An introduction to the $1.6 million transfer balance cap and its impact on retirement | Accurium

An introduction to the $1.6 million transfer balance cap and its impact on retirement

From 1 July 2017, a $1.6 million cap on assets that can be transferred to a tax-free superannuation retirement phase income stream will take effect. In this article, we explain how the cap works and the impact this could have on your clients’ retirement.

About the transfer balance cap

The transfer balance cap will generally limit the amount of assets a person can transfer to tax-free superannuation retirement phase income streams.

If an amount greater than the transfer balance cap is transferred to a superannuation retirement phase income stream, the person will generally be required to remove the excess amount from the retirement phase of superannuation. In most cases, they will be liable for an excess transfer balance tax.

Also, assets in superannuation retirement phase income streams before 1 July 2017 that exceed the transfer balance cap will generally need to be removed from the retirement phase of superannuation.

With average retirement balances of significantly less than $1.6 million, most Australian retirees will be unaffected by this reform. However, appropriate planning, both before and after 1 July 2017, could minimise the impact on affected clients.

The general and personal transfer balance cap

The general transfer balance cap is $1.6 million for 2017/18 and is subject to CPI indexation (in $100,000 increments) thereafter.

From 1 July 2017, anyone with a superannuation retirement phase income stream will have a personal transfer balance cap.

A client’s personal transfer balance cap will initially be equal to the general transfer balance cap, and is subject to proportional indexation in line with the general transfer balance cap.

Proportional indexation means the indexation will only be applied to the unused cap percentage.

The transfer balance account

A person commences to have a transfer balance account on the later of 1 July 2017 and when they start a superannuation retirement phase income stream. The transfer balance account will track the net amount a person has transferred into the tax-free retirement phase of superannuation.

Certain transactions will be recorded as credits or debits to a personal transfer balance account. Credits to a person’s transfer balance account include:

  • the value of any superannuation retirement phase income streams at 30 June 2017 (generally including death benefit income streams);
  • the commencement value of superannuation retirement phase income streams commenced from 1 July 2017 (generally including death benefit income streams);
  • the credit value of capped defined benefit income streams (see below); and
  • the notional earnings on any excess transfer balance. 

Investment earnings on superannuation retirement phase income streams do not count as a credit towards a person’s transfer balance account. It will be possible for a client to commence a superannuation retirement phase income stream within their transfer balance cap, and for that income stream to grow in excess of the cap.

Debits to a person’s transfer balance account include:

  • a commutation of a superannuation retirement phase income stream;
  • structured settlement contributions;
  • a payment split on divorce or relationship breakdown; and
  • certain events that result in a person’s superannuation interest being reduced including fraud or dishonesty or bankruptcy.

Income payments from a superannuation retirement phase income stream do not count as a debit towards a person’s transfer balance account.

Superannuation death benefits paid as a superannuation retirement phase income stream

Where a superannuation death benefit is paid to an eligible dependant as a superannuation retirement phase income stream, it will generally be credited to the dependant’s transfer balance account.

Where a superannuation retirement phase income stream reverts to a reversionary beneficiary following the death of the original recipient, a credit will arise in the reversionary beneficiary’s transfer balance account twelve months after reversion.

A child recipient of a superannuation retirement phase income stream death benefit from a parent will be entitled to a modified transfer balance cap (determined by reference to the value of the parent’s or the general transfer balance cap and the child’s share of the deceased’s superannuation interests).

In these cases, a death benefit beneficiary will need to manage their affairs to ensure they do not exceed the transfer balance cap.

Defined benefit income streams

Where a person is receiving certain lifetime superannuation defined benefit income streams (referred to as capped defined benefit income streams), including certain complying1 lifetime pensions, the income stream is valued by multiplying the annual entitlement (an annualised payment) by 16.

Where a person is receiving certain life expectancy superannuation defined benefit income streams, including market-linked and complying1 term pensions, the income stream is valued by multiplying the annual entitlement by the number of years remaining on the term of the product (rounded up to the next whole number).

Example:
On 1 March 2017 William, age 75, had an existing lifetime defined benefit pension paying $40,000 pa. and commenced an account-based pension in his SMSF with $900,000.
Between 1 March and 30 June 2017, the balance of the pensions will change.
William’s transfer balance account will be credited with:
- the 30 June 2017 account balance of the account-based pension; and
- the $40,000 annualised payment at 1 July 2017 x 16 = $640,000
If William’s account-based pension increases in value between 1 March 2017 and 30 June 2017, this value when combined with special value of his defined benefit pension would mean he would breach his personal transfer balance cap.

Breaching the transfer balance cap

Where a person’s transfer balance account exceeds their personal transfer balance cap, they will have an excess transfer balance.

If a person has an excess transfer balance, they will generally be required to reduce their transfer account balance below their personal transfer balance cap.

They can do this by commuting the excess (equal to the excess transfer balance plus a notional earnings amount) from a superannuation retirement phase income stream.

They will also generally be liable for an excess transfer balance tax.

The excess amount commuted could be transferred to an accumulation superannuation account or withdrawn from the superannuation system altogether.

Excess transfer balance earnings

Where a person has an excess transfer balance they will generally benefit from earnings on the excess capital. These earnings must be removed from the retirement phase of superannuation.

