• Transfer balance cap

    As part of the 2016 Budget, some changes were introduced to make superannuation fairer and more sustainable.

    The transfer balance cap applies to the total amount of superannuation that has been transferred into the retirement phase. It does not matter how many accounts you hold these balances in.

    The amount of the cap will start at $1.6 million, and will be indexed periodically in $100,000 increments in line with CPI. The amount of indexation you will be entitled to will be calculated proportionally based on the amount of your available cap space. If, at any time, you meet or exceed your cap, you will not be entitled to indexation.

    You will be able to make multiple transfers into the retirement phase as long as you have available cap space.

    Each individual with superannuation interests in the retirement phase has a personal transfer balance cap. The cap cannot be shared with any other person. To determine your position with respect to the transfer balance cap, you have a transfer balance account. This tracks the net amounts you have transferred to the retirement phase.

    The transfer balance account works in a similar way to a bank account. Amounts you transfer to, or are otherwise entitled to receive, from the retirement phase give rise to a credit (increase) in you transfer balance account. Certain transfers out of the retirement phase give rise to a debit (decrease) in your transfer balance account.

    The transfer balance cap will affect you if you are currently receiving a pension or annuity income stream that is close to or in excess of the cap, or start a retirement phase income stream after 1 July 2017.

    If you are currently receiving a pension or annuity, you will need to speak to your superannuation providers about the likely value of your income stream as at 30 June 2017. Check how you can reduce the value of your income stream before 1 July 2017 to ensure you do not have an excess.

    If you will commence a retirement phase income stream after 1 July 2017, you will need to:

    • ensure that your account based pensions and annuities do not exceed the $1.6 million transfer balance cap
    • include income from certain lifetime pensions (usually paid from a defined benefit fund) in your income tax return if you are over 60, and may need to pay more tax
    • ensure that if you have a mix of pension types, with a total value exceeding $1.6 million, you reduce any account based pensions to reduce the total value of all your pensions below the transfer balance cap.

    Although there is now a limit on the amount of assets you can transfer into a tax-free retirement phase account, this does not affect the amount of money that you can have in the accumulation phase of a superannuation fund. Any amount of superannuation you have in your fund above the $1.6 million amount can be retained in the accumulation phase and/or be taken as lump sum payments.

    See also:

    What counts towards your cap

    The cap limits the amount that you can transfer into retirement phase to start a pension or annuity over the course of your lifetime. This is no matter how many accounts you hold or how many times you transfer money into retirement phase. The cap also includes the value of pensions or annuities you may start to receive for some other reason, for example:

    • your spouse has died and you are receiving, or start to receive, a pension from their superannuation
    • your former spouse has been ordered to pay you a portion of their pension income stream as part of a family court settlement.

    The cap does not apply to any subsequent growth or losses. This means that:

    • if you start a pension with $1.6 million and the value of that pension grows to $1.7 million, you will not exceed your cap
    • if you start a pension with $1.6 million and the value of that pension goes down over time as you use it to live on or you suffer losses, you can’t 'top up' your pension accounts – you will still be able to access other superannuation amounts you may hold in accumulation phase by taking these as a 'lump sum'.

    The transfer balance cap will also apply to future 'innovative' income stream products.

    Transition to retirement income streams (TRIS) will not count towards your transfer balance cap as from 1 July 2017.

    When calculating if you have exceeded your cap, we will subtract the value of any structured settlement contributions you've made.

    Special rules apply to child death benefit beneficiaries.

    Find out about:

    Special rules for lifetime pensions and annuities

    Special rules apply to certain lifetime pensions and annuities, whenever they start to be paid. You should contact your fund about the value of your pensions and annuities.

    The value of your pension or annuity for an account-based pension will generally be the value of your pension account.

    Special rules apply to calculate the value of:

    • lifetime pensions and annuities
    • certain life expectancy and market-linked pensions and annuities where the income stream existed on 30 June 2017.

    See also:

    Lifetime pension and annuities

    These are valued by multiplying the annual entitlement by a factor of 16. This provides a simple valuation rule based on general actuarial considerations.

    This means that a lifetime pension that pays $100,000 per annum will fully exhaust your transfer balance cap in the 2017–18 financial year and you will not be able to start or maintain any account based retirement phase income stream after 1 July 2017 without breaching your transfer balance cap. If this happens you will generally need to reduce the value of your account based pension to nil and pay excess transfer balance tax.

