Podcast | Episode 36 – It’s TBAR time…

Aaron Dunn:

Hey there, Aaron Dunn here from Smarter SMSF, and as the dust settles from what is another federal budget, we move into about the last six weeks of the financial year, and for many of you who are heavily working through the implementation still of the superannuation reforms – CGT relief, transfer balance cap, and now, our attention turns very sharply to the transfer balance account reporting.

Now, according to the ATO there are some 11,000 SMSFs that have now done some form of events-based reporting for SMSFs, but for many of us, we still await for release of software so that we can do far more efficient processing at a larger scale through the bulk data exchange within our SMSF software. And as these are coming on to their next release, over the course of the next week or two, it is going to see the ATO get an absolute barrage of events-based reporting done by those SMSFs or the administrators, and accountants on behalf of those SMSFs.

One of the things that I want to talk about in today’s podcast is for you to understand some of the important nuances in the reporting of the transfer balance account, and in particular with the pre-existing income streams that we need to report by the 1st of July (2018), because only in the past week or so have we started to see some additional commentary around the fact that where a member that has both a retirement phase income stream and also an accumulation account; so, this is going to be capturing all of those members that had to comply with the transfer balance cap and have retained amounts within superannuation, the fact that we’re going to actually have to report the accumulation phase value of that member’s total superannuation balance, because if we go back and think about the lodgement of the 2017 SMSF annual return, the way in which that return is currently constructed with the member information, (this) only captures the member’s total balance, so we have no separation between what is an individual’s accumulation benefit and their pension benefits.

Now, that in itself therefore poses a problem, because if we’re reporting the amounts that are against an individual’s transfer balance cap, what does the ATO know in respect to the member’s accumulation phase value? This is why we’re now seeing the ATO indicate that we need to report the individual’s accumulation phase value as part of the total superannuation balance, so that reporting of the events that we have for the individual’s pre-existing income streams, and as a part of that actually separating or disclosing what the accumulation phase value is. In our SMSF online course, we go into, in great detail, just how we need to define an individual’s total superannuation balance and how that actually influences a whole range of measures from making non-concessional contributions through to the use of segregation, the TBAR requirements with the $1.0m threshold and much, much more.

But in reality, this is an important thing that we need to remember to do, because the impact of not doing this could be quite profound. So, let’s just take an example, where maybe we had an individual that had $2 million of their superannuation interest, and we needed to roll back to the accumulation phase 400,000 of that to comply with the $1.6 million transfer balance cap. So what the ATO is now expecting to be reported is, in addition to the event of the pre-existing income stream, which we need to ensure we date at the 30th of June 2017, the expectation is that we also need to tell the ATO of the $400,000 accumulation value.

Now, if we don’t, because the ATO in theory only has the closing balance for each member’s account in total, we could get into the situation where there’s going to in essence be a double counting of that retirement phase benefit or the event that commences the income stream, and that in itself, therefore, can present an excess transfer balance when we know quite clearly that that wouldn’t be the case. So it is important, therefore, just to note that, that with your clients that have both accumulation and pre-existing income streams that are moving into the retirement phase (at 30 June 2017), that we should be reporting the amount of the accumulation interest as well, because the ATO don’t have that information, and therefore we could put at risk an excess transfer balance, or at least having to go through a process of re-reporting.

I guess this is really important for us to make sure we get right, because, like I said earlier, with our total superannuation balance threshold being so influential across a range of measures. So if we think about, like I said, the use of segregation and the new disregarded small fund assets definition, we think about government co-contributions, spouse contributions, we also have the non-concessional contributions, the difference between quarterly and annual reporting for TBAR, so there are a range of things here that the incorrect reporting of those events and how the ATO matches this up, is going to be absolutely critical as we move into the 1st of July 2018.

The other thing that I just wanted to touch on was just making sure we have a very clear understanding of the obligations beyond this initial concession at the 1st of July 2018, because what we also need to understand as part of the rollout of the events-based reporting, is that for the events that have occurred in this financial year, so the 2017-18 year, we are going to need to align it, based upon the total superannuation balance of the members inside that superannuation fund. So if we have, for example, a member that has a total superannuation balance (equal to or) in excess of the $1 million, and we’re using in essence that value at the 30th of June 2017, then the due date of any of those events that have occurred throughout the 2017-18 year, is going to be at the first time that the SMSF’s first TBAR is due, so in essence, 28 days after the end of the quarter or the 28th of October 2018.

However, where the members of the fund have a total superannuation balance of under the million dollar threshold, then of course it needs to be lodged at the first time that the due date of the fund’s annual return is due. So for the 2017/18 return, that could be as late as the middle of May 2019, but is going to have to align with the due date of the fund’s tax return, which could also be, of course, as early as the 31st of October of 2018 as well.

