From 1 July 2017 a $1.6 million limit will apply on the amount of superannuation that an individual can transfer from accumulation phase to pension phase, where earnings are tax-free.
Those individuals with balances in excess of the $1.6 million transfer balance cap (including those already with existing retirement income streams as at 1 July 2017) will need to either:
- transfer the excess back into an accumulation superannuation account; or
- withdraw the excess amount from their superannuation fund.
Transfer balance account
The transfer balance account tracks how much you have transferred to the pension (retirement) phase within superannuation, and broadly operates via a system of credits and debits. A credit (increase) is an assessment against the cap such as when an income stream commences and:
- reversionary income streams upon entitlement
- notional earnings accruing to excess transfer balance amounts.
A debit (decrease) reduces the amount assessed against the cap, such as a commutation to accumulation phase, and:
- structured settlement payments contributed to superannuation
- specific payments to meet family law settlements.
What counts towards your transfer balance cap?
The transfer balance cap applies to all income streams, regardless of commencing before or after 1 July 2017.
Superannuation retirement income streams include:
- account based pensions
- lifetime and term annuities
- defined benefit pension
- death benefit superannuation income streams (with modifications for child death benefit pension)
Note that Transition to retirement (TTR) income streams are not assessed against the transfer balance cap. However, as soon as the TTR recipient meets a condition of release which converts the pension to unrestricted non-preserved (e.g. retirement, permanent incapacity or reaching age 65), the value of the TTR will be included in the transfer balance cap.
Income streams that do not ordinarily have an account balance, such as defined benefit pensions and annuities, have a value determined based on a legislative formula. Typically, that value will be based on the annual income entitlement multiplied by a factor of 16.
Personal transfer balance cap
Your personal transfer balance account will commence when you first transfer an amount from accumulation to pension phase (or 1 July 2017, if already in existence). In that financial year, your personal transfer balance cap would be the same as the general transfer balance cap at that time (e.g. $1.6 million for 2017/18).
In future years, the personal transfer balance cap is cumulative and will depend on:
- if indexation is available – the unused cap percentage, and
- debits and credits to the transfer balance account.
Proportional indexation will apply on an individual basis to measure the percentage of the cap previously utilised and the percentage of unused cap space an individual has available at any point in time. For example, if an individual has previously used up 75 per cent of their cap they will have access to 25 per cent of the current (indexed) cap in the future.
Fluctuations in retirement funds due to earnings growth or pension payments are not considered when calculating subsequent unused cap space.
Individuals can apply to the Commissioner of Taxation to replenish their transfer balance cap space for unusual situations that cause their retirement balance to be depleted, such as fraud or bankruptcy.
Exceeding the transfer balance cap:
Breaches of the $1.6 million cap require the excess amount (plus a notional earnings) to be commuted back to accumulation phase or withdrawn from the superannuation system. Excess transfer balance tax is payable for all days where the amount held in pension phase exceeds the cap. Notional earnings will be calculated from the date of breach of the cap through to when a determination is made by the Australian Taxation Office; and that amount will then attract the General Interest Charge.
Notional earnings will be subject to tax at:
- 15 per cent for the first breach
- 30 per cent for the second and subsequent breaches.
Those individuals with balances in excess of $1.6 million will need to either:
- transfer the excess back into an accumulation superannuation account; or
- withdraw the excess amount from their superannuation fund.
Superannuation savings accumulated in excess of the cap can be commuted and remain in an accumulation superannuation account, where the earnings will be taxed at a maximum of 15 per cent.
Non-commutable income streams (defined benefit pensions) in excess of the cap can generally not be commuted. In such cases, excess transfer balance tax is not payable; however, where the annual income exceeds $100,000 additional tax may be incurred.
Indexation of the transfer balance cap
The transfer balance cap will be indexed in $100,000 increments in line with inflation (consumer price index). However, individuals will only be able to access a proportion of the indexed cap that represents the unused proportion of their personal cap, as opposed to the full $100,000, when this becomes available.
