TBARs: The good and the ugly

A critical element of the new superannuation system is the transfer balance account.  The ATO will establish and maintain a transfer balance account for each taxpayer who has one or more superannuation interests in retirement phase (or, in other words, for each taxpayer who has one or more superannuation interests which are currently enjoying the earnings tax exemption).

The function of the account is to limit the amount of a taxpayer’s superannuation benefits which enjoy the advantage of tax free earnings.  Currently, the limit is $1.6m.  The account records superannuation interests moving into retirement phase (the value of the interest is reported as a credit to the account) and superannuation interests moving out of retirement phase (the value of the interest is reported as a debit to the account).

The purpose of the transfer balance account report (TBAR) is to notify the ATO of circumstances which gives rise either to a credit to the taxpayer’s transfer balance account.  

The correct and timely reporting of credits and debits to a taxpayer’s transfer balance account is critical.  Incorrect or late reporting of transfer balance account credits or debits may result in the taxpayer having an excess pension balance.

Example

George wishes to transfer his current pension interest from the Bill & George SMSF (which contains his former business partner Bill as a member) to his own SMSF, the George SMSF.

The current pension commenced 1 July 2016 with an initial balance of $1.4m.  At 30 June 2017 the pension balance was $1.59m.

Transfer balance account implication 

As George was receiving a pension immediately before 1 July 2017, the pension balance at that date (and not 1 July 2016) was reported to the ATO and the ATO established a transfer balance account for George with an initial credit of $1.59m.  As the balance of the account just after it was established did not exceed $1.6m, no excess pension arose.  The account balance is $1,590,000.

On 31 December 2018, George commuted his pension payable from the Bill & George SMSF which gave rise to a lump sum of $1.8m.  This lump sum was paid to the George SMSF.  The replacement pension was issued on 4 January 2019 with an initial balance of $1.8m

Transfer balance account implications

The commutation on 31 December 2018 gives rise to a debit of $1.8m.  This debit is applied to the transfer balance account resulting in a new balance of negative $210,000.
When the new pension commences on 4 January 2019, a credit is applied to the transfer balance account.  This credit results in a new balance of $1,590,000.

However, had the commutation not been reported before the reporting of the issue of the new pension, then the transfer balance account would be $3,390,000.  This would result in an excess pension amount of $1,790,000 and the ATO would then commence action to require George to commute the new pension to reduce the excess balance and, additionally, impose penalty tax for exceeding the transfer balance account cap.   This result arose because the order of reporting of the various steps in the transaction was out of sequence.

While the issue would most likely be resolved by administrative action of the ATO if the debit report was submitted within a short time of the submission of the credit report, unnecessary time and effort would have been incurred in resolving the issue.