Introduction of Transfer Balance Cap
From 1 July 2017, the Government will introduce a $1.6 million cap on the total amount of superannuation that you can transfer into a tax-free retirement account. Superannuation benefits accumulated in excess of the cap can remain in the accumulation account, where the earnings will be taxed at up to 15%.
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.
How Will the Transfer Balance Account Work?
In general, the amounts transferred into the retirement phase give rise to a credit in your transfer balance account and amounts commuted from the retirement phase will give rise to a debit in the transfer balance account.
If you are receiving a pension 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 pension commenced after 01 July 2017 will also be credited to the 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. This means that your balance can grow above $1.6 million in the retirement phase account.
Commutations will give rise to a debit in the transfer balance account. Accordingly, 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 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.
Transitional CGT Relief
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 1 July 2017, the fund will have the option of resetting that asset’s cost base to its current market value. This will ensure that tax will not be applied to gains that accrued while the asset supported a retirement phase interest.
The relief only applies to assets acquired by the Fund prior to 9 November 2016 and continued to be held by the Fund until 30 June 2017. The choice needs to be made in the approved form before the 2016/17 fund tax return is lodged, and cannot be revoked.
Where an asset is already partially supporting an accumulation account, the fund will need to pay tax on the proportion of capital gain made prior to 01 July 2017 that is allocated to the accumulation account. The liability can be paid immediately or deferred until the asset is sold.
Lump Sums Do Not Count towards the Minimum Pension Requirements
Individuals will no longer be able to use partial commutations (i.e. lump sum withdrawals) 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.
If an individual is aged under 60 and retired, then 2016-17 is the last financial year during which the individual may choose to treat all withdrawals as lump sums and none as pensions in order to minimise tax in their personal tax return.
Note: The ATO is currently preparing the guidelines in relation to the superannuation reforms and ESUPERFUND will contact affected clients once the ATO has provided clear guidance.
Other Types of Income Stream Products (e.g. Defined Benefit Pensions, Non-commutable Pensions etc.)
Different rules apply to other types of income stream products. Please contact your scheme provider directly in order to verify your personal circumstances.
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 particular 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.