Don’t Sink Under the Second Wave of Super Reforms

SMSFs are now being hit with a second wave from the Super Reforms.

On top of the already heavy workload from pension commutations and CGT relief, new analysis by Class, SMSF software provider, shows the volume of reporting required under the incoming TBAR regime is likely to be significantly higher than expected.

Reportable events could rise by 340%, driven by a surge in pension commutations. [1]

The new reporting system, known as TBAR (Transfer Balance Account Reporting), is due to begin in July 2018. All establishments and commutations of super pensions must be reported within a strict time limit after they occur so the ATO can ensure all SMSFs are complying with the new $1.6 million cap on the amount that can be transferred into pension phase.

This is a serious tightening of the current rules, where pension transactions are often reported nearly two years after the SMSF annual return is lodged. For example, pensions established in July 2015 were only just reported in the June 2017 lodgment period.

Surge in commutations

The major reason for the dramatic increase in reportable events is that SMSF pensioners who draw more than their required minimum will likely perform additional commutations to maintain room under the $1.6 million cap for extra contributions.

Financial planner and SMSF specialist Liam Shorte says this commutation strategy will be “very popular”.

“Advisers will recommend this move to ensure maximum availability of remaining pension caps just in case they are needed later,” he says.

Class analysis shows that 39% of pensioners drew down at least $5,000 more than the minimum on their pensions in FY2016, the level at which Shorte expects to see the commutation strategy deployed.

The average SMSF pensioner withdraws about $74,000 annually on their pension over a series of 12 transactions and overdraws $24,000 above their minimum. If this pattern holds, there will likely be 4 withdrawals towards the end of the financial year beyond the minimum which would be commuted and reported to the ATO under the TBAR regime.

Rise in pension establishments

Pension establishments will also contribute significantly to the reporting requirements because many pensioners have more than one pension (1.9 on average) and 21% have three or more.

Shorte says that these numbers may be further boosted by account-based pension establishments driven by a movement of funds out of TRISs and additional commutations by two member SMSFs seeking to keep below the $1.6m transfer balance cap by evening up their pension balances.

Class data shows that 29% of the 50,900 two-member SMSFs where at least one member has a balance over $1.6m could get below the cap by evening up the balances.

This analysis drives home the reality that SMSF members, their accountants and administrators will need to adopt highly efficient reporting and administration solutions to ensure investment and account balances in an SMSF are up to date and to be able to accurately and promptly report the required information to the ATO.

This has highlighted to many in the industry the urgent need for a automated SMSF software that streamline reporting and boost service levels in the SMSF sector.  Meanwhile SMSF administration software providers that are not cloud based find themselves rushing to move their solutions to the cloud in order to stay competitive. The consequences of not acting could be fines and other disadvantages for your clients.

[1] This analysis excludes pension establishments and commutations made as part of transition to retirement pensions, which lost their tax exemptions on 1 July 2017.