“In particular, tax effect accounting can be of relevance for managing TSB compliance by helping to ensure that an individual’s TSB is correctly reflected having regard to taxation,” explained Mr Cheung.

Mr Cheung explained that member account balances in an SMSF broadly reflect the financial position of the SMSF, or the value of the SMSF’s net assets.

“This means that member account balances are based on the market value of the relevant SMSF’s assets,” he said.

In practice, many advisers and SMSF trustees, he said, treat a member’s account balance as equivalent to the member’s TSB except where the member has multiple superannuation funds.

“The ATO’s default position is to use the member account balance information disclosed in an SMSF’s annual return to calculate an individual’s TSB, assuming the member is not a member of another SMSF and that no structured settlement amounts have been contributed to the SMSF,” he explained.

“However, it should be noted that a member’s TSB is not identical to their account balance. Broadly, a member’s TSB represents the amount of their accumulation phase interests and retirement phase interests that would become payable if the individual voluntarily caused the relevant interests to cease at a particular time.”

This withdrawal benefit amount, he explained, can “broadly be equated to the net realisable value of the relevant interests, and could take into account tax payable and perhaps also future costs associated with realising the assets that support the relevant accumulation and/or retirement interests”.

While the transfer balance account report (TBAR) system informs the ATO of an individual’s TSB and essentially overrides the ATO’s account balance-derived TSB value, this requires ongoing intervention, he noted, and may not be attractive for many advisers.

“As an alternative to using TBAR to manually change the ATO’s total superannuation records periodically, SMSFs have the option to apply tax effect accounting so that the SMSF’s financial position, and therefore member account balances, better reflects the elements of the TSB definition,” he said.

“For instance, tax effect accounting facilitates the recognition of deferred tax liabilities where there is reasonable certainty that a future tax liability will arise for the SMSF.”

The tax payable on a deferred notional gain in relation to CGT relief is one example of a future tax liability that could be reasonably certain, he explained.

This is subject to there being no anticipated capital losses, which could eliminate the deferred notional gain in the financial year that the asset is realised, he said.

“The application of tax effect accounting can potentially reduce the value of an SMSF’s net assets if there is a deferred tax liability and the amount of the deferred tax liability is greater than any applicable deferred tax asset[;] generally, it is rare for an SMSF to have deferred tax assets,” said Mr Cheung.

“Such a reduction in an SMSF’s net assets will result in a corresponding reduction in member account balances, since the balances are net of tax, which could lead to a more accurate calculation of a member’s TSB.”