The ATO raises the TBAR on pension reporting

SUMMARY: Real-time reporting of pension income streams is coming. Here’s what you need to start thinking about.

TBAR sounds like something your kids (or grandkids) might play on, or with, in the school yard.

But no. It stands for “transfer balance account report”. And it’s something that anyone with a self-managed super fund pension is going to have to get to know and understand.

It is a constant reporting framework that self-managed super fund trustees are going to need to understand in light of the $1.6 million transfer balance cap (TBC), when reporting to the Australian Taxation Office.

From 1 July just gone, as you’ll know, pension funds are limited to starting with a balance of $1.6 million. (They can grow higher than that with good investing, but you’ll be limited to starting with that balance.) If you have more than that in super, you will have to leave the remainder in accumulation.

The accepted wisdom is that if you need to take more than the minimum pension from your account (minimums are based on your age, see Table 1) that the remainder of any funds you require should be taken as a commutation – that is, taking that portion of your income requirements as a lump sum, by way of commuting a portion of your benefits back to accumulation.

The reason for taking the remainder as a commutation is that commutations will reduce your TBC. And the reason you might want your TBC reduced is in case you might be able to top up your pension later on.

For example, if you are 63 and have $1.6m in your pension, you will be required to take $64,000 as a pension. However, if your income requirements are actually $164,000, then you will need to take another $100,000 from your super fund.

If you take that $100,000 as a pension, your TBC will remain unchanged at $1.6m. If, however, you take that $100,000 as a commutation, then your TBC will reduce to $1.5m ($1,600,000 minus $100,000).

Why is this important? Because you have reduced your TBC by $100,000, you may be able to add another $100,000 to your pension fund later (perhaps from an inheritance, or the sale of other assets). And if this is required for a number of years, you potentially open up the possibility of adding a lot more money back into pension funds down the track.

The ATO, however, wants what it calls “real-time reporting” of these commutations, as it fears it could be manipulated. And it doesn’t want super funds, or trustees, being able to manipulate the data, at the end of the year.

So, if you take a commutation, real-time reporting means it wants to know virtually as soon as you do it.

TBAR is that system. It hasn’t been fully worked out yet. But you can expect that it will be done fairly soon. And if you’re drawing on your super fund, beyond the minimum, you will either want your accountant to be all over it, or you will need to be on top of it yourself.

These decisions also feed back in to what I’ve described before as the “three pots” strategy.

Essentially, your put your $1.6m into a pension fund. Then you have somewhere between $500k and $1m in your personal name (generating just enough money to keep you under the limit for paying personal tax), then as much as you can of the remainder back in superannuation accumulation. This should mean that the most tax you pay on anything is 15%.

So, imagine that you’ve managed to get everything you own lined up properly, in that order. Then, when you’re taking your retirement savings out to spend … you take the minimum pension first, then take excess money from super accumulation (which is taxed at 15%). When your accumulation fund is drained, then you start to draw more from pension or outside.

If you have too many assets outside of super in your personal name, you draw your pension first, then spend down assets in your personal name until those assets are earning under the tax-free limit, which might be taxed at up to 45%, plus Medicare. Then when those are drawn, eat into your super accumulation before eating further into your pension fund.

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The experts are saying that best practice, or at least having the best explanation available for the ATO, will be to have a document that explains how you are going to manage what happens after the minimum pension drawdown is taken.

That will mean a document from the members that instructs the trustees to take the minimum pension and that anything after that will be taken as commutations until the new financial year.

That won’t get people out of the real-time reporting requirements of TBAR, but if properly executed, will give the ATO an upfront, signed, indication of what your intentions were.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.