Transfer balance cap - capped defined benefit income streams

This information is for people who are:

• retired and receiving one or more capped defined benefit income streams
• retired and receiving both account-based and capped defined benefit income streams
• expecting to receive a capped defined benefit income stream
• receiving a capped defined benefit income stream and start receiving, or expect to receive, a reversionary defined benefit income stream
• receiving, or may start receiving, a capped defined benefit income stream and are due to turn 60 years old soon.

The transfer balance cap rules apply differently to capped defined benefit income streams as generally, any excess transfer balance is unable to be commuted from these income streams.

If you have a capped defined benefit income stream:

• it will be included in your transfer balance account and:  
  • count towards your personal transfer balance cap
  • considered when we calculate if you are entitled to indexation of your personal transfer balance cap
   
• your fund will calculate the special value of the credit in your transfer balance account you get from one of these income streams in accordance with a formula in the law and report this information to us.
• from 1 July 2017 you may need to include income from these income streams in your assessable income and may have a reduced entitlement to the 10% tax offset if
  • your income from your capped defined benefit income streams exceeds the defined benefit income cap, and
  • you are 60 years old or older – or under 60 years old (and in receipt of a death benefit income stream from a person who died at 60 years old over). 
   

If you exceed your personal transfer balance cap due to a combination of capped defined benefit income streams and account-based income streams, then:

• tax consequences may apply to the income from your capped defined benefit income streams
• you may need to commute your account-based pension and be liable for excess transfer balance tax.

What are capped defined benefit income streams

Capped defined benefit income streams include:

• lifetime pensions, regardless of when they commence
• lifetime annuities that existed prior to 1 July 2017
• life expectancy pensions and annuities that existed prior to 1 July 2017
• market-linked pensions and annuities that existed prior to 1 July 2017.

If you are receiving an income stream, you should check with your superannuation fund to determine if it is a capped defined benefit income stream.

If you have a capped defined benefit income stream your fund will calculate the 'special value' of your income stream and this value will count towards your transfer balance cap.

Calculating the 'special value'

Your superannuation fund will calculate the 'special value' of your capped defined benefit income stream and report this information to us. You will receive a credit in your transfer balance account for this amount.

The following is a guide on how they will calculate it.

Step 1 – Annualise your entitlement.

Annualise the first payment you are entitled to receive from the income stream after the income stream commenced (or after 1 July 2017 if income stream existed before 1 July 2017).

This can be expressed in the following formula:

First payment divided by the number of days in the period, multiplied by 365.

Step 2 – Calculate your special value

• For lifetime pension or annuity, your special value is your annual entitlement multiplied by 16.
• For non-commutable life expectancy or market-linked products, your special value is your annual entitlement multiplied by the number of years (rounded up to the nearest whole number) remaining in that product.
  

If your special value exceeds your personal transfer balance cap

If you only have credits in your transfer balance account from capped defined benefit income streams, you will not have an excess transfer balance.

However, if your annual income you receive from your capped defined benefit income streams exceeds your ‘defined benefit income cap’, you may need to include part of the excess amount in your assessable income. Your entitlement to the tax offset may also be affected.

See Example 3 and Example 4 if your special value exceeds your personal transfer balance cap and you have a capped defined benefit income stream and an account-based income stream.

Assessable income from your capped defined benefit income streams

If you are 60 years old or over (or a death benefit dependant and the deceased died at 60 years old or over) and your capped defined benefit income exceeds your defined benefit income cap, you may have additional tax liabilities.

This depends on which of the following components are paid to you as part of your total annual capped defined benefit income stream:

Taxable and tax-free components

If you receive a taxable component only, or both taxable and tax-free components, 50% of your annual income stream amount over your defined benefit income cap will be taxed at your current marginal rate. The taxable component may consist of a taxed element or an untaxed element depending on whether the benefit is paid from a taxed or untaxed source.

Untaxed element

If you receive an unfunded (untaxed) element of your income stream, the 10% tax offset will not apply to untaxed-sourced benefits over your defined benefit income cap.

Multiple components

Both of the above treatments will apply to you if the capped defined benefit income stream that you received includes an untaxed element as well as a:

• taxed element
• tax-free component, or
• both taxed element and tax-free component .

Note: that any taxed source income is counted first (‘stacked’) before including your untaxed-source income in making these calculations.

If you have an untaxed element in your income stream, your fund will not pre-populate your payment summary with your entitlement to the tax offset as they don't know if you have income from other capped defined benefit income streams which will affect your entitlement to the offset. You will need to determine your entitlement to the offset as part of lodging your income tax return.

See also

• Withdrawing and using your super

Capped defined benefit and account-based income streams

If you receive an account-based income stream and a capped defined benefit income stream, you will need to compare the balance of your transfer balance account (taking into account credits and debits from all your income streams) to both your:

• personal transfer balance cap
• capped defined benefit balance.

Your capped defined benefit balance is the net sum of all the transfer balance credits and debits in your transfer balance account from capped defined benefit income streams.

If the balance of your transfer balance account exceeds your transfer balance cap, and also exceeds your capped defined benefit balance, you will have an excess transfer balance. Your excess transfer balance amount will include notional excess transfer balance earnings.

You will need to commute your account-based income streams to reduce the balance of your transfer balance account below your personal transfer balance cap. You will also be liable to pay excess transfer balance tax.

Income tax consequences may also apply to the income you received from your capped defined benefit income streams.

Information on your personal transfer balance cap can be found through the ATO link in myGov under Super – Information – Transfer balance cap.

See also

• Excess transfer balance
  

See also

• Transfer balance cap
• Transfer balance account
• Indexation of the general transfer balance cap
• Defined benefit income cap tool  
• LCR 2016/9 Superannuation reform: transfer balance cap
• LCR 2016/10 Superannuation reform: defined benefit income streams – non-commutable, lifetime pensions and lifetime annuities

LCR 2017/1 Superannuation reform: defined benefit income streams – pensions or annuities paid from non-commutable, life expectancy or market-linked products