FINANCIAL YEAR-END: TOTAL SUPERANNUATION BALANCE

22 June 2020

The importance of the Total Superannuation Balance

The Total Superannuation Balance (“TSB”) of a member calculated as at 30 June each year is pivotal to determining the SMSF’s eligibility for certain super measures as well as contributions that may be made in respect of that member in the ensuing year. 
Examples of these measures are assets segregation for ECPI, non-concessional contributions (“NCC”), bring-forward NCC.  It also determines whether a member is eligible for carry forward unused concessional cap contribution and work-test exempt contribution which have a lower TSB limit. The TSB should be very integral to an SMSF’s year-end review.
While the above measures are affected by the TSB limits (as at 30 June of the previous year), a member’s TSB is not fixed, but increases or decreases with attributed earnings, withdrawals, contributions, and asset valuation fluctuation.  Whilst the manipulation of the TSB through non-market valuation is strictly forbidden, a member with unrestricted non-preserved benefits may, if warranted, bring their TSB to the desired range by making lump sum or further pension payments with proper documentation.
Total Superannuation Balance and Transfer Balance Cap
The general TSB limit is $1.6M.  It mirrors the Transfer Balance cap (“TBC”) and is indexed accordingly.  However, the TSB and the TBC are different concepts.  This article focuses on the TSB and is broadly the sum total of a member’s retirement phase income stream benefits and accumulation benefits, with other inclusions and modifications.  The TBC, on the other hand, manages the amount of superannuation that may be transferred to a member’s tax-free retirement phase accounts.
Monitoring TSB requires proper planning.  As superannuation reform continues to evolve, the TSB is now made up of many components.  Failure to include one or more components may result in a higher than anticipated TSB with undesirable outcomes.  This paper highlights the various inclusions in the TSB other than the basic components, as well as the TSB implications. 
TSB – Basic components
To start with, a member’s TSB does not only include the member’s SMSF interest but all their superannuation balances.  The basic components of a member’s TSB are:
1. Accumulation phase value of superannuation benefits not in retirement phase i.e. withdrawal value of the accumulation interests;
2. retirement phase value of superannuation interests i.e. the current value of super interest that supports the account-based superannuation income stream at the end of 30 June of the relevant year; and
3. the amount of superannuation roll-over benefits in transition, that is not reflected in the member’s accumulation phase or retirement phase balances.
To the above, modifications are made for structured settlement contributions, non-commutable excess amounts and excess transfer balance earnings.
TSB – Other components
In addition, the following amounts or benefits are also included in the calculation of the TSB and may increase a member’s TSB significantly.  These should not be overlooked.
1. Outstanding Limited Recourse Borrowing Arrangement (LRBA) amounts
From 2019-20 the outstanding LRBA amount attributable to an SMSF member whose superannuation interest is supported by a LRBA asset(s) is also included in the TSB of the member if one of the following circumstances apply.  This measure is only applicable to LRBAs that commence on or after 1 July 2018 and an LRBA refinanced on or after 1 July 2018 with a different asset or higher amount.
• LRBA between the SMSF and an associate of the fund:  In this case, all members whose interests are supported by the asset to which the LRBA relates will have their TSB adjusted.  “Associates” of the SMSF include any entity and their associates that benefit under the SMSF.  This includes the member and related parties.
• LRBA between the SMSF and an unrelated party:  The increase will only apply to a member who has met a condition of release with nil cashing restriction.  It does not apply to other members who have not satisfied such a condition, despite the fact that their interest may be supported by the same LRBA asset.
The proportion of a member’s TSB increase is based on their share of the total super interests that are supported by the asset that is subject to the LRBA.
2. Transition to retirement income streams (“TRIS”)
The value of superannuation interests that support TRIS is also included in the TSB.  TRIS not in retirement phase are counted as accumulation phase value.  TRIS in retirement phase are counted as retirement phase value.
3. Downsizer contributions
A member’s eligibility to make downsizer contribution is not affected by the TSB.  The member can make a downsizer contribution even if their TSB is more than $1.6M.  However, the downsizer contributions will count towards the TSB when it is calculated on 30 June at the end of the financial year.
Maximum NCC may be made in the year of the downsizer contribution where it is anticipated the contribution will cause the TSB to exceed the $1.6M limit.  No further NCC can be made in the ensuing year after this limit has been reached.
 