    Certain life expectancy and market linked pensions

    Certain life expectancy and market linked pensions and annuities being paid on or before 30 June 2017 are valued by multiplying the annual entitlement by the number of years (rounded up to the next whole number) remaining on the term of the product.

    Retirement phase income streams

    Rules apply to the balance transfer cap for people receiving or planning to start a retirement phase income stream before 1 July 2017, and from 1 July 2017.

    Income streams before 1 July 2017

    If you are receiving or planning to start a retirement phase income stream before 1 July 2017, you will need to ensure that the likely value of the pensions and annuities that will count towards your cap will not exceed your transfer balance cap.

    The value of the account based pension or annuity that will count at the beginning of the measure on 1 July 2017 is the value of the pension or annuity as at 30 June 2017. Special rules apply to how the value of certain lifetime, life-expectancy and market linked pensions will be valued.

    When calculating if you have exceeded your cap, we will subtract the value of any structured settlement contributions you've made.

    Find out about:

    Value below $1.6 million

    If the total value of all of your retirement phase income streams, less any structured settlement contributions, will not exceed the $1.6 million cap, you do not need to do anything.

    Value above $1.6 million

    If the total value of all of your retirement phase income streams, less any structured settlement contributions, will exceed $1.6 million you will need to reduce the value of any account based income streams prior to 1 July 2017. Subject to the rules of your income stream you may be able do this prior to 1 July 2017 by:

    • removing the necessary amount from retirement phase (this is known as commuting) and transferring it back to your accumulation account, or paying a lump sum out of the superannuation system
    • making additional pension payments to reduce your income stream capital by the necessary amount.

    If at 1 July 2017, the total value of your pre 1 July 2017 retirement phase income streams is between $1.6 million and $1.7 million and the excess comes from account based income streams, you have six months to remove the excess capital without penalty.

    If you do not reduce your retirement phase interests to or below the cap level prior to 1 July 2017, and the transitional rules do not apply:

    • You will generally need to remove the excess capital plus the excess transfer balance earnings from the retirement phase once the measure comes into effect and will have to pay excess transfer balance tax.
    • You will also be restricted in the way that you are able to reduce your retirement phase interests to come back under your cap (that is, additional pension payments will not count towards reducing your excess).

    Exceeding the cap on or after 1 July 2017

    The transfer balance cap measure will commence on 1 July 2017. This generally means if you have a retirement phase account balance in excess of the $1.6 million cap on or after this date you will need to:

    • remove any amount over $1.6 million, plus excess transfer balance earnings, from retirement phase
    • pay excess transfer balance tax.

    If you exceed the cap because you were receiving certain lifetime, life-expectancy or market linked pensions or annuities before 1 July 2017, you may not be able to commute these pensions or annuities to bring yourself under the cap. If this happens, the tax treatment of these income streams will change. If you are over 60 you will need to include this income in your income tax return. Where an income stream from these sources exceeds $100,000 per year, you may need to pay more tax

    Special transitional rules

    If, at 1 July 2017, the total value of your pre 1 July 2017 retirement phase income streams is between $1.6 million and $1.7 million you have six months to remove the excess capital without penalty.

    What is the difference between $1.6 million transfer balance cap and $1.6 million total superannuation balance?

    The ‘transfer balance cap’ introduces a new limit on the amount you can transfer into retirement phase to support an income stream over the course of your lifetime. You will be liable to pay excess transfer balance tax if your transfer balance account exceeds the cap limit.

    The ‘total superannuation balance’ has been introduced as part of a new test to determine an individual’s non-concessional contributions cap and bring forward period. Your total superannuation balance is essentially the total value of your accumulation and retirement phase interests (subject to modifications) and rollover amounts not yet included in those interests across all of your superannuation providers. Where an individual’s total superannuation balance is greater than or equal to the general transfer balance cap they will be deemed to be in excess of the non-concessional contributions cap on any non-concessional contributions they make after 1 July 2017. They will also not be entitled to a superannuation co-contributions payment.

    The transfer balance cap will be set at $1.6 million for the 2017/18 year. This means that you will need to comply with two separate $1.6 million limits from 1 July 2017:

    • the transfer balance cap limit on the value of the interest that supports your retirement phase income streams
    • your total superannuation balance in order to determine your non-concessional contributions cap.

    The general transfer balance cap is subject to indexation in $100,000 increments on an annual basis in line with the consumer price index. The total superannuation balance limit is equal to the general transfer balance cap.

    Will my transfer balance account and total superannuation balance be the same value?

    Your transfer balance account and total superannuation balance are calculated differently, therefore it is possible that you will have different balances under the two separate tests.

