Introduction of the Transfer Balance Cap
From 01 July 2017, the Government will introduce a $1.6 million cap on the total amount of superannuation benefits that you can transfer into a tax-free retirement account. This limit is known as the Transfer Balance Cap (TBC).
Superannuation benefits accumulated in excess of the cap can remain in the accumulation account, where the earnings will be taxed at up to 15%.
What Counts towards Your Transfer Balance Cap?
Only pension accounts in the retirement phase count towards the Transfer Balance Cap. The following types of income streams are counted for TBC purposes:
- Simple Account Based Pensions (SABPs), including Death Benefit Pensions
- Capped Defined Benefit Income Streams
Simple Account Based Pensions (SABPs)
If you have commenced a Pension with ESUPERFUND and you have satisfied a nil condition of release
(e.g. aged over 65 / aged between preservation age ~ 64 & retired / permanent incapacity / death benefit pension etc.),
your pension is an SABP. As a result, you will be affected by the Transfer Balance Cap.
Capped Defined Benefit Income Streams
Capped defined benefit income streams include:
- Certain lifetime pensions, regardless of when they start
- Certain lifetime annuities that exist prior to 1 July 2017
- Certain life expectancy pensions and annuities that exist prior to 1 July 2017
- Certain market-linked pensions and annuities that exist prior to 1 July 2017
Different rules apply to the above income stream products. We advise that ESUPERFUND does not establish capped defined benefit income streams for clients.
Therefore, we are unable to provide advice. Please contact your scheme provider directly in order to verify your personal circumstances.
You may find some general information on the ATO website
A Total Cap on a Member Basis
The Transfer Balance Cap works on a per-member basis.
If you have more than one super pension account in the retirement phase with different Superfunds, the Transfer Balance Cap applies to the combined amount in all of those pension accounts.
What Does Not Count towards Your Transfer Balance Cap?
Transition to Retirement Pensions (TRAP) do not count towards the Transfer Balance Cap as they will no longer receive an earnings tax exemption from 01 July 2017. Further details on how the superannuation reforms affect TRAPs can be found here.
Moreover, the accumulation phase value of your super interests is not counted, either. There is no limit on the amount of money you can have in your accumulation super account(s).
How Will the Transfer Balance Account Work?
The Transfer Balance Cap Account operates similarly as a bank account in a sense that certain transactions give credits and debits to its balance.
Credits in the Transfer Balance Account
In general, the amounts transferred into the retirement phase give rise to a credit in your transfer balance account.
If you are receiving a retirement income stream before 01 July 2017, your transfer balance account will be credited with the value of the pension just before 01 July 2017. The value of any new pensions (commenced after 01 July 2017) will also be credited to the account when they commence.
Debits in the Transfer Balance Account
Amounts commuted from the retirement phase will give rise to a debit in the transfer balance account. Commutations usually occur in the following situations:
- When you make lump sum withdrawals (i.e. not pension withdrawals) from your Pension Account.
- When you transfer your Pension Balance back into the Accumulation Account of the SMSF.
- When you roll out your Pension Balance to another superannuation provider.
Transactions that Do Not Count towards the Transfer Balance Account
Investment earnings and losses on your superannuation interests and pension amounts paid to you do not affect the balance of your transfer balance account.
If the total amount in your pension account(s) grows over time (through investment earnings) to more than $1.6 million, you will not exceed your cap.
If the amount in your pension account(s) goes down over time, you cannot 'top it up' if you have already used up your transfer balance cap. Sometimes, a full commutation of a pension may result in a negative transfer balance.
Barney commences a pension with $1.6 million on 01 July 2017. He makes pension withdrawals of $250,000 in the 2018 Financial Year and the balance in the pension account increases to $1.7 million on 30 June 2018 due to investment earnings. Barney’s transfer balance remains at $1.6 million because both pension withdrawals and earnings do not give rise to debit or credit in the transfer balance account.
On 30 June 2018, Barney decides to fully commute the pension and rollover the benefit to another SMSF. His transfer balance account is debited with the commutation amount of $1.7 million (i.e. value of his pension on that day), resulting a balance of -$100,000. When the rollover is received by the new SMSF, Barney commences a new pension with the $1.7 million. His transfer balance account will now have a balance of $1.6 million (i.e. -$100,000 + $1.7 million) and he does not breach his transfer balance cap.
When the general transfer balance cap is indexed and you have not previously met or exceeded your cap, your personal transfer balance cap will be subject to proportional indexation. The amount of cap space you have available will be determined by the proportionate method which measures the percentage of the cap previously utilised.
