One of the joys of being an academic, after 25 years in corporate life (besides not having to speak in that risk averse formal legal way), is you have the time to check the tax rules and then get one of those lightbulb moments.
A Cuffelinks reader asked whether an SMSF member who has already maxed out their $1.6 million Transfer Balance Cap (TBCap) can have additional earnings added to the fund account supporting their pension?
The answer is yes.
And here is the light bulb moment: there is no connection between the actual value of a member’s account when paying a pension and their TBCap. The Explanatory Memorandum specifically says that.
The Transfer Balance Account (TBAccount), the value of which is measured against the TBCap, is calculated, briefly, as the 1 July 2017 value for existing pensions or the value at commencement of subsequently-commenced pensions. Of course, there are credits and debits to that which can take the TBAccount over the TBCap but, briefly, they are credits for deemed earnings on commencing TBAccount excesses and debits for commutations, plus some more obscure events giving rise to debits.
That is, the TBAccount value for these purposes is frozen at commencement so that additional earnings added to the members’ account in the fund, and consequent additional pension because of the minimum 1 July account balance that must be paid, are ignored for this calculation.
What that means in practice is that, say, you have a fund roaring along at a 10% pa earnings rate which will then have an increased pension of that amount, the TBAccount will stay at the amount it was when the pension commenced.
In fact, that is the design of the system. The fund doesn’t have to annually check the TBAccount for a member, it is only done at commencement or when one of those specific credits or debits occurs.
If the TBAccount exceeds the TBCap at commencement, or otherwise, then there is a mechanism that is intended to reclaim the exemption from tax that the fund receives on the income from the excess. This is achieved by the rules deeming an earning rate on that excess TBAccount, which earnings are taxable to the member, but the fund will still continue to get the exemption from tax.
So, again, earnings allocations, and indeed losses, to the members’ account in an SMSF are ignored for the purposes of comparing their TBAccount with their TBCap.
I’m not sure the delight from these light bulb moments in academe actually makes up for the pay differential, but that is another discussion (sigh).
Gordon Mackenzie is a Senior Lecturer in taxation and superannuation law at the Australian School of Business, University of New South Wales. This article summarises the major points as understood by the author, it does not consider the needs of any individual and does not consider all aspects of the legislation.