Excess TBC issues surfacing with reduced pension account values

The ATO has expressed concern that some trustees with diminished pension account values may be putting themselves at risk of exceeding their transfer balance cap by commuting their pension and then topping it back up.

In a recent discussion with Smarter SMSF, ATO assistant commissioner, SMSF segment, Steve Keating said the ATO is worried that some trustees don’t fully understand how the credits and debits in their transfer balance account operate, which may expose them to potential transfer balance cap issues.

“We’re concerned that where we’ve seen the value of pension accounts reduce, that some trustees may be putting themselves at risk of exceeding the transfer balance cap by commuting to roll back and then top up their pension because they may not properly appreciate how the credits and debits in their transfer balance account operate,” he explained.

“Without getting too technical, if a member starts a pension valued at $1.5 million which is today now worth only $1.2 million and they wish to roll it back into accumulation phase so that they can top it up with, say, $300,000 that they still have in accumulation phase, if they start a new pension at $1.5 million, they’ll be in excess of their transfer balance cap by $200,000.”

Mr Keating said this means the trustee will have to commute the excess, plus any extra transfer balance earnings from the pension as well as pay excess transfer balance tax.

He also reminded SMSF professionals and trustees that where a pension is being commuted in part, trustees must ensure that sufficient assets remain to meet the minimum pension payment status for that year based on the original value of the income stream at the start of the year.

“Trustees have an obligation to ensure that the commencement and commutation of pensions is supported by contemporaneous records and that the payments have been correctly characterised to allow the SMSF auditors to ensure that the minimum pension payment status had been met,” he said.

“There are transfer balance cap as well as exempt current pension income consequences if a pension fails to meet the standards, and these can lead to more and more complex TBAR reporting obligations in the future.”

Miranda Brownlee
24 July 2020
smsfadviser.com