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Determining a client’s total superannuation balance is not as simple as it sounds…


The total superannuation balance (TSB) is a way to value an individual’s total super interests on a given date.

The TSB is generally calculated at the end of 30 June of each income year and is relevant when working out a client’s eligibility for:

  • the unused concessional contributions cap carry-forward;
  • the non-concessional contributions cap and entitlement to the two or three-year bring-forward period;
  • work test exemption for claiming personal superannuation contributions;
  • the government co-contribution;
  • the tax offset for spouse contributions.

Further, each SMSF member’s TSB will determine whether an SMSF has ‘disregarded small fund assets’ and therefore is prohibited from using the segregated method to calculate and claim exempt current pension income (ECPI). It will also determine whether the fund may have a choice of how to calculate and claim ECPI from the 2021-22 income year.

Calculating an individual’s TSB

An individual’s TSB at a particular time, generally at 30 June, is calculated by:

Adding:

  • the accumulation phase value¹ of the individual’s superannuation interests that are not in the retirement phase
  • the retirement phase value of the individual’s superannuation interests;
  • the amount of each roll-over superannuation benefit not already included in the accumulation phase value or the retirement phase value. This is any rollovers that are in transit between super funds on 30 June;
  • the outstanding limited recourse borrowing arrangement (LRBA) amount in an SMSF or small APRA fund entered into from 1 July 2018, if either:
    • the loan is from a related party; or
    • the individual has satisfied a condition of release with a nil cashing restriction, e.g., met the ‘retirement’ condition of release or attained age 65.

Subtracting:

  • any personal injury or structured settlement contributions that have been paid into their super funds.

These components are relatively straightforward except for:
1. the value of retirement phase income streams; and
2. the outstanding LRBA amount.

Let’s look further at these two components….

Valuing retirement phase income streams for TSB purposes

The ‘retirement phase value’ is worked out using the individual’s transfer balance account (TBA) balance at the end of 30 June. However, this value will be subject to modifications in certain circumstances.

In particular, a modification occurs where the person has account-based income streams (pensions). Instead of using the TBA value of the income stream, all debits and credits (in relation to the income stream) are disregarded² and instead the value for TSB purposes is the current value of the interest at the end of 30 June. This current value is the amount that would become payable if you were to voluntarily cease the interest, i.e. generally the account balance for an account-based pension.

Other types of super income streams retain the TBA value. That is, the TBA debits and credits related to that income stream. For an SMSF, such income stream will be the following legacy income streams (pensions):

  • Lifetime complying pension [SIS Reg 1.06(2)];
  • Flexi pension [SIS Reg 1.06(6)];
  • Life expectancy pension [SIS Reg 1.06(7)].

It is therefore important to understand what ‘types’ of retirement phase income streams fall under each definition to determine whether the value for TSB purposes is the actual value of the income stream or the TBA value.

Watch out for market linked pensions

Market linked pensions use a modified transfer balance for TSB purposes, even if it is a capped defined benefit income stream (CDBIS)³.

A market-linked pension is therefore considered ‘account based’ for the purposes of the TSB valuation. This is irrespective of whether the pension is a CDBIS, and was valued for TBA purposes using a special value. The current TBA value of the market linked pension is disregarded for TSB purposes and instead the modified amount is used. The modified amount is the amount that would become payable if the member both had the right to cease the interest, and voluntarily caused the interest to cease at that time, i.e. the account balance.

For example, consider an SMSF member who has account-based pensions and market-linked pensions and they are looking to assess their TSB at 30 June 2022. The TSB retirement phase value will simply reflect the current account value of those income streams. This will allow for growth in the accounts over time as well as any decreases in value due to payments, and is not likely to equal the value of the interests applied to the member’s TBA for those income streams.

Impact if a client has ‘other income streams’

Other income streams in an SMSF, generally known as legacy pensions, for example, flexi-pensions and defined benefit income streams are not included in the list of pensions subject to the modification rule4.Therefore, the TSB at any given time, again generally 30 June, is calculated using their TBA value.

The transfer balance for these income streams is the sum of all transfer balance credits in that account, less any transfer balance debits5 and does not always equal the account balance at that particular time.

For example, consider a member who had a lifetime complying pension at 30 June 2017 and their initial TBA assessment was calculated using the special value formula which determined a TBA credit of $1million. The member is now working out their TSB at 30 June 2022. The TSB value is their current transfer balance relating to this income stream which (assuming there were no debits) will be unchanged at $1million. This is regardless of the fact that the current value of the assets supporting the income stream at 30 June 2022 was, say, $1.4million.

The TSB value for other income streams does not require a recalculation of the TBA value and therefore does not allow for growth in the account over time or any decreases due to regular payments.

The TSB of other income streams in an SMSF including defined benefit pensions and flexi pensions retain their current TBA as the value for TSB purposes.

Outstanding limited recourse borrowing arrangement

A member of an SMSF will have an outstanding limited recourse borrowing arrangement (LRBA) amount included in their total superannuation balance if:

  • the LRBA was entered on or after 1 July 2018 and either:
    • the loan is from a related party; or
    • the individual has satisfied a condition of release with a nil cashing restriction, e.g., met the ‘retirement’ condition of release or attained age 65.

