A Simple Account Based Pension is an income stream that you receive from your SMSF when you reach age 65 or alternatively when you are aged between preservation age and 64 and "Retired".
Benefits of commencing a Simple Account Based Pension (SABP)
The main benefit of commencing an SABP in your SMSF is that earnings from assets supporting the SABP are tax exempt (subject to the Transfer Balance Cap). Consider the benefits when you commence an SABP from your SMSF:
- You never pay tax on your investment earnings & realised capital gains in the SABP account (e.g. interest and dividends).
- You can access any level of income from your SMSF subject to an aged based minimum amount.
- The Pension income you access is tax free if you are aged above 60.
- The Pension income you access is concessionally taxed if you are aged between preservation age and 59.
- You do not have to change your SMSF investments when you start a Pension.
Introduction of the Transfer Balance Cap
From 01 July 2017, the Government introduces a $1.6 million cap on the total amount of superannuation benefits that you can transfer into a tax-free Retirement Phase 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
- TRISs that are in retirement phase (R-TRISs)
- Capped Defined Benefit Income Streams
Simple Account Based Pensions (SABPs)
If you commence a Pension when you have already satisfied a condition of release
with a nil cashing restriction (e.g. retirement/permanent incapacity/terminal illness and notified the trustees, aged over 65 or death benefit pension etc.),
your pension is an SABP and will be subject to the Transfer Balance Cap.
TRISs that are in Retirement Phase (R-TRISs)
If you have commenced a TRIS and subsequently satisfied a condition of release with a nil cashing restriction (e.g. retirement/permanent incapacity/terminal illness and notified the trustees or reached age 65), your TRIS enters the Retirement Phase and will be subject to 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?
TRISs that are not in Retirement Phase (i.e. member is still under age 65 and not retired) do not count towards the Transfer Balance Cap as they no longer receive an earnings tax exemption from 01 July 2017. For more information on TRIS, please click 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 Does the Transfer Balance Account Work?
The Transfer Balance 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 Phase income stream before 01 July 2017, your Transfer Balance Account would 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 Retirement Phase Pension Account.
- When you transfer your balance in the Retirement Phase Pension back into the Accumulation Account of the SMSF.
- When you roll out your balance in the Retirement Phase Pension 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 an SABP with $1.6 million on 01 July 2020. He makes pension withdrawals of $250,000 in the 2021 Financial Year and the balance in the pension account increases to $1.7 million on 30 June 2021 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 2021, Barney decides to fully commute the SABP 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.
For more information on Transfer Balance Account, please click here.
Reporting of Transfer Balance Account Events
Due to the Transfer Balance Cap measure, the ATO has imposed a new reporting obligation on SMSF Trustees so as to record and track the movements in the member’s Transfer Balance Account and apply provisions should the member breach the Transfer Balance Cap. Any events that affect the balance in the member’s Transfer Balance Account need to be reported to the ATO using the Transfer Balance Account Report (TBAR). For more information on Transfer Balance Account Report (TBAR), please click here.
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 the balance of your Transfer Balance Account exceeded your Transfer Balance Cap, you would have breached the Transfer Balance Cap and have an Excess Transfer Balance. 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 excess amount will need to be either:
- Transferred back into the accumulation account (where earnings will be taxed at 15%); or
- Withdrawn from the superannuation system.
The notional earnings on the Excess Transfer Balance will be calculated by the ATO and credited to your Transfer Balance Account daily until the ATO issues the Excess Transfer Balance Determination. For more information on how the notional earnings are calculated by the ATO, please click here.
You will also be subject to a 15% tax on the notional earnings for the first breach and 30% tax for the subsequent breaches.
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.
Excess Transfer Balance Determination and Commutation Authority
When you have an Excess Transfer Balance, the ATO will issue an Excess Transfer Balance Determination which states the amount that needs to be removed from the Retirement Phase to bring your Transfer Balance Account back in line with your Transfer Balance Cap. This amount includes the notional earnings on the excess. If no response has been made within 60 days after an Excess Transfer Balance Determination was issued, the ATO will issue a Commutation Authority requesting the amount to be commuted.
When you remove the Excess Transfer Balance in response to the Excess Transfer Balance Determination or Commutation Authority, the event needs to be reported to the ATO via the TBAR within a specified time frame. For more information on Excess Transfer Balance, please click here.
Due to the tight time frame set by the ATO, please contact ESUPERFUND via the Client Portal Inbox immediately after you have responded to the ATO’s Excess Transfer Balance Determination / Commutation Authority and attach the ATO’s letter.
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 superannuation terminologies used to describe different withdrawal types, they have no direct reference to the frequency or size of your withdrawals. For example, a large amount withdrawn in a single transaction during the year can still be classified as a Pension withdrawal.
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. For more information on the difference between Pension withdrawals and Lump Sum withdrawals, please click here.
E.g. Lisa 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 2021.
- Total withdrawals = $1,000 * 12 + $50,000 = $62,000
- Lisa 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 Lisa’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.
Seek Professional Advice from a Financial Adviser
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 SMSF.