Example 1 - Cap fully utilised previously
If you transfer the full $1.6 million into a retirement phase account which subsequently decreases due to pension withdrawals or investment losses, you will not be able to transfer any more into the retirement phase even if the general transfer balance cap has been increased due to indexation as you have utilised 100% of your cap space previously.
Example 2 - Cap not fully utilised previously
If you transfer $1.2 million into a retirement phase account, you will have utilised 75% of the cap space. If the cap is later indexed to, for example, $1.7 million, you will be able to transfer an additional 25% of the indexed cap.
- Personal transfer balance cap: $1.625 million ($1.6 million + 0.25 * $100,000).
- Additional balance that can be converted to retirement phase: $425,000 (1.625 million - $1.2 million).
Breach of the Transfer Balance Cap
If your total pension balance exceeds $1.6 million as at 01 July 2017, the amount in excess of the $1.6 million will need to be either:
- Transferred back into the accumulation account (where earnings will be taxed at 15%); or
- Withdrawn from the superannuation system.
If you breach the cap, you will be required to remove the excess (including notional earnings) from the retirement phase account and will be liable to pay tax on the notional earnings attributable to the excess capital. The amount can be transferred into the accumulation account or withdrawn from the superannuation fund. You will be subject to a 15% tax on the notional earnings for the first breach and 30% tax for the subsequent breaches.
Transitional arrangements will apply for those with existing pension accounts and with balances above $1.6 million but below $1.7 million (i.e. excess equal to or less than $100,000). No penalty will apply if you reduce the balance to below the $1.6 million cap within 6 months from 01 July 2017.
Where a fund needs to transfer the pension balance back to an accumulation account to comply with the introduction of the transfer balance cap before 01 July 2017, the fund may be eligible for the transitional CGT Relief.
The purpose of the CGT relief provisions is to provide temporary CGT relief for accumulated capital gains on assets which would have been exempt but for the introduction of the Transfer Balance Cap. The relief will ensure that CGT is only payable (on the sale of these assets after 01 July 2017) on capital gains accrued from 01 July 2017.
The CGT relief is not automatic and the SMSF needs to satisfy a set of conditions through self-assessment before CGT relief can be elected. E.g. The relief only applies to assets acquired by the Fund prior to 09 November 2016 and continued to be held by the Fund until 30 June 2017.
Provided your SMSF is eligible for the CGT Relief, you can apply it on an asset-by-asset basis. The chosen asset is deemed to have been sold and re-purchased back immediately on the same day (i.e. on 30 June 2017) in the accounting records of the SMSF. Physically the asset is owned by the SMSF without any transfer of ownership.
Where an asset is already partially supporting an accumulation account, the fund will need to pay tax on the proportion of capital gains made prior to 01 July 2017 that is attributable to the accumulation account. The tax on this notional gain can be paid in the 2016/17 income tax return or deferred until the asset is sold.
The choice is to be made by notifying the Commissioner of Taxation (i.e. ATO) in the approved form on or before the date the fund is required to lodge its 2016-17 income tax return. Once lodged, the choice is irrevocable. At the time of writing, the "approved form" has not been released by the ATO yet.
The above information only provides a brief overview of the Transitional CGT Relief. Please click here for detailed explanation and some worked examples.
ESUPERFUND Will Contact You before 01 July 2017
If at least one member of your SMSF has an existing SABP in the 2016/2017 income year, you will be contacted by ESUPERFUND before 30 June 2017 to guide you through the Superannuation Reform.
Actions Required before 01 July 2017
Before 30 June 2017, you need to form an estimate of the total value of your retirement phase interest(s) on 01 July 2017.
We advise that your exact pension balance as at 01 July 2017 can only be determined after the 2016/2017 income tax return has been completed. Before that, you will need to predict your Pension Balance as at 30 June 2017 by taking account of the transactions made since 01 July 2016. You also need to consider your balances held with other Superfunds. Based on the prediction, you will then decide if you may exceed the $1.6 million transfer balance cap on 01 July 2017.
If you will definitely exceed or likely to exceed the $1.6 million transfer balance cap on 01 July 2017, you will need to remove the amount in excess of the $1.6M by transferring the excess to your accumulation account of the SMSF OR withdrawing it out of the super environment. The choice is yours.
1. Transfer the Excess to the Accumulation Account
If you prefer to transfer the excess pension balance to the accumulation account, you need to sign a commutation request letter before 30 June 2017 to confirm your intention to comply with the transfer balance cap.
You also need to inform our office of your desired pension account balance in the SMSF as at 01 July 2017 by considering your super benefits held in other Superfunds as well (i.e. how much can be left in the SMSF SABP as at 01 July 2017). This amount will be reported to the ATO as the opening balance of your SABP as at 01 July 2017.