    Transfer balance account

    Your transfer balance account is calculated on amounts that you transfer into retirement phase to support a pension or annuity over the course of your lifetime.

    The transfer balance account works in a similar way to a bank account. Amounts you transfer to, or are otherwise entitled to receive, from the retirement phase give rise to a credit (increase) in you transfer balance account. Certain transfers out of the retirement phase give rise to a debit (decrease) in your transfer balance account. The total value of all of the credits and debits to your transfer balance account at the end of a financial year, will count towards the calculation of your total superannuation balance.

    The transfer balance also includes the value of pensions or annuities you may start to receive for some other reason, for example:

    • you receive a death benefit pension
    • you receive a portion of a retirement income stream as part of a family court settlement.
    Total superannuation balance

    Your total superannuation balance will be calculated at the end of 30 June of the previous financial year in order to determine your current non-concessional contributions cap.

    At a particular time, an individual’s total superannuation balance is the sum of the following.

    • The accumulation phase value of their superannuation interests that are not in the retirement phase. This is the total amount of benefits that would become payable if the individual voluntarily ceased the interest at that time.
    • The retirement phase value of their superannuation interests. This is the balance of the individual’s transfer balance account, modified to reflect the value of account-based interests in the retirement phase at that time and disregarding certain debits.
    • The amount of each rollover superannuation benefit not already reflected in the accumulation phase value or the retirement phase value, reduced by the sum of any structured settlement contributions.

    Example:

    As of 1 April 2017, Fred is receiving an account-based pension valued at $2 million. On 28 June 2017, Fred commutes $500,000 from his pension and transfers it back into his superannuation accumulation account.

    On 18 August 2017, Fred makes $50,000 in voluntary non-concessional contributions to his fund.

    Fred has a personal transfer balance cap of $1.6 million for the 2017–18 year. Fred has a transfer balance account of $1.5 million, so is within his personal transfer balance cap.

    Fred’s total superannuation balance as of 30 June 2017 was $2 million ($500,000 in the accumulation phase of his superannuation fund and $1.5 million in his transfer balance account). As this exceeds the general transfer balance cap, his $50,000 contribution will be treated as excess non-concessional contributions.

    End of example

    See also:

    Removing the excess capital and earnings

    If you exceed your transfer balance cap you will benefit from earnings on the excess capital while you are in excess of the cap. Consequently, these earnings will need to be removed from retirement phase.

    The excess transfer balance earnings you will need to remove are not the actual earnings you may have accrued, they are notional earnings calculated at a rate based on the general interest charge.

    For the purposes of calculating how much you will need to remove from retirement phase, excess transfer balance earnings accrue and compound daily until we send you a determination or, if you remove the excess capital and earnings before we send you a determination, the date you remove the total excess.

    Example

    On 1 August 2017 Andrew starts a pension worth $2 million. Andrew has an excess transfer balance of $400,000 as his personal transfer balance cap is $1.6 million. Assuming an earnings rate of 9.2%, after 30 days, in excess transfer balance tax earnings of $3,036 will have accrued.

    End of example

    Where you exceed your cap, and do not remove the excess capital and excess transfer balance earnings we will issue you with an excess transfer balance determination. This will specify how much you will need to remove from retirement phase.

    The excess transfer balance determination will be accompanied by a default commutation notice which details:

    • the income stream provider we will ask to remove the excess capital and earnings from retirement phase
    • the superannuation income stream we will ask them to remove the excess from.

    If you receive an excess transfer balance determination, you can tell us in the approved form, if you want the amount in the determination removed from a different income stream or streams. You must make the election within 60 days of the date when the determination was issued. Once made, the election is irrevocable and we will issue a commutation authority to your elected superannuation fund.

    If you do nothing, we will issue commutation authorities to your superannuation provider as set out in the default commutation notice.

    If you disagree with the determination you can also lodge an objection.

    If a superannuation provider receives a commutation authority from us, they must reduce the identified income stream by the amount outlined in the authority within 60 days.

    If you do not have enough in that account to cover the full amount in the determination we will continue to issue commutation authorities to other funds until either:

    • the determination amount has been removed from retirement phase
    • you have no amounts left that can be removed from retirement phase.

    Excess transfer balance tax

    Once you have removed all the excess capital and excess transfer balance earnings from retirement phase, we will calculate the amount of excess transfer balance tax you will need to pay and send you an assessment.

