The TSB is generally calculated at the end of 30 June of each income year and is relevant when working out a client’s eligibility for:

• The unused concessional contributions cap carry-forward
• The non-concessional contributions cap and the two- or three-year bring-forward period
• The government co-contribution
• The tax offset for spouse contributions.

Further, each member’s TSB will determine whether an SMSF has disregarded small fund assets and therefore is prohibited from using the segregated method to claim exempt current pension income in the annual return.

The ATO’s webpage on Total superannuation balance identifies that a persons’ TSB is calculated as:

The accumulation phase value of a person’s super interests that are not in the retirement phase[1]

+

The person’s 'transfer balance' or 'modified transfer balance' (but not if it is less than nil) of retirement phase income streams

+

The amount of any rollover superannuation benefit not already reflected in the accumulation phase value or transfer balance (that is, rollovers in transit between super funds on 30 June)

-

Any personal injury or structured settlement contributions that have been paid into the person’s super fund(s).

These components are relatively straightforward except for the value of retirement phase income streams.

Valuing retirement phase income streams for TSB purposes

The 'retirement phase value' is worked out using the person’s transfer balance account (TBA) at the end of 30 June, with modifications in certain circumstances.

In particular, a modification occurs where the person has account-based income streams. Instead of using the TBA value of the income stream, all debits and credits are disregarded and instead the value for TSB purposes is the current value of interest at the end of 30 June. This current value is the amount that would become payable if you were to voluntarily cease the interest, i.e. the account balance for an account-based pension.

Other types of super income streams retain the TBA value.

It is therefore important to understand what ‘types’ of retirement phase income streams fall under each definition to determine whether the value for TSB purposes is the current value of the TBA value.

Watch out for market linked pensions

In looking at these TSB rules we were not clear whether a market linked pension whilst it was a capped DB income stream would fall under the ‘account based’ type of income stream and asked the tax office for clarification.

The ATO confirmed that because market-linked pensions are listed under subsection 307-230(4) of the ITAA 1997 as retirement phase interests which are modified when calculating TSB, that a modified value is used even if it is a capped DB income stream.

A market-linked pension is therefore considered ‘account based’ for the purposes of the TSB valuation. This is irrespective of whether the pension is a capped DB income stream, and was valued for TBA purposes using a special value. The current TBA value of the market linked pension is disregarded for TSB purposes and instead the modified amount is used. The modified amount is the amount that would become payable if the member both had the right to cease the interest, and voluntarily caused the interest to cease at that time, i.e. the account balance.

For example, consider an SMSF member who has account-based pensions and market-linked pensions and they are looking to assess their TSB at 30 June 2018. Then generally the TSB retirement phase value will simply reflect the current account value of those income streams. This will allow for growth in the accounts over time as well as any decreases in value due to payments, and is not likely to equal the value of the interests applied to the member’s TBA for those income streams.

Impact if a client has ‘other income streams’

Other income streams in an SMSF such as flexi-pensions and defined benefit income streams are not included in the list of pensions modified by subsection 307-230(3) of the ITAA 1997. Therefore, the TSB at any given time is calculated using their TBA value.

Transfer balance is defined in subsection 294-30(2) of the ITAA 1997 as the sum of all transfer balance credits in that account, less any transfer balance debits. For these types of income streams this does not always equal the account balance at a particular time.

For example, consider a member who had a lifetime complying pension at 30 June 2017 and their initial TBA assessment was calculated using the special value formula which determined a TBA credit of $1million. The member is now working out their TSB at 30 June 2018. The TSB value is their current transfer balance relating to this income stream which (assuming there were no debits)  will be unchanged at $1m. This is regardless of fact that the current value of the assets supporting the income stream at 30 June 2018 was, say, $1.4million. The TSB value for other income streams does not require a recalculation of the TBA value and therefore does not allow for growth in the account over time or any decreases due to regular payments.

Summary of TSB valuations

We identify below how different retirement phase income streams commonly held in an SMSF would be valued for TSB purposes:

Current value:

• Account-based pension
• TRIS in retirement phase
• Allocated pension
• Market linked pension

TBA value:

• Flexi pension
• Lifetime pension
• Life-expectancy pension

Generally, this is the withdrawal value for an accumulation fund. The method for determining the accumulation phase value for a defined benefit interest not in retirement phase may be different. You may need to contact the relevant superfund to obtain the value for TSB purposes.