The exact rollback amount can be determined later as part of the 2016/2017 tax return process (conditions apply under this retrospective approach). This means you do NOT need to determine the rollback amount before the 2016/2017 tax return is completed based on the ATO's recently released public compliance guidance PCG 2017/5 (see here for more information).
ESUPERFUND has prepared a sample commutation request letter to ensure affected members can satisfy all the conditions set out in the PCG 2017/5.
The re-balancing between pension and accumulation accounts represent accounting entries only and is processed on a proportional basis. This means no physical movement of SMSF investments are required and you cannot choose which assets are to be transferred into the accumulation account.
From 01 July 2017, the SMSF earnings will then be allocated to your Pension Account and Accumulation Account on a proportional basis using an actuarial certificate.
- Earnings allocated to the pension account are tax free
- Earnings allocated to the accumulation account are taxed at up to 15%.
2. Withdraw the Excess from the Superannuation System
If you wish to withdraw the excess from the SMSF, then the withdrawal must occur before 30 June 2017 in order to comply with the $1.6M Cap (unless the excess is less than or equal to $100,000, in which case, you have until 31 Dec 2017 to make the withdrawal under the transitional arrangement discussed above).
The withdrawal may have possible implications in your personal tax return, especially if you are aged between the Preservation age and 59. In addition, you may not be able to return the funds to the SMSF due to the reduced Contribution Caps.
Actions Required after 01 July 2017
From 1 July 2017, SMSF Trustees need to keep track of your transfer balance account to make sure you do not exceed the cap. You need to manage your transfers into retirement phase. For example:
- If you have an available cap space, then you can transfer more (for example, by commencing an additional pension).
- If you have no cap space, you cannot commence additional pensions.
Lump Sums Do Not Count towards the Minimum Pension Requirements from 01 July 2017
When you have a Simple Account Based Pension, you are allowed to make both pension withdrawals and lump sum withdrawals.
"Lump sum" and "pension" are simply superannuation terminologies used to describe different withdrawal types, they have no direct reference to the frequency or size of your withdrawals.
The withdrawal type may affect you in the following way:
Until 30 June 2017
- If you are aged between preservation age and 60, the withdrawal type makes a difference in your personal tax return.
- When you are aged over 60, they make no differences in your personal tax return since all withdrawals after age 60 are tax free.
- Lump sums may be preferred for Centrelink purposes (you need to confirm your personal circumstance with Centrelink directly if you have Centrelink benefits)
- Both withdrawal types can count towards the minimum payment requirement.
If you are aged under 60 and retired, then you may choose to treat all withdrawals as lump sums and none as pensions in order to minimise tax in your personal tax return.
From 01 July 2017
Items 1~3 detailed above remain unchanged. However, item 4 will change. From 01 July 2017, only pension withdrawals count towards the minimum payment requirement while lump sum withdrawals cannot be used to meet the minimum pension requirement. This implies that at least the minimum pension amount must be pension withdrawals and only the amount in excess of the minimum pension amount can be either lump sum withdrawals or pension withdrawals at the Trustee’s discretion.
E.g. Sue is aged over 65 and has commenced a Simple Account Based Pension in her SMSF. The minimum requirement is $10,000 and she withdraws $1,000 each for 12 months plus one payment of 50,000 in June 2018.
- Total withdrawals = $1,000 * 12 + $50,000 = $62,000
- Sue must treat at least $10,000 of her total withdrawals as pension payments.
- The remaining $52,000 can be either pensions or lump sums at Sue’s discretion regardless of the size and frequency of her withdrawals. She may treat the entire $52,000 as a pension / as a lump sum / a combination of pensions and lump sums.
In simple terms, the 2016/2017 Finaical Year is the last financial year during which an individual aged under 60 & retired may choose to treat all withdrawals as lump sums and none as pensions in order to minimise tax in the personal tax return.
Seek Professional Advice from a Financial Adviser
This package of Superannuation Reforms involves complex changes which may affect your retirement plans. The situation is even more complex if you have superannuation benefits in multiple Superfunds. This is because all the thresholds and caps apply to your total superannuation balance, not your balance in each individual Superfund.
ESUPERFUND is a no advice model and does not provide financial advice to clients. We recommend that you seek professional advice from a financial adviser. A licensed financial adviser will consider your personal situation and make a recommendation suitable to your financial needs.
It should always be remembered that Trustees are legally responsible for all the decisions made even if you obtain advice from a Financial Planner. Whilst a Financial Professional can provide advice and assistance you are ultimately responsible for the Fund.