    To calculate the tax you need to pay we will:

    • calculate your excess transfer balance earnings from the day you first exceed the cap to the date of rectification (when your balance is no longer in excess)
    • multiply your earnings by the excess transfer balance tax rate.

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

    This will issue to you and you are liable to pay the assessed tax amount. This is even if you have reduced your retirement phase income stream to below the cap before we issued a determination.

    Capped defined benefit income stream modifications

    Modifications apply to certain income streams which are subject to commutation restrictions which mean the general rules can't apply. These income streams are referred to as capped defined benefit income streams.

    There are two categories of superannuation income streams the definition applies to:

    • certain lifetime pensions, regardless of when they started
    • certain
      • life expectancy pensions and annuities
      • market-linked pensions and annuities
      • where the income stream existed on 30 June 2017.
       

    You will need to talk to your provider to determine if your income stream falls within these modifications.

    The value of these income streams count towards your transfer balance cap from 1 July 2017. Excess transfer balance tax is not imposed for a breach of the transfer balance cap that is only attributable to these income streams.

    Instead the income streams paid from these pensions and annuities are subject to additional income tax rules.

    Where these income streams are paid to an individual 60 years or over, the amount of the income stream above the defined benefit income cap will be taxed differently.

    The defined benefit income cap will be $100,000 for the 2017–18 year and will be indexed in line with the general transfer balance cap.

    The defined benefit income cap will be reduced if:

    • you are receiving a pension and turn 60 part-way through the year, or start a pension for the first time part-way through a year
    • you are under 60 and receiving one of these income streams and start to receive a death benefit pension and your spouse was over 60.

    For a taxed source capped defined benefit income stream, half of the income stream above $100,000 will be included in your assessable income and taxed at your marginal tax rate.

    The taxed source is made up of the tax-free component and the taxed element of the taxable component of an income stream.

    Example 1

    Frances is 62 years old and receives a capped defined benefit income stream income of $160,000 from her funded defined benefit scheme. Her capped defined benefit income exceeds the cap by $60,000. Therefore she will need to include $30,000 in her assessable income.

    For an untaxed source capped defined benefit income stream, your entitlement to the tax offset will be limited to the first $100,000 of your total capped defined benefit income streams.

    The untaxed source is the untaxed element of the taxable component of an income stream.

    End of example

     

    Example 2

    Gordon is 65 years old and receives a capped defined benefit income stream income of $140,000 from an untaxed source. The pension is taxed at marginal rates, subject to a 10% offset. However, his offset entitlement of $14,000 is reduced by $4,000 to $10,000.

    For a mix of taxed and untaxed income streams, the taxed portion is applied to the $100,000 cap before the untaxed portion.

    End of example

     

    Example 3

    Alastair is 63 years old. On 1 July 2017, he is receiving a defined benefit pension of $150,000 pa made of up of a tax-free component of $50,000 and an untaxed element of the taxable component of $100,000.

    The value for transfer balance cap purposes of Alastair's defined benefit pension for transfer balance cap purposes is $150,000 × 16 = $2.4 million.

    As he only has defined benefit pension income, he has exhausted his transfer balance cap but does not need to remove any excess from retirement phase.

    He has exceeded his defined benefit pension income cap of $100,000.

    The tax-free component of Alastair's defined benefit pension income is considered to have come from a 'taxed source'. As the $50,000 he receives does not exceed his defined benefit pension income cap he does not need to include it in his assessable income.

    Alastair includes the $100,000 of the untaxed element in his assessable income.

    End of example

    From 1 July 2017, superannuation providers who pay these types of income streams will have new withholding obligations. They will need to provide payment summaries to members.

    If you are already over the transfer balance cap due to a lifetime, life expectancy or market linked pensions or annuity income stream, you will need to reduce all of your account-based pensions or annuities to nil.

    Example 4

    Max started an account-based pension when he turned 60. The pension is valued at $0.9 million. Max then starts a defined benefit pension of $150,000 pa on 1 July. The defined benefit pension is entirely from a taxed source (that is, made up of a tax free component and a taxed element of the taxable component).

    The special value of Max's defined benefit pension for transfer balance cap purposes is $2.4 million.

    Max has exceeded his transfer balance cap by $1.7 million, but only $0.9 million of this excess relates to an account-based pension. As he has breached his cap due to two distinct types of income streams, they will be treated differently.

    Max has also exceeded his capped defined benefit income cap of $100,000.

    Treatment of excess relating to the account based pension

    Max’s transfer balance account exceeds his transfer balance cap with $0.9 million of the amount relating to an account-based pension. He will need to remove $0.9 million plus excess transfer balance tax earnings from retirement phase.

