case, the fund has 28 days from the end of the quarter that the reporting event occurs to submit their TBAR, so for this event that means reporting by 28 July 2019. The commencement on 1 July 2018 of the pension account should have been reported before 28 October 2018.

The fund will not get any tax exemption for the pension for the 2018-2019 financial year and will start the tax year on 1 July 2019 entirely in accumulation phase. However, the member’s TBA will not be $0. A credit of $1,320,000 would have been recorded at 1 July 2018 for the original pension commencement and then a debit of $1,350,000 recorded on 30 June 2019 for the pension commutation.

The end result is that the fund was unable to claim ECPI, but Mary’s TBA actually has a negative balance of $30,000 at the end of the 2018-2019 financial year. When Mary looks to recommence her pension, either on 1 July 2019 or some other point in the future, she can now commence a new retirement phase income stream for up to $1,630,000.

Conclusion

The disparity between commutation dates for the purposes of tax compared to TBAR may cause confusion for some trustees and lead to incorrect commutation dates and amounts being submitted on TBARs. Correcting these errors would result in greater administration costs and uncertainty for members who may have chosen to recommence a retirement phase income stream before the correction occurs. It is important to be aware of the commutation process for members who fail the minimum pension standards to avoid such issues.