This issue of quarterly and annual reporting really throws up some important decisions inside your practice. This, whilst initially is a cemented view based upon the 30th of June, where if we do have that member that has more than a million dollars in their TSB, that fund is a quarterly reporter forever and a day. If it is an annual reporter, it will remain an annual reporter forever and a day, regardless of the fact of what’s going on. But what we also need to flavour into this conversation is, is that at some point in the future, we’re going to be having members moving into the retirement phase – the first member inside that fund moving into the retirement phase, and therefore having to account on an ongoing basis for events-based reporting.

Now, what we have to understand here, is that as soon as we have that first member now needing to report for transfer balance cap purposes, the determination here for whether we are going to do quarterly or annually is not based upon the value of the TSB of that pensioner, but rather we need to look at all members in that fund to determine whether it’s going to be on a quarterly or annual basis. So if we have an individual that has, say, $500,000, and they’re starting a pension with that amount, but we have another member in accumulation inside the fund with $1.2m, well that fund of course moves into a quarterly loop even though we only have one member in the retirement phase that is, in essence, under that $1.0 million dollar threshold.

The ATO is obviously going to pay some close attention to this over the journey as we move with our transfer balance caps over time, where it may go from $1.6m to $1.7m and really assess that threshold on an ongoing basis. That whole issue of segmentation, what we do and how we manage this inside of our practice, is going to be really important. This is where we spent the time recently on one of our webinars, on our TBAR webinar round the game changer, that it really is inside the SMSF profession, and we had a range of polls throughout that session, where we had well in excess of 270-odd people participate in all those polls, and looking at the type of reporting and the timeliness of that reporting. One of the activities that we did after that was to survey those attendees, and beyond that some of our members, in respect to how they’re looking at segmentation and the other issues that impact the events-based reporting framework for our SMSFs.

It’s been quite fascinating as we work through now about 170-odd responses. The fact that segmentation is clearly going to be something that many of us are going to consider, so thinking about the fact that we need to have some clear separation between our annual and quarterly payers. Now, there is around 20% of those from the survey, and it was very similar when we think about the poll statistics, that aren’t going to any form of segmentation, but rather have a straight-through process where they’re going to, in essence, report all events on that quarterly requirement, because that is a byproduct, in my view, of the systems and processes being in order as practitioners have improved on their data feeds and therefore moved onto cloud-based technology.

The move to cloud is one thing, but it’s really the systems and processes to be able to successfully implement that has really enabled a range of the participants that we’ve had in our survey to really feel like they’re quite comfortable in that decision to report all on a quarterly basis. If you think about general practice, and we think about the requirements of business services-type work, the fact that we build that quarterly framework for GST reporting and so forth, for some of you, that leap may not be as far as what individuals may ultimately think.

The other thing here that was quite interesting throughout the poll, and again, right across our SMSF days, where we had activities around the way in which we’re going to look at this scope of work. The client engagement here is going to be fundamentally important, and what the initial polls found was that there’s still some level of uncertainty in respect to how we were going to be dealing with bringing this on scope, or in essence, what that client engagement is. What we have started to see is this inclusion, or collaboration is probably the better word, around the practitioner themselves and the client. So in the poll, it was very much this sort of shared responsibility concept, and the other sort of response was, it is our responsibility to make sure…  And in both of those circumstances, it is going to require a detailed level of engagement with the SMSF trustee.

Now, sure, for those that take responsibility, there needs to be a level of comfort that we have all the information readily available to be able to undertake that task and meet the specific prescribed timeframes for lodgement of those events. But when it comes to the shared responsibility, and our surveys here suggest about 60% are going to look at that shared responsibility (with the client for TBAR), how is this going to be built as a process inside your practice, in particular where you’re going to have those members that are going to be far more active in respect to events-based reporting and making sure the trustees understand what those key triggers are, to ensure that they engage with you and tell you those events on a timely basis?

And sure, in the initial instance we’re not going to see the ATO take an aggressive approach to penalising, and it is, of course, this initial play of education, and then we move to enforcement at some point in time. But engagement here with the trustee is going to be absolutely fundamental in getting them acutely aware of those key points, to ensure that reporting is done, and done on a timely basis.

The other thing that we found so far in the survey is, is how individuals are intending on engaging with clients. Most of this was done on a case-by-case basis, in terms of that feedback we’ve had so far. That, to my view, might cause some problems, because having different sets of rules for different clients could ultimately start to unwind systems and processes and the way you do work. Now sure, every client’s different, and so when they come in and you talk to them about things, they may want to do it their way, because that’s the way things have been done. But when it comes to efficiency and effectiveness inside practices, ensuring that you’ve got robust processes are clearly going to be critical to the viability and success of your SMSF business model. And those that I see that do it and do it well really control the relationship with their trustee(s), set those expectations and therefore do it efficiently and promptly, and I think this will be a real key to the ongoing efficiency around reporting for transfer balance cap purposes.