    The earnings will be calculated and added to the excess from the time he went into excess until the time the excess amount is removed or we issue a determination. If Max no longer has sufficient assets in his account based pension to remove the total excess amount, he will be required to reduce his account based pension to nil.

    Excess transfer balance tax will also apply.

    Max’s account-based pension is still tax free.

    Treatment of capped defined benefit pension income in excess of the defined benefit income cap

    Max's pension income comes from a 'taxed source'. He will need to include 50% of his capped defined benefit pension income that is above his defined benefit income cap of $100,000 in his assessable income.

    As $50,000 of his defined benefit pension income is above his defined benefit income cap, Max will need to lodge an individual income tax return to include $25,000 in his assessable income. This may result in him having a tax liability for the financial year in question.

    End of example

    Provider reporting

    Retirement phase income stream providers will have new reporting requirements associated with the transfer balance cap. The new reporting requirements will be event based, not annual reporting – that is, they will need to report every time there is a change to a member's retirement phase interests.

    Superannuation providers will need to report directly to us when:

    • a retirement phase superannuation income stream commences, including the associated value of the income stream
    • an amount in a retirement phase account is commuted
    • a death benefit income stream commences including the recipient and the amount of the income stream
    • the amount of any structured settlements received before and after 1 July 2017.

    Capped defined benefit income streams

    Different treatment applies to the following.

    • Lifetime pensions paid under Superannuation Industry Supervision Regulation 1.06(2)
    • Lifetime annuities paid under Superannuation Industry Supervision Regulation 1.05(2)
    • Life expectancy pensions being paid under Superannuation Industry Supervision Regulation 1.06(7) as at 30 June 2017
    • Life expectancy annuities being paid under Superannuation Industry Supervision Regulation 1.05(9) as at 30 June 2017
    • Market linked pensions being paid under Superannuation Industry Supervision Regulation 1.06(8) as at 30 June 2017
    • Market linked annuities being paid under Superannuation Industry Supervision Regulation 1.05(10) as at 30 June 2017

    Where these income streams are paid to an individual 60 years or over, the amount of the income stream above $100,000 per year will receive different tax treatment.

    From 1 July 2017, superannuation providers who pay a capped defined benefit income stream will have new withholding obligations and will need to provide payment summaries to members.

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    Capital gains tax relief

    From 1 July 2017 funds may apply for transitional capital gains tax (CGT) relief. Funds who choose to apply for the CGT relief will need to complete an updated CGT schedule. Superannuation funds will need to report:

    • that they have chosen for the CGT relief to apply
    • the amount of tax applied in the current year in relation to assets for which relief has been sought
    • the amount of tax to be deferred to a later year.

    A superannuation provider must notify us of the above by completing the CGT schedule on or before the day the trustee is required to lodge the fund’s 2016–17 income tax return.

    Find out about:

    Capital gains tax relief for funds

    Transitional provisions provide capital gains tax (CGT) relief. Under the new measure, complying superannuation funds are able to reset the cost base of assets to their market value where those assets are reallocated or re-apportioned from the retirement phase to the accumulation phase prior to 1 July 2017 in order to comply with the transfer balance cap or new transition to retirement income stream arrangements.

    Where the assets are already partially supporting an interest in the accumulation phase, tax will be paid on this proportion of the capital gain made to 1 July 2017. This capital gain may be deferred until the asset is sold.

    CGT relief applies differently and is subject to different conditions depending on whether the superannuation fund segregates assets to support its current pension liabilities or whether it applies the proportionate method. The following conditions apply to both methods.

    • The relief applies to reallocation or re-proportioning made between 9 November 2016 and 30 June 2017 in relation to assets a complying superannuation fund held through that period.
    • The superannuation fund must choose to apply the relief if they wish to do so. The superannuation fund must make this choice and notify us in the approved form on or before the day the trustee is required to lodge the fund’s 2016–17 income tax return. A choice to apply the relief cannot be revoked.

    Further information regarding CGT relief is being developed.

    See also:

    Death benefits

    If an individual has a superannuation interest when they die, the trustee of the superannuation fund will generally pay the deceased’s remaining superannuation interests (accumulation and retirement phase interests) as a death benefit lump sum to a beneficiary. This money is cashed-out of the superannuation system.

    The fund is allowed to pay a death benefit as a superannuation income stream (rather than a lump sum) if the beneficiary is a dependant of the deceased member.

