Relationship Manager | Executive Director
The ATO wants more detailed and more frequent information regarding SMSF pensions.
The regulator is consulting with the SMSF industry about the details of new events-based reporting obligations. While the details are still to be formalised, these changes will have wide-ranging implications for many SMSF trustees.
When an SMSF lodges its 2017 annual return, the value of SMSFs pensions at 30 June 2017 are recorded against a person’s Transfer Balance Account. From 1 July 2017, there is a $1.6m limit on the total value of pensions a person can have.
The 30 June 2017 pension balance reporting is the starting point for the ATOs events-based reporting regime.
From 1 July 2018 SMSFs will be required to report the following common transactions as they occur:
It is important to note that the Transfer Balance Account only applies to SMSF members who are drawing a pension from their fund. SMSFs where all members only have accumulation accounts at this stage will not have additional reporting requirements.
At the time of writing, they ATO was considering two options regarding the reporting of the above events:
Even if option 2 is elected by the ATO, they’ve indicated that after an ‘appropriate transition period’ – likely two years, the frequency of reporting will revert to option 1. Although the timing and frequency of events-based reporting for SMSFs is still to be finalised, the ATO is adamant they require this additional information to administer the new regulations surrounding the $1.6m Transfer Balance Cap.
The ATO believe the impact of events-based reporting for SMSFs will be minimal. Their rationale is that an SMSF will likely only need to report twice per member lifetime: When a member starts a pension and when the pension stops upon their death (if the capital is not exhausted beforehand).
This is an overly simplistic view. Close to half (48%) of SMSFs pay pension based on ATO statistics relating to the 2015 financial year. SMSFs will have significantly more than two events per member lifetime. It is common for SMSF members to commence drawing a pension, then contribute additional monies from which a second pension is created.
Similarly, from 1 July 2017 when a SMSF member draws a pension over and above their minimum drawdown requirement, they can elect to take the additional amounts as partial commutations. A partial commutation is debited back against a person’s Transfer Balance Account, opening up future credits.
Sarah is 60 and has a $1.4m pension account leaving $200,000 available under her $1.6m Transfer Balance Cap.
Her minimum drawdown requirement is 4% p.a. requiring $56,000 per year to be taken as a pension.
If Sarah required$80,000 per year and withdrew this amount for 5 years, she would still have $200,000 available under her Transfer Balance Cap at age 65.
However, if she only took $56,000 per year as a pension and took the remaining $24,000 as a lump sum (partial commutation event) she would have $320,000 available as $120,000 ($24k x 5) would be debited back against her Transfer Balance Cap.
Clawing back amounts over and above the minimum drawdown requirement can future-proof an SMSF and be useful in enabling new pension(s) to be created from future non-concessional contributions or to free up ‘space’ to receive the value of a death benefit pension from a spouse.
To implement the above strategy however, the SMSF will need to report these additional commutation events periodically soon after they occur. Contrary to the ATO it’s not a case of ‘set and forget’ with SMSF pensions.
SMSF administration software provider Class Super reports that 40% of pension members take at least $5,000 above their minimum pension. Assuming 48% of SMSFs are paying pensions, then this means close to 1-in-5 SMSFs will potentially have events based reporting requirements on this aspect alone – not to mention all the ‘standard’ pension starts and stops that happen each year.
The biggest implication for trustees is that a once-per-year visit to an accountant to have your return completed is no longer good enough for any SMSF paying pension. Trustees with events-based reporting requirements will need to utilise service providers that can monitor their SMSF transactions, identify events that need to be reported and submit the required information to the ATO within the necessary timeframe. The overwhelming majority of accountants do not have these capabilities.
Events-based reporting will force trustees to review how they are operating their SMSF. For a specialist SMSF provider to track pension accounts throughout the year, they need visibility on all transactions to determine reporting requirements. Most SMSFs use bank accounts that provide daily transactional data, however many non-major banks and credit unions do not. This means SMSF trustees will need to switch to bank accounts that provide this data to their adviser / SMSF administrator.
Similarly making pension payments via cheque can no longer be an option as there is no way to determine what the payment relates to. In this day and age an SMSF should have no need for a cheque book – EVERYTHING can be paid electronically.
Events-based reporting will force a more frequent dialogue between trustees and their accountants and advisers. The option of preparing the required paperwork ‘after the event’ when the SMSF accounts are completed will no longer be an option.
For an accountant to discuss the starting or stopping of a pension – or any other SMSF strategy – they need to be licensed by ASIC to do so. Many non-specialist accountants are not licensed to provide SMSF advice meaning trustees may need to seek a specialist adviser / financial planner who can discuss and implement these strategies.
Once in place, events-based reporting will be mandatory for all impacted SMSFs. This means if SMSF trustees do not comply, they can be hit with failure to lodge penalties the same as late lodgement of annual returns or activity statements. These amounts currently are $210 per 28 days up to a maximum of $1050 for each event.
Events-based reporting for SMSFs seems onerous. Whether trustees like it or not, the ATO as the regulator seems determined to make more frequent SMSF reporting a reality.
SMSF trustees have to make the decision on whether they want to continue to comply with these new realities and work with professionals who can remove the administrative burden, or whether an SMSF is no longer for them and they are better off moving their retirement savings back into the industry or retail superannuation world.
Either way advice is essential whenever there is change – and there is currently a lot of change in the SMSF world!