The other one that was quite fascinating is around how we intend on charging, and the charging issue was something that we’re probably going to see be more relevant initially, and then over time, as the technology improves and we get greater interface with the ATO through the Standard Business Reporting … call it version 2, so SBR 2 … that level of additional work should reduce over time. Now, what we did want to test is, is how practitioners are going to be charging for this work, and we do have almost 50/50 in our survey and also in our polls between fixed fee and time cost billing. In this day and age, in particular the fact that we’ve seen many people move to cloud, that we still have this time cost as a byproduct is a real interesting insight here, because we’re not seeing them deliver the systems and processes that should be adopted as part of cloud migration.

So what is interesting here that we’ve also found in this fact is that many people are looking at time cost still, is that they are potentially looking at this as a measurement to then look at determining future value or future fees on a more fixed basis. For those that have looked at a fixed fee, they are looking at how they may bundle those events for TBAR, maybe to attribute it to the specific thing that they might be doing. So it might be a pension commencement. It could also incorporate an SOA around the advice for the pension commencement, commutation, whatever the case may be.

And we’ve also measured in here some of the anticipated fees that we expect individuals to be charging, and we’ve got some really interesting insights there, that unfortunately I won’t be able to share with you at the moment (in this podcast), because we are finalising these (findings), and we are making this (results) specific to not only our members but also to those that have participated in the survey. So that can be my call to action for you here, that if you haven’t participated and you’d like to get some greater insights into what we are seeing around the TBAR requirements, like I say, we have over 170 complete this survey to date. We’re going to be putting some stuff together and sharing with you what the broader community are doing, how they’re tackling TBAR, and how they’re charging for that as well.

The most compelling thing that we’ve found out of this process is, we’ve been talking about the technical elements to TBAR, but also the practical issues as well, is the fact that the TBAR requirements here, so this change, this compliance approach that we now have to revisit, is fundamentally making a change to the way in which practitioners need to contemplate their SMSF business model. So the way that you engage with your client and the way that your pricing needs to support that engagement process, and what is quite fascinating out of these results, in both our poll but also our survey, is that a large majority … so we’re talking more than 2/3rds (or participants)… in essence feel as though it is time for a change. And that change may be across the way in which they process the work. If we think about regular reporting, it is cloud technology, and it also making a shift in your fee model from what is an annual fee to a regular fee.

And that in itself is a jump for many individuals that struggle, also find that they struggle in getting that shift in that client, where you’ve charged a particular way for a long time, and struggle to articulate the value in what is being done. And this TBAR stuff, sure, it could be defined as a grudge purchase. You know, every time you have to do it, they get a bill for it. It’s an additional compliance thing that needs to be done, so they’re not necessarily happy, but there’s much more that can be added in terms of value here when it comes to the events-based reporting. And it’s not the events itself from a reporting context, but it’s what’s makes up that event. So the strategy that underpins the reporting that has to occur is where the value is.

I go back to when I presented at this year’s SMSF Association National Conference, and one of my panellists that I had in the session that I presented and facilitated, in Adam Goldstien, his practice, Skeggs Goldstien, has both financial planning and accounting.  He really turned the conversation on its head when we think about the way in which compliance is viewed in today’s age, because sure, there is a greater focus in the industry on outsourcing and technology and this real compression in terms of fees, but for a practice like Adam’s, what he said is his compliance is the new strategy. So bringing it to the front, making sure your systems and processes are in play, so that the information that you have is timely to enable decisions that add value to the conversation. The byproduct of that is, is that then we can get our events-based reporting done and done in a seamless and efficient way as well.

So I leave that with you there, just to make sure that, as part of this requirement, you reconsider the way in which you’re tackling the approach to your business model, looking at your reporting, looking at the technology you have in play, looking at the way in which you’re charging, whether it’s time cost or fixed fee, whether you move from annual fee to regular fee. These are all things that now could really be the catalyst for you to make some change in the way in which you approach your SMSF business model. Cloud technology has been one enabler, but this is the real catalyst, in my view, to ensure that you move to a model that will not only enable you to survive, but thrive as we move into what is an exciting few years ahead for the SMSF industry.

So that’s pretty much it for this week’s SMSF Podcast. If you do have any other questions around the transfer balance account requirements or the total superannuation balance, like I said, we are launching our SMSF day online course on the 21st of May. It has 5.75 CPD points from the SMSF Association and count as 5.25 CPE hours. It is full of videos, webinar (recordings), like I said, you can have a look on the site, SMSFDay.com.au, and find out more. And you can use this special code, ONLINE18, as a listener to the SMSF Podcast, and you can use that code right up until the 21st of May to take $50 off the ordinary price of $397 (just $347).

So that’s it for me today. Thank you for joining once again for our SMSF Podcast, and I look forward to hearing, and join me again next week. Take care. Bye for now.