    A dependant is a person who is either a:

    • spouse of the deceased
    • child of the deceased (less than 18 years old, financially dependent under 25 years old or has a disability)
    • person who was in an interdependency relationship with the deceased.

    The value of a death benefit income stream paid to a dependant will be credited to the dependant’s transfer balance account. This value includes investment gains that accrued to the deceased’s superannuation interest between the time they died and the death benefit income stream became payable to the beneficiary.

    A beneficiary will need to manage their affairs to ensure that a death benefit income stream does not result in exceeding their transfer balance cap. If a death benefit income stream, in combination with the individual’s own superannuation income stream, results in a beneficiary exceeding their transfer balance cap, they will need to decide which superannuation income stream to reduce.

    Importantly, a superannuation death benefit cannot be held in an accumulation interest. This contravenes the regulatory requirement to cash the benefit out of the system as soon as practicable.

    Example:

    On 17 August 2017, Harry commences a $500,000 superannuation income stream. Harry has a transfer balance of $500,000.

    Harry’s wife, Sally, dies on 30 November 2018, leaving superannuation interests of $288,000. On 15 July 2019, Sally’s superannuation fund advises Harry that he is the sole beneficiary.

    The superannuation fund cashes the death benefits (now worth $290,000) as a death benefit income stream to Harry from 1 August 2019. This increases Harry’s transfer balance account to $790,000 on that date, which is still below his transfer balance cap. Harry does not need to take any further action.

    End of example

    Modifications for reversionary superannuation income streams

    Reversionary superannuation income streams are different from other death benefit income streams because they revert to the beneficiary immediately on the death of the member. If an individual receives a reversionary superannuation income stream, the value of the entire supporting superannuation interest at the time it becomes payable to the beneficiary counts towards their transfer balance cap.

    If you are the recipient of a reversionary pension, the income stream will not count as a credit in your transfer balance account until 12 months after the death of the member. This gives you time to adjust your affairs and reduce any amount of the income stream that may cause you to exceed your transfer balance cap.

    Example

    John has a reversionary pension worth $1.0 million at the time of his death on 1 August 2017. The pension reverts to John's wife, Barbara, and payments from the pension continue to be made to their joint bank account. Barbara already has her own pension and a transfer balance account with a balance to $800,000.

    In September 2017 Barbara is advised that she became the recipient of John's pension in August. Barbara is advised that, unless she acts, the combined value of the two pensions will cause her to exceed her transfer balance cap. Barbara has a number of options to respond to the situation. She can fully commute either pension or she can undertake a partial commutation of her pension for the potential excess of $200,000.

    On 1 December 2017 Barbara makes a partial commutation of $200,000 of her own pension. On that date a debit arises in her transfer balance, bringing her transfer balance down to $600,000.

    The $1 million credit in respect of the reversionary pension arises in Barbara's transfer balance account on 1 August 2018. Barbara has not exceeded her transfer balance cap.

    End of example

    Child death benefits

    A child recipient receiving superannuation death benefits from a parent is entitled to a modified transfer balance cap.

    A child recipient is a deceased person’s dependent child under 25 years old. A child between 18 and 25 must also be financially dependent on the deceased to qualify to receive a superannuation death benefit income stream. A deceased’s child is also a dependant if they have a permanent disability, regardless of their age.

    A child recipient is required to commute all their superannuation income streams and remove the capital from the superannuation system when they turn 25, unless they have a permanent disability. The child’s modified transfer balance account will cease when they commute all their superannuation income streams or the capital is exhausted.

    A child who is only receiving death benefit income streams as a child recipient does not have a personal transfer balance cap set to the indexed value of the general transfer balance cap. Rather, the child’s cap is generally determined by reference to the value of the deceased’s retirement phase assets that they receive.

    If the deceased person did have a transfer balance account, the child beneficiary is entitled to retain their portion of the deceased’s superannuation interests that were in the retirement phase. Therefore, if a child receives a superannuation interest from both parents, both of whom were in the retirement phase, the child’s transfer balance cap amount will be the accumulated total of both parent’s retirement phase interest. This is the case even where the accumulated amount is greater than the general transfer balance cap.

    Once a child’s transfer balance account ceases, their entire position with respect to the transfer balance account is reset. When they subsequently retire, they will likely start a new transfer balance account and have a new transfer balance cap based on the general transfer balance cap.

    Death benefit income streams commenced before 1 July 2017

    If a child is receiving superannuation income streams as a child recipient when these amendments begin to apply, the child’s transfer balance cap is $1.6 million. This reflects the amount of retirement phase superannuation interests the deceased parent could have had if they had died shortly after 1 July 2017.