TSB Implications
The TSB of a member calculated as at 30 June of the previous year (“TSB-PY”) will affect eligibility of the SMSF for the following measures.
TSB-PY ($1.6M limit)
1. Non-concessional contributions
Currently the NCC cap is $100,000.  However, if the TSB-PY of a member is equal to or greater than $1.6M, the NCC cap is reduced to nil and no NCC can be made by the member for the entire year.
2. Bring forward contributions
The TSB-PY determines whether a member can access the NCC bring forward and whether they have a two or three year bring forward period.  The bring forward NCC cap allows a member to make larger NCCs by bringing forward a maximum three years NCC over a rolling three-year period, subject to eligibility criteria.
If a member’s TSB-PY is $1.6M or more, the bring forward NCC is not available.  The following table sets out the bring forward amount for the different TSB-PY bands.

The Total Superannuation Balance (“TSB”) of a member calculated as at 30 June each year is pivotal to determining the SMSF’s eligibility for certain super measures as well as contributions that may be made in respect of that member in the ensuing year. 

Examples of these measures are assets segregation for ECPI, non-concessional contributions (“NCC”), bring-forward NCC.  It also determines whether a member is eligible for carry forward unused concessional cap contribution and work-test exempt contribution which have a lower TSB limit. The TSB should be very integral to an SMSF’s year-end review.

While the above measures are affected by the TSB limits (as at 30 June of the previous year), a member’s TSB is not fixed, but increases or decreases with attributed earnings, withdrawals, contributions, and asset valuation fluctuation.  Whilst the manipulation of the TSB through non-market valuation is strictly forbidden, a member with unrestricted non-preserved benefits may, if warranted, bring their TSB to the desired range by making lump sum or further pension payments with proper documentation.

 

Total Superannuation Balance and Transfer Balance Cap

The general TSB limit is $1.6M.  It mirrors the Transfer Balance cap (“TBC”) and is indexed accordingly.  However, the TSB and the TBC are different concepts.  This article focuses on the TSB and is broadly the sum total of a member’s retirement phase income stream benefits and accumulation benefits, with other inclusions and modifications.  The TBC, on the other hand, manages the amount of superannuation that may be transferred to a member’s tax-free retirement phase accounts.

Monitoring TSB requires proper planning.  As superannuation reform continues to evolve, the TSB is now made up of many components.  Failure to include one or more components may result in a higher than anticipated TSB with undesirable outcomes.  This paper highlights the various inclusions in the TSB other than the basic components, as well as the TSB implications. 

 

TSB – Basic components

To start with, a member’s TSB does not only include the member’s SMSF interest but all their superannuation balances.  The basic components of a member’s TSB are:

1. Accumulation phase value of superannuation benefits not in retirement phase i.e. withdrawal value of the accumulation interests;

2. retirement phase value of superannuation interests i.e. the current value of super interest that supports the account-based superannuation income stream at the end of 30 June of the relevant year; and

3. the amount of superannuation roll-over benefits in transition, that is not reflected in the member’s accumulation phase or retirement phase balances.

To the above, modifications are made for structured settlement contributions, non-commutable excess amounts and excess transfer balance earnings.

 

TSB – Other components

In addition, the following amounts or benefits are also included in the calculation of the TSB and may increase a member’s TSB significantly.  These should not be overlooked.

 

1. Outstanding Limited Recourse Borrowing Arrangement (LRBA) amounts

From 2019-20 the outstanding LRBA amount attributable to an SMSF member whose superannuation interest is supported by a LRBA asset(s) is also included in the TSB of the member if one of the following circumstances apply.  This measure is only applicable to LRBAs that commence on or after 1 July 2018 and an LRBA refinanced on or after 1 July 2018 with a different asset or higher amount.

  • LRBA between the SMSF and an associate of the fund:  In this case, all members whose interests are supported by the asset to which the LRBA relates will have their TSB adjusted.  “Associates” of the SMSF include any entity and their associates that benefit under the SMSF.  This includes the member and related parties.
  • LRBA between the SMSF and an unrelated party:  The increase will only apply to a member who has met a condition of release with nil cashing restriction.  It does not apply to other members who have not satisfied such a condition, despite the fact that their interest may be supported by the same LRBA asset.

The proportion of a member’s TSB increase is based on their share of the total super interests that are supported by the asset that is subject to the LRBA.

