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  • Child recipients of a death benefit income stream

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    How the transfer balance cap applies to child recipients

    An individual is a 'child recipient of a death benefit income stream' if they are receiving a death benefit income stream and is either:

    • under 18 years old
    • between 18 and 25 years old and was financially dependent on the deceased
    • living with a permanent disability.

    Child recipients of a death benefit income stream from a deceased parent may have a modified transfer balance cap, rather than the general transfer balance cap ($1.6 million in 2017–18).

    The normal transfer balance rules apply, but the modified transfer balance cap depends on the deceased parent’s super interests.

    The modified cap is the total amount of the ‘cap increments’ a child recipient is entitled to. Child recipients will be entitled to retain super income stream (or streams) up to the amount of the cap increment (or increments) without exceeding their transfer balance cap.

    When the transfer balance account ceases

    Unless the child recipient has a permanent disability, upon turning 25 years old they are required to cash out all death benefit income streams and withdraw the capital from the super system. At this time, their transfer balance account and modified transfer balance cap will cease (unless the capital has already been exhausted).

    Child recipients with a permanent disability will not be subject to the cashing out rule. The modified transfer balance cap will cease when all of the funds that support their death benefit income stream have been exhausted. An exception is if they also have other super income streams, such as a disability pension or an income stream funded by a structured settlement contribution.

    If, after their transfer balance account has ceased, the child recipient subsequently starts receiving another super income stream (other than as a child recipient), they will start a new transfer balance account. The new transfer balance account will have a new transfer balance cap applied, based on the general transfer balance cap at that time.

    Recipient of another super income stream

    If the child recipient also receives their own super income stream or another death benefit income stream (eg from an interdependency relationship), the modified transfer balance cap is worked out differently. In this case, the cap is the sum of:

    • the recipient's personal transfer balance cap, worked out according to the general rules
    • the total amount of cap increments received as a child recipient.

    To ensure death benefit income streams and related transfer balance cap increments do not affect the indexation of the recipient's personal transfer balance cap, these amounts are disregarded in the transfer balance cap calculation. This modification only applies when calculating the recipient's transfer balance cap, including access to proportional indexation of the cap.

    For child recipients also receiving their own super income stream, their transfer balance account will not cease when the child recipient death benefit income stream has been cashed out or exhausted.

    How do the cap increments work?

    Child recipients who are only receiving death benefit income streams do not have a personal transfer balance cap equal to the general transfer balance cap. Instead, their ‘modified transfer balance cap’ generally takes into account the value of the deceased parent’s retirement phase interests they receive. This is achieved through a series of transfer balance cap increments that accrue to the child recipient.

    The cap increments that apply depend on when the child recipient starts receiving the death benefit income stream, either:

    • before 1 July 2017
    • on or after 1 July 2017.

    Started receiving income stream before 1 July 2017

    The cap increment for child recipients receiving death benefit income streams before 1 July 2017 is equal to the general transfer balance cap of $1.6 million.

    The cap increment arises on 1 July 2017 and means the child recipient can be in receipt of death benefit income streams of up to $1.6 million without exceeding their modified transfer balance cap.

    Start receiving income stream on or after 1 July 2017

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    For child recipients who start to receive a death benefit income stream after 1 July 2017, the cap increment that applies depends on the following circumstances:

    • whether the deceased parent had a transfer balance account before the time of their death
    • if the deceased parent had a transfer balance account, the source of their super interest that the child recipient's income stream comes from
    • whether the deceased parent had a transfer balance account and also had an excess transfer balance in the retirement phase just before the time of their death.

    A cap increment arises for each death benefit income stream received from a parent. If the child recipient starts to receive death benefit income streams because both of their parents died, the modified transfer balance cap is the total of the cap increments worked out for each parent.

    Each cap increment arises when the child recipient starts to be entitled to the death benefit income stream. However, in the case of a reversionary death benefit income stream, the cap increment is deferred for 12 months to align with the modifications for this type of death benefit income stream.

    See also:

    Deceased parent had no transfer balance account

    If the parent did not have a transfer balance account at the time of their death (eg they died before they were in retirement phase), the child recipient will receive the death benefit income stream from the parent's accumulation phase interest.

    In this case, if the child recipient is the sole beneficiary of the super interest, their cap increment is equal to the general transfer balance cap ($1.6 million in 2017–18). If the child recipient is not the sole beneficiary of the super interest, their cap increment is a proportion of the general transfer balance cap, reflecting their share of the parent’s super interests.

    Deceased parent had a transfer balance account

    If the deceased parent had a transfer balance account before they died, the child recipient's cap increment depends on the type of super interest their death benefit income stream comes from. This is because only death benefit income streams that come from a retirement phase interest of a deceased parent are entitled to a cap increment.

    Generally, an amount is considered to be sourced from the deceased parent’s retirement phase interest if the amount came from super interests supporting income streams payable to them just before their death. This amount includes earnings accrued on those income streams after the parent’s death, up until a death benefit income stream is paid.

    If the deceased parent only had a retirement phase interest, the child recipient's cap increment is equal to the share of the deceased parent’s interest they are receiving as a death benefit income stream. However, if the deceased parent had a transfer balance account, but the child recipient's death benefit income stream comes from the parent's accumulation interest, the cap increment is nil.

    If the child recipient's death benefit income stream is partially funded by a retirement phase interest and partially from an accumulation interest, the cap increment is equal to their share of the retirement phase interest. The benefit received from the deceased parent’s accumulation interest has a cap increment of nil. This means the child recipient will have an excess transfer balance (unless they also have a cap increment because of the death of another parent or they also have a personal transfer balance cap because they have another non-death benefit income stream).

    Deceased parent had an excess transfer balance

    The child recipient's cap increment is reduced if the deceased parent had a transfer balance account that exceeded their cap just before they died. In this situation, the child recipient's cap increment is reduced by their share of the parent’s excess amount.

    Scenarios to assist you further can be found in the guidance note New transfer balance cap – child death benefit recipients.

    See also:

    • Transfer balance cap
    • Guidance notes for super changes
    • LCR 2017/1 Superannuation reform: defined benefit income streams – pensions or annuities paid from non-commutable, life expectancy or market-linked products
    • LCR 2017/3 Superannuation reform: superannuation death benefits and the transfer balance cap
    • LCR 2016/9 Superannuation reform: transfer balance cap
    • LCR 2016/10 Superannuation reform: defined benefit income streams – non-commutable, lifetime pensions and lifetime annuities
    • PCG 2017/6 Superannuation reform: commutation of a death benefit income stream before 1 July 2017
      Last modified: 27 Mar 2018QC 54352