    Death benefit income streams commenced on or after 1 July 2017 without a transfer balance account

    If the deceased parent did not have a transfer balance account at the time of their death, and they died on or after 1 July 2017, the child’s cap is their share of the deceased’s superannuation interests multiplied by the general transfer balance cap.

    Example

    Emma dies on 6 June 2018 at 55 years old, with accumulation interests worth $2 million. Emma's two daughter's Sana, 15, and Chloe, 13, are the beneficiaries of her superannuation interests. Emma had a binding death benefit nomination that her superannuation interests are to be shared equally between Sana and Chloe.

    As Emma did not have a transfer balance account before her death, her beneficiaries are entitled to their proportion of the general transfer balance cap.

    Sana and Chloe will each receive a transfer balance cap increment of $800,000 (50% of the 2017–18 general transfer balance cap). Sana and Chloe may each receive a death benefit income stream of $800,000. The remaining $200,000 that each child receives would need to be taken as a death benefit lump sum and cashed out of the superannuation system.

    End of example

    Death benefit income streams commenced on or after 1 July 2017 with a transfer balance account

    If the deceased parent had a transfer balance account at the time of their death, and they died on or after 1 July 2017, the child's cap is their portion of the deceased parent's superannuation interests that were in the retirement phase that the child received as a death benefit income stream.

    To be within the transfer balance cap increment, each death benefit income stream the child receives must be sources solely from the retirement phase interests of the deceased parent.

    Generally an amount is considered to be sourced from the deceased parent's retirement phase interest if it can be shown that the interest that supports the child's death benefit income stream came from the superannuation interests that supported superannuation income streams payable to the parent just before their death.

    Earnings that accrue on a deceased person's retirement phase interest after their death up until a death benefit income stream is paid are considered to be part of the deceased person's retirement phase interest. However, these earnings do not include an amount paid from a life insurance policy or a reserve.

    Example:

    Damien dies on 23 March 2018 at 70 years old, with retirement phase interests worth $1.3 million and accumulation phase interests of $400,000. Damien's two children, Alyssa and Zali, are his sole superannuation beneficiaries. Damien leaves advice that his superannuation interests are to be evenly divided between his two children.

    The trustee of Damien's superannuation fund pays Damien's retirement phase interests to Alyssa and Zali as $650,000 death benefit income streams. As each income stream is sourced solely from Damien's retirement phase interest, each child receives a transfer balance cap increment of $650,000.

    They each receive $200,000 from Damien's accumulation phase interests as death benefit lump sums that are cashed out of the system.

    End of example

    Death benefit income streams commenced on or after 1 July 2017 with an excess transfer balance

    A child's transfer balance cap increment is reduced if their deceased parent had an excess transfer balance just before their death. The child's cap is reduced by their proportionate share of their parent's excess transfer balance.

    In some rare circumstances, a child recipient may receive their own income stream in addition to a death benefit income stream they receive from a parent. This is most likely to be the case where the child has a disability or has received a structured settlement.

    In this case, their transfer balance cap is worked out as the sum of:

    • their personal transfer balance cap worked out according to the general rules
    • the total amount of transfer balance cap increments they receive as a child benefit recipient.

    Structured settlements

    A structured settlement is a payment for a personal injury you have suffered. A debit will arise in your transfer balance account for any structured settlement amount you receive and contribute towards your superannuation interest.

    The personal injury payment must be in the form of a structured settlement, an order for a personal injury payment or lump sum workers compensation payment. Two legally qualified medical practitioners must certify that, as a result of the injury, you are unlikely to ever be able to be gainfully employed in a capacity for which you are reasonably qualified.

    The structured settlement contribution must be made to a superannuation fund within 90 days of being received, or the structured settlement order coming into effect, whichever is later. You must notify your superannuation provider that the contribution is being made under this exemption before, or when, making the contribution.

    Slightly different rules apply to structured settlements received before 10 May 2006. These rules remove the requirement that you make the contribution within 90 days and the requirement that you notify your superannuation provider. This reflects that it was not necessary to comply with these requirements before the start of the excess non-concessional contributions regime.

    A debit arises in your transfer balance account when you make the contribution of the structured settlement amount or at the time that you first have a transfer balance account, whichever is later. The debit that arises is the value of the contribution.

    Example:

    On 13 November 2018, Alice, 42, is seriously injured in a car accident. She undertakes legal proceedings against the driver and is awarded a court ordered structured settlement of $4 million due to the severity of her injuries.

