We aren’t talking about a type of construction material, rather some much more relevant to retirees and in particular those who have chosen to be trustees of their own super funds. The TBAR (or transfer balance account reporting) legislation was introduced in 2017 as part of the commencement of the $1.6m pension cap.
What is the impact of the change?
As most readers are likely aware, from 1 July 2017, the Government has placed a cap on the amount of your superannuation that can be held in the tax-exempt pension, retirement or drawdown phase of superannuation. This limit was set at $1.6m per person and is known as the Transfer Balance Cap or TBC.
For clarification, only pension accounts that are in the retirement phase of superannuation, where you have retired or attained aged 65, are included in the cap. This means transition to retirement or TRIS pensions, that occur when you continue to work and have not yet met a full condition of release, can exceed this amount and not require any reporting to the ATO. The TBC does, however, include death benefit or reversionary pensions as well as defined benefit income streams, which must be multiplied by 16x to determine the cap figure.
Importantly, accumulation phase superannuation balances, as they are not tax exempt, are excluded from this cap and the associated reporting.
What is the TBA?
The TBA is the account that the ATO uses to track the transactions and amounts in retirement phase across all your superannuation accounts, not just your SMSF. Your TBA reporting requirements either commenced on 1 July 2017, if you were already receiving a retirement pension, or when you commence a pension in the future.
How does the TBC work?
The TBA operates like any other account with the ATO, in that certain transactions result in credits and debits to its balance. Generally, the credits to your TBA occur when you transfer funds into pension or retirement phase and these must be immediately reported to the ATO by your super fund. If your pension balance exceeded $1.6m on 30 June, it would have been reduced to meet the cap.
The primary debits from the cap are amounts that are commuted or withdrawn from retirement phase, such as lump sum withdrawals, moving your pension balance back to accumulation for any reason or should you rollover to another superannuation provide.
Importantly, earnings and losses on your superannuation investments do not affect the balance, so if your portfolio grows over time to exceed $1.6m you will not be impacted. Similarly, you cannot top up your balance if it falls due to pension drawdowns or investment losses.
The transfer balance cap is proportionally indexed, meaning if you are under the cap your limit will be increased as the cap increases. However, if you have ever met or breached the $1.6m cap, you will not gain the benefit of indexing in the future.
What if you exceed the TBC?
If your balance exceeds the cap, you will be notified by the ATO that you have an excess transfer balance. They will require you to remove the excess immediately, along with any ‘notional earnings’ calculated using the ATO’s default earnings rate. You will also be liable to pay tax on the notional earnings on the excess transfer balance for the period of time the funds remain in superannuation. These amounts will be calculated by the ATO and a notice issued to you, with subsequent breaches increasing the notional earnings tax rate to 30%.
An important strategy consideration…..
With the imposition of this new limit, more importance is placed on the appropriate treatment of lump sum versus regular pension payments. Regular pension payments have no impact on your TBC, however, if the payments from superannuation exceed your minimum and are not being drawn regularly, it may be benefit to threat these as lump sum draw downs, reducing the amount of cap that is used at any given time.