The superannuation transfer balance cap of $1.6 million is a new measure set to be introduced from 1 July 2017. This is a further shift towards reducing the tax-effectiveness of the superannuation environment for high-net worth individuals.
So, how does the $1.6 million transfer balance cap work?
Well, superannuation has two ‘phases’: Accumulation phase and Pension phase. Accumulation phase is where superannuation contributions are made into and Pension phase is where an individual uses some or all of their accumulated savings to commence an income stream (aka pension).
In both Accumulation and Pension phases, superannuation benefits are invested. The earnings from these investments are taxed at 15% in Accumulation phase and 0% in Pension phase. Up until 1 July 2017 the amount that can be held in Pension phase is unlimited.
Superannuation Transfer Balance Cap $1.6 Million
As of 1 July 2017, the maximum amount that can be transferred from Accumulation phase to commence a Pension income stream is $1.6 Million per person. This $1.6 Million cap applies to the consolidated value of all pensions owned by an individual, including defined benefit pension income streams.
Transfer Balance Cap For Existing Pension Holders on 1 July 2017
For individuals in receipt of one or more income streams prior to 1 July 2017, it is prudent for them to take necessary steps to roll back any amount in excess of the Transfer Balance Cap to Accumulation phase prior to 1 July 2017.
Transfer Balance Cap Indexation
The $1.6 Million Transfer Balance Cap will be indexed in-line with Consumer Price Index (CPI) periodically in increments of $100,000.
Limit on Superannuation Accumulation Account
There is no limit on how much an individual is able to hold in a superannuation accumulation account.
How Is The Transfer Balance Cap Calculated
The Transfer Balance Cap is calculated based on a credit / debit account system. All transfers from Accumulation phase to Pension income stream phase are counted towards the Transfer Balance Cap and any amounts rolled from the Pension income stream back to Accumulation phase will reduce the amount counted towards the Transfer Balance Cap. All earnings on investments within the Pension account and any Pension income stream payments are irrelevant for Transfer Balance Cap calculation purposes.
Transfer / Share Transfer Balance Cap
A person is unable to share or transfer any portion of their unused Transfer Balance Cap to another individual. The Transfer Balance Cap is a per-person limit.
How are Defined Benefit Pensions / Lifetime Annuities Assessed?
The annual income received from a lifetime pension, defined benefit pensions and other lifetime annuities should be multiplied by 16. This will then be the capital amount that counts towards the Transfer Balance Cap and whether it exceeds the defined benefit pension income cap. For pensions that commenced prior to 1 July 2017, the calculation will be done on 30 June 2017.
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If an individual holds a defined benefit or lifetime annuity income stream that is unable to be commuted and they also hold an account based pension (allocated pension). The account based pension will need to be commuted to the point that it brings the total combined pension values under the Transfer Balance Cap.
Where a person only has defined benefit / lifetime annuities or pensions that are unable to be commuted and where the calculated value exceeds the Transfer Balance Cap, there are capped defined benefit income stream modifications. Excess Transfer Balance Tax is not levied on these income streams, rather incomes received from such pensions are subject to income tax rules. Specifically, individuals over aged 60, receiving a defined benefit pension from a taxed source will have half of the income above the Defined Benefit Income Cap of $100,000 p.a. taxed at their marginal tax rate.
How Are Life Expectancy and Market Linked Pensions Assessed
Income streams based on a pre-determined term or life expectancy factor that began prior to 1 July 2017 are valued by multiplying the annual payment by the remaining term or life expectancy (rounded up). For pensions that commenced prior to 1 July 2017, the calculation will be done on 30 June 2017.
TTR Pension / TRIS Transfer Balance Cap
The value of a transition to retirement (TTR) pension or income stream will not count towards the Transfer Balance Cap. This is because all earnings within a TTR Pension / TRIS will be taxed at 15% from 1 July 2017 – removing any tax advantage on earnings by having these funds in pension phase.
Exceeding the Transfer Balance Cap
Pre 1 July 2017 Income Streams
An account based pension (allocated pension) in place prior to 1 July 2017 will need to have a balance of no more than $1.6 Million on 1 July 2017. It can be reduced prior to this date by rolling funds back to Accumulation phase or by taking additional pension payments / commutations.
If an individual has an existing account based pension/s with a balance of between $1.6 Million and $1.7 Million on 1 July 2017, the member will have six months to roll the excess amount back to accumulation phase without penalty, as part of transitional rules.
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If an individual has existing account based pension/s in excess of $1.7 Million on 1 July 2017, a notice will be issued by the ATO and the excess will need to be transferred back to Accumulation phase, together with any notional earnings. Notional earnings are calculated based on a daily rate of earnings. Actual earnings within the account are irrelevant. Excess Transfer Balance Tax of 15% will also be payable on the notional earnings with the intention of neutralising the tax benefit received from having the excess balance in tax free pension phase.
Income Streams Commenced After 1 July 2017
If an income stream or pension commences after 1 July 2017 and the commencement of this pension breaches the Transfer Balance Cap or causes the Transfer Balance Cap to be breached due to other existing pensions or income streams, the excess amount, plus any notional earnings will need to be transferred back to Accumulation phase.
Excess Transfer Balance Tax
The Excess Transfer Balance Tax rate is 15%. As of 1 July 2018, the Excess Transfer Balance Tax will be 15% for the first breach, increasing to 30% for the second and any subsequent breaches.
Death Benefits Transfer Balance Cap
The beneficiary of a death benefit superannuation pension income stream will have the inherited pension value counted towards their own Transfer Balance Cap – together with any existing pension income streams they have in place.
The value of the death benefit superannuation pension income stream will be calculated as the death benefit balance upon death, plus any earnings that have accrued between when the deceased died and when the beneficiary became entitled to payments.
Reversionary pension income streams are assessed differently. See below.
Reversionary Pension Transfer Balance Cap
A recipient of a reversionary pension will have the reversionary pension counted towards their own Transfer Balance Cap; however they will have 12 months before the value is counted towards their Transfer Balance Cap – intended to give them time to organise their pension balances to avoid exceeding the cap.
The value of the reversionary pension for Transfer Balance Cap purposes is the value at the time of the deceased’s death.