    Alice contributes the $4 million into her superannuation fund and immediately commences a superannuation income stream with the amount, notifying the fund of this contribution. A credit and a debit of $4 million arise in her transfer balance account on the same day. Alice’s transfer balance account is now nil. Alice is entitled to start another pension worth up to $1.6 million without breaching her transfer balance cap.

    Alice never had an excess transfer balance because she determines her balance at the end of a day. Similarly, her transfer balance cap is subject to full indexation in the future.

    End of example

    Payment splits

    There are circumstances where, following a divorce or other relationship breakdown, superannuation interests may be split as part of the division of property. Under Part VIIIB of the Family Law Act 1975, this may occur as a result of a court order or the agreement of the parties. Most commonly, one party (the member spouse) will be required to provide a proportion of their superannuation interests to the other party (the non-member spouse).

    Family law payment splits from prior to you commencing a superannuation income stream will not affect your transfer balance account as the division occurred prior to the interest entering the retirement phase.

    There are two ways in which a family law payment may affect your superannuation income stream.

    Generally, the member spouse will partially reduce their superannuation income stream, receive a superannuation lump sum and pay this amount to the non-member spouse. Where this occurs the member spouse’s transfer balance account will reduce by the amount paid to the non-member spouse.

    If the non-member spouse uses the proceeds of the member spouse’s superannuation lump sum to start a new superannuation income stream, this will count towards their own transfer balance cap.

    In some uncommon cases, the family law payment split may have the effect of splitting the income stream benefits attached to the member spouse’s superannuation income stream. That is, the member spouse will retain complete ownership of the superannuation interest but a portion of each payment they receive will be directed to the non-member spouse.

    In these instances, the member spouse’s transfer balance account will be reduced by the amount of the superannuation interest that the non-member spouse is entitled to.

    The non-member spouse receives a credit in their transfer balance account equal to the full value of member spouse’s superannuation interests. To address the overvaluation of the non-member spouse’s credit, they also receive a debit to reflect the member spouse’s retained entitlement.

    Either party must notify us in order for their debits to arise in your transfer balance account. It is not necessary for both parties to make a separate notification. The debit arises at the time the payment split becomes operative under the Family Law Act 1975 or when you start to have a transfer balance account, whichever is later.

    Example

    On 1 October 2017, Nancy commenced a superannuation income stream with the value of $1 million. This means her transfer balance account is credited with $1 million.

    On 30 September 2018, as part of finalising her divorce, Nancy needs to transfer $500,000 of her superannuation to her ex-partner, Michael. Nancy partially commutes her superannuation income stream by the $500,000 and transfers it to Michael’s superannuation fund.

    Nancy’s transfer balance account is debited by $500,000 meaning her transfer balance is now $500,000.

    Michael uses $200,000 of the amount he receives to start his own superannuation income stream. He receives a $200,000 credit in his transfer balance account.

    End of example

    Fraud and bankruptcy

    There are a limited number of events that may result in an individual losing some or all of the value in their superannuation interests. These include family law payment splits, fraud and void transactions under the Bankruptcy Act 1966. In these specific circumstances, an affected individual is able to notify us of the event and receive a debit in their transfer balance account. There is no time limit to notify us.

    Fraud

    Where the superannuation interest that supports an individual’s superannuation income stream is reduced because of a loss suffered by the superannuation income stream provider as a result of fraud or dishonesty, and the offender is convicted, the individual is able to notify us and receive a debit in their transfer balance account to the value of the reduction.

    Though uncommon, sometimes superannuation is the target of fraudulent or dishonest activities that can result in losses suffered by the superannuation provider. If this loss is brought home to the individual member in respect to their retirement phase interests, and another person is convicted of fraud or dishonesty, the member is entitled to a debit equal to their loss.

    Bankruptcy and void transactions

    Where the superannuation interest that supports an individual’s superannuation income stream is reduced because of payments required to comply with the Bankruptcy Act 1966, the individual is able to notify us and receive a debit in their transfer balance account to the value of the reduction.

    Generally, superannuation interests cannot form part of a bankrupt estate. However, there are very specific circumstances where some superannuation contributions can form part of the bankrupt estate and are made available to the trustee in bankruptcy.

    Generally, this is only where out-of-character contributions were made to superannuation with the intent to defeat creditors or to stop the amount becoming part of the bankrupt estate. In these circumstances, the contributions may be required to be transferred out of superannuation to the bankrupt estate.

    Last modified: 28 Mar 2017QC 50880