However, for this purpose, earnings on an excess transfer balance are not the actual earnings that accrue. They are instead notional earnings calculated at a rate based on the general interest charge. Excess transfer balance earnings accrue and compound daily.

Excess transfer balance determination

Where a person has an excess transfer balance and does not remove both the excess and any earnings on the excess, they will be issued with an excess transfer balance determination by the ATO.

The determination will be accompanied by a default commutation notice which details the income stream provider and superannuation income stream the ATO will request to remove excess capital and earnings from. A person has 60 days from the date of the determination to nominate a different income stream from which the excess capital and earnings are to be removed.

Excess transfer balance tax

Where a person has an excess transfer balance they will generally be liable for an excess transfer balance tax.

To calculate the tax payable, the accrued excess transfer balance earnings are multiplied by the excess transfer balance tax rate.

The rate of excess transfer balance tax is 15% for any excess periods that start in 2017/18. From 1 July 2018, the rate is 15% for the first year breach and then 30% for subsequent breaches.

Treatment of defined benefit income streams

Excess transfer balance tax is not imposed for a breach of the transfer balance cap that is only attributable to a capped defined benefit income stream (see definition above). Instead, part of the income from such income streams may be subject to additional income tax rules.

For a taxed-source capped defined benefit income stream, half of the income stream above $100,000 per annum (for 2017/18 and indexed thereafter in line with the general transfer balance cap) will be included in the recipient’s assessable income and taxed at their marginal tax rate.

For an untaxed-source capped defined benefit income stream, excess income above $100,000 per annum (for 2017/18 and indexed thereafter in line with the general transfer balance cap) will not be eligible for the 10% tax-offset that would otherwise apply. The excess income would be taxed at the recipient’s marginal tax rate. 

Transitional provisions for certain excess amounts to 31 December 2017

A person will not have an excess transfer balance in the transitional period if:

  • the only transfer balance credits in that person’s transfer balance account are from existing income streams at the end of 30 June 2017;
  • their transfer balance is in excess of their transfer balance cap (of $1.6 million) by $100,0000 or less; and
  • their transfer balance is reduced to or below their personal transfer balance cap within the transitional period.

The transitional provisions operate only to disregard a person’s excess transfer balance for the six month transitional period so that the person does not have any excess transfer balance earnings and they are not liable for excess transfer balance tax.

CGT relief for funds

Transitional provisions provide CGT relief to superannuation funds that comply with the requirements of the transfer balance cap, and that transfer assets from the retirement phase to the accumulation phase.

Superannuation annuities

The assessment of a superannuation annuity as at 30 June 2017 will depend on the annuity type.

Annuity type
Credit value
Allocated/Account-based annuity
Account balance (30 June 2017)
Account balance (30 June 2017)2
Identifiable lump sum3
Lifetime Annuity (excl. complying lifetime annuity)2
Identifiable lump sum3
Complying lifetime annuity2
Annualised payment4 x 16
Complying life expectancy (term) annuity2
Annualised payment4 x remaining term
Market-linked annuities5
Annualised payment4 x remaining term

From 1 July 2017 the purchase price of all new superannuation annuities will generally be credited to a person’s transfer balance account.

Commutable annuities and a breach of the transfer balance cap

A breach of the transfer balance cap by an investor with a commutable superannuation annuity will generally mean a commutation of any excess amount plus notional earnings (based on general interest charge) on the excess amount is required from a superannuation retirement phase income stream.

Complying6 annuities and a breach of the transfer balance cap

Because these superannuation retirement phase income streams are non-commutable, an alternative to requiring commutation of excess amounts is necessary.

Where payments from such income streams exceed $100,000 per annum (for 2017/18 and indexed thereafter in line with the general transfer balance cap) half the excess income will be included in the recipient’s assessable income. These payments will be taxed at the recipient’s marginal tax rate.

Other annuities and a breach of the transfer balance cap

There remains a small category of annuities that do not meet the definition of a complying6 annuity but that are non-commutable. Under the law as passed, these are treated the same as commutable annuities. However, government consultation continues in relation to this assessment for these annuities and further regulation may change this.

Planning for clients affected by the cap

In the lead up to 1 July 2017, you will have an opportunity to proactively engage with clients who may have retirement phase income streams in excess of $1.6 million.

You will be able to help your clients determine whether to transfer any excess back to the accumulation phase of superannuation or withdraw it from the superannuation system altogether.

Familiarising yourself with how the cap works will leave you well positioned to discuss these incoming changes with your clients.


1Complying lifetime pensions that meet SIS Reg. 1.06(2) and life expectancy pensions that meet SIS Reg. 1.06(7)
2Complying lifetime annuities that meet SIS Reg. 1.05(2) and life expectancy annuities that meet SIS Reg. 1.05(9).
3Identifiable lump sum is currently defined for term and lifetime annuities (other than complying term or lifetime annuities) to be an amount equal to purchase price. Government consultation continues in relation to this assessment for certain types of annuities and further regulation may alter this assessment.
4Annualised payment based upon first payment of financial year.
5Market-linked annuities include Term Allocated Annuities.
6Complying lifetime annuities that meet SIS Reg. 1.05(2) and life expectancy annuities that meet SIS Reg. 1.05(9).