 

2. Transition to retirement income streams (“TRIS”)

The value of superannuation interests that support TRIS is also included in the TSB.  TRIS not in retirement phase are counted as accumulation phase value.  TRIS in retirement phase are counted as retirement phase value.

 

3. Downsizer contributions

A member’s eligibility to make downsizer contribution is not affected by the TSB.  The member can make a downsizer contribution even if their TSB is more than $1.6M.  However, the downsizer contributions will count towards the TSB when it is calculated on 30 June at the end of the financial year.

Maximum NCC may be made in the year of the downsizer contribution where it is anticipated the contribution will cause the TSB to exceed the $1.6M limit.  No further NCC can be made in the ensuing year after this limit has been reached.

 

TSB Implications

The TSB of a member calculated as at 30 June of the previous year (“TSB-PY”) will affect eligibility of the SMSF for the following measures.

TSB-PY ($1.6M limit)

 

1. Non-concessional contributions

Currently the NCC cap is $100,000.  However, if the TSB-PY of a member is equal to or greater than $1.6M, the NCC cap is reduced to nil and no NCC can be made by the member for the entire year.

 

2. Bring forward contributions

The TSB-PY determines whether a member can access the NCC bring forward and whether they have a two or three year bring forward period.  The bring forward NCC cap allows a member to make larger NCCs by bringing forward a maximum three years NCC over a rolling three-year period, subject to eligibility criteria.

If a member’s TSB-PY is $1.6M or more, the bring forward NCC is not available.  The following table sets out the bring forward amount for the different TSB-PY bands.


TSB on 30 June 2019

NCC bring forward cap 2019-20

Bring forward period

$1.6M or more

nil

nil

$1.5M to less than $1.6M

$100,000

General NCC Cap (no bring forward)

$1.4M to less than $1.5M

$200,000

2 years

Less than $1.4M

$300,000

3 years

 

After the bring forward rule has been triggered (Year 1), a member’s NCC of the ensuing year (year 2 or year 3) may still be reduced to nil if the TSB just before the year is $1.6M or more.  This may happen for example, where a downsizer contribution has been made which substantially increases the TSB.

Currently, there is proposed legislation before Parliament to allow individuals under 67 years of age to access the bring forward NCC cap.

 

3. Using segregated asset method for ECPI

From 2017-18, a SMSF which has disregarded small fund assets will not be able to use the segregated asset method to calculate exempt current pension income (“ECPI”).  This happens if  at any time in the financial year, the SMSF has at least one retirement-phase income stream and as at 30 June of the previous year, there was a member of the fund who (a) had a TSB above $1.6M and (b) receiving a retirement phase income stream from the fund or any other provider.  

If this condition has been triggered, all the assets of the SMSF will be disregarded small fund assets and must use the proportionate method to calculate ECPI.

 

4. Government co-contribution and spouse tax offset

The Government co-contribution will not be available if the member’s TSB-PY is at or above $1.6M, even if all the other eligibility criteria have been met.  This is the same for the spouse tax offset.  If the receiving spouse’s TSB-PY exceeds the $1.6M limit, the offset will not be available.

 

5. Carry forward unused concessional cap contribution

2019-20 is the first financial year in which a member can access the unused concessional contribution (“CC”) cap.  It allows a member to increase their concessional contribution by applying previous unapplied unused CC cap amounts from one or more of the previous five financial years.  The first year that the CC cap can accrue is 2018-19.  This measure is only available if the TSB-FY of the relevant member is less than $500,000.

 

6. Work test exemption for voluntary contributions

Effective from 1 July 2019, the work test exemption measure allows recently retired individuals between the age of 65 and 75 (28 days after end of the month member turns 75) to make voluntary contribution to super provided they have met the part-time gainful employment test in the previous financial year.  This measure is only available if the member’s TSB-PY is less than $300,000.

 

Going forward

The TSB may be the pivotal point from which many super measures flow.  The TSB as at 30 June of this financial year will affect the planning and strategies for the next financial year (2020-21). 

However, it should be borne in mind that many of the super measures that come into effect this financial year (2019-20) are in fact affected by the TSB of the member as at 30 June 2019.  With this in mind, a review of the recently enacted contribution possibilities (e.g. catch up unused concessional contribution, work-test exempt contribution, downsizer contribution) prior to this financial year end will be worthwhile.

 

 

Written by Maria Sui, Special Council-Superannuation, Townsends Business & Corporate Lawyers.

June 2020

For more information please contact SUPERCentral on 02) 8296 6266.

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