However, this does not include refinancing an existing LRBA that was entered before 1 July 2018 and refinanced on or after 1 July 2018, if both of the following apply:

  • the new borrowing is secured by the same asset or assets as the old borrowing; and
  • the refinanced amount is the same or less than the existing loan under the LRBA.

The LRBA amount is a proportion of the total outstanding loan balance based on the member’s share of the superannuation interests supported by the LRBA. The proportion is calculated by determining the ratio of the total superannuation interests supported by the borrowing that are attributable to the member.

Example

The Highlife Super Fund is an SMSF with two members, Gavin, aged 65 and Stacey, aged 52. At 30 June 2022 the member balance are as follows:

  • Gavin: $645,000
  • Stacey: $430,000

The 30 June 2022 net assets of the SMSF of $1,075,000 includes a property held under an LRBA with a year end value of $800,000 and an outstanding LRBA loan balance of $200,000. The loan is from a commercial lender.

As Gavin has met a condition of release with a nil cashing restriction, attaining age 65, his TSB will be increased by his share of the outstanding LRBA loan balance at 30 June 2022. However, Stacey will not have to report her share of the outstanding LRBA loan balance as she has not met a condition of release with a nil cashing restriction and the loan is not from a related party.

Gavin is calculating his TSB for 30 June 2022 and needs to know his share of the outstanding LRBA amount to include in the calculation of his total super balance.

Gavin works out his outstanding LRBA amount at 30 June 2022 as follows:

  • Outstanding LRBA loan balance x (value of Gavin’s interests supported by the assets that secure the LRBA ÷ value of fund’s interests supported by the assets that secure the LRBA).
    • The portion of Gavin’s account balance that is supported by assets that secure the LRBA is ($645,000 ÷ $1,075,000 x $800,000) ÷ $645,000 = 74.42%
  • $200,000 x ($645,000 x 74.42%) ÷ $800,000 = $120,002.

An alternative calculation approach is:

  • $645,000 ÷ $1,075,000 x $200,000 = $120,000 (the difference being in the rounding of Gavin’s share of his account balance supported by the LRBA).

Gavin’s SMSF will report $120,000 as the outstanding LRBA loan amount for him in the member section of the SMSF annual return for the 2021–22 income year. This will mean that his TSB at 30 June will be $765,000, being his accumulation account balance of $645,000, plus his share of outstanding LRBA loan amount of $120,000. Stacey’s total superannuation balance will not be increased and will be reported as $430,000.

Reporting TSB

The ATO will use the amounts reported at the following labels in the member information section of the SMSF annual return to calculate the member’s TSB:

  • S1: accumulation phase account balance – the value of the member’s accumulation account, plus any transition to retirement pension not in retirement phase at 30 June, reported in the annual financial statements, and
  • S2: Retirement phase account balance – Non CDBIS – the value of all retirement phase pensions, except for defined benefit pensions, at 30 June, reported in the annual financial statements (Note: you will include the value of a market linked pension at this label, including one that commenced prior to 1 July 2017, which is a CDBIS).

Note: the ATO will not use any amount included at label S3: Retirement phase account balance – CDBIS to calculate the member’s TSB. The value of a flexi pension is included at this label, despite it not being a CDBIS.

However, the value included at S1 and S2 is based on the amounts disclosed in the SMSF’s financial statement. As the financial statements are based on market value and not net market value, the amounts disclosed at S1 and S2 may not represent the withdrawal value, which TSB is based upon.

Where an amount is provided at X1, it will be used to determine the member’s accumulation value for TSB purposes, rather than S1.

Where an amount is provided at X2, it will be used to determine the member’s retirement phase value for TSB purposes, rather than S2.

Labels X1 and X2 are conditional as to whether they are completed for each member. Generally, X1 and X2 must be completed where the difference between the account value and the withdrawal value is not limited to the value of the administration and exit fees and realisation costs if the member was to voluntarily cease the interest.

For further information on completing these label, please refer to the SMSF annual return instructions for the relevant income year.

Summary of TSB valuations

We identify below how different retirement phase income streams commonly held in an SMSF would be valued for TSB purposes:

Use year end value, per annual financial statements, for:

  • Account-based pension;
  • TRIS in retirement phase;
  • Allocated pension;
  • Market linked pension.

TBA value, the relevant TBA credits and debits in respect of the pension:

  • Flexi pension;
  • Lifetime pension;
  • Life-expectancy pension.

Here is a link to Law Companion Ruling 2016/12 which further clarifies how to calculate TSB. 

1. Generally, this is the withdrawal value for an accumulation fund. The method for determining the accumulation phase value for a defined benefit interest not in retirement phase may be different. You may need to contact the relevant superfund to obtain the value for TSB purposes.
2.TBA excess transfer balance earnings credits are not disregarded.
3. A market linked pension is a CDBIS if it commenced prior to 1 July 2017.
4. Sub-sectn 307-230(3) ITAA 1997
5. Sub-sectn 294-30(2) ITAA 1997

 


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