One of the distinctive differences under the transfer balance cap rules with reversionary and non-reversionary is the timing of transfer balance account reporting (TBAR) of the income stream.
For any new pension that commences where the pension does not automatically continue to the reversionary beneficiary, the benefit is required to be ‘cashed’ as soon as practicable as either a pension or lump sum in accordance with the compulsory cashing requirements in SISR 6.21.
For TBAR purposes, where a tax dependant chooses to commence a new income stream (death benefit pension):
- the value of the income stream is determined at the time of cashing the benefit; and
- the reporting to the ATO will due based upon the new commencement date, factoring in whether the fund has an obligation to report quarterly (28 days after the end of the quarter) or annually (by the due date of the SMSF Annual Return).
The legislation does not define ‘as soon as practicable’ so this length of time is subjective, potentially being relatively short (up to 6 months) in straight forward death benefit, extending to several years where an estate may be in dispute.
What happens when the pension automatically reverts?
For reversionary pensions, the rules for transfer balance cap purposes provides that the credit attributable to the reversionary beneficiary is deferred for 12 months from the starting day – that is, the date of death where the pension automatically continues).
This extension of time has been established to allow for the surviving tax dependant (e.g. spouse) to seek guidance on the implications of the death benefit and contemplate what actions might need to occur to ensure they do not breach their transfer balance cap.
This extension of time might naturally infer that reporting of the event to the ATO does not need to occur for 12 months, with the benefit then due following this deferral period, again subject to the reporting requirements for TBAR (annual or quarterly reporting). This is however incorrect – what must occur is that the fund will be required to report the value of the reversionary pension within the prescribed time, with the ATO deferring the impact of the reported value for the reversionary recipient’s transfer balance account. We have recently sought clarity on this item from the ATO as the available literature on the ATO website appeared unclear. The ATO have confirmed that the fund must report within the quarterly or annual timeframe from the date the pension reverted (i.e. date of death) – the ATO will effectively display a ‘pending’ credit on the individual’s transfer balance account information. They can then access the information online to assist them in managing their affairs and to help them understand what action they may need to take to avoid exceeding their transfer balance cap when the credit is applied.
To understand the impact of this, let’s consider the following example.
Jim and Irene are trustees and members of their SMSF. Both members are receiving account-based pensions (ABP) within the fund, with balances as follows at 30 June 2018:
- Jim – ABP – $1,150,000
- Irene – ABP – $680,000
Jim dies on 1 September 2018. His ABP was initially established as automatically reverting to Irene upon his death. The value of Jim’s ABP at his date of death was $1,180,000. As Jim had a Total Superannuation Balance (TSB) at 30 June 2017 over $1.0m, the fund must report events for TBAR purposes on a quarterly basis.
Therefore, the fund needs to (quickly) determine the value of Jim’s death benefit as the TBAR for this event (being the reversionary pension, not Jim’s death benefit) is due by no later than 28 October 2018 – yes, 6 weeks after death! There is therefore some sizeable pressure on the service provider (e.g. accountant) to determine the value of the reversionary pension quickly to meet the reporting deadline. Note: SMSF is not required to report the death benefit for Jim, his death and cessation of transfer balance account is provided by birth, deaths and marriages (Government body).
Whilst the reporting is required in short time period, the credit is not applied by the ATO immediately, but rather deferred for 12 months from the date of death (starting day). This will allow for Irene to contemplate any commutation of income streams based up her now having an excess transfer balance (>$1.6m).
The ATO are currently in the process of updating their event-based reporting content on their website to ensure that this message is clear for the TBAR requirements with reversionary income streams.
What if the SMSF reported TBAR annually?
Let assume the same facts, however Jim’s balance was $600,000 at the time of death and the fund reported events on an annual basis. In this instance, the due date for the TBAR is at the same time as the SMSF Annual Return – let’s assume 15 May 2020. Therefore, in this example we have a situation where the credit will apply to the member earlier than the reporting due date as the credit must be applied 12 months later from Jim’s date of death – i.e. 1 September 2019).
Whilst the 12-month deferral for reversionary pensions does provide relief for individuals to seek guidance on any potential excess transfer balances, the timeframe to report the auto-entitlement of the reversionary pension does not, in particular for SMSFs required to report quarterly.
This is yet another reason as to why regular reporting becomes critical to the success of a practice from 1 July 2017 and changing the regularity of dialogue with your SMSF clients.
If you need help with documentation relating to the death of a member, Smarter SMSF provides the following documents on its platform:
- Death of a Member
- Payment of a Reversionary Pension
- Death Benefit Pension (non-reversionary)
- Death Benefit Lump Sum
- Deed of Retirement (due to Member’s death where corporate trustee)
- Deed of Retirement and Appointment (where required to add new member)
- Add or remove a reversionary beneficiary (where survivor’s income stream was reverting to the deceased member)
- Death Benefit Nominations (including non-lapsing BDBNs) where the surviving member needs to update any existing instructions.