• Excess transfer balance

    This information is for people who are retired and are receiving (or may commence receiving):

    • one or more account-based income streams (where the value will exceed their transfer balance cap)
    • a combination of one or more account-based income streams and capped defined benefit income streams (where the combined value will exceed their transfer balance cap).

    From 1 July 2017, there is a new transfer balance cap for retirement phase accounts. If you exceed your transfer balance cap, you may have an excess transfer balance and have to pay excess transfer balance tax.

    What is an excess transfer balance?

    Generally, you have an ‘excess transfer balance’ if the balance of your transfer balance account exceeds your transfer balance cap at the end of a particular day. However, there are special rules for certain defined benefit income streams (see New transfer balance cap – defined benefits).

    Your excess transfer balance is the sum of:

    • the amount that exceeds the transfer balance cap
    • the earnings on the excess amount.

    Earnings on your excess transfer balance

    The earnings on your excess transfer balance are known as 'excess transfer balance earnings'. They are notional earnings. A notional amount is used because it is difficult to determine actual earnings on a specific portion of the overall assets.

    Excess transfer balance earnings compound daily – each day the earnings are calculated and credited to your transfer balance account. This increases the amount that excess transfer balance earnings are calculated on for the following day.

    This process continues until we issue an excess transfer balance determination, or you stop having an excess transfer balance, whichever is earlier.

    The daily rate for excess transfer balance earnings is worked out as follows:

    Take the 90 day bank accepted bill yield and add 7 percentage points, then divide by the number of days in the calendar year.

    This rate is based on the general interest charge. The 90-day bank accepted bill yield is a benchmark indicator published by the Reserve Bank of Australia.

    We will calculate your excess transfer balance earnings and advise you of the amount if we issue an excess transfer balance determination. You can also calculate your own excess transfer balance earnings to work out how much you need remove from the retirement phase.

    Excess transfer balance determination

    If you have an excess transfer balance in your transfer balance account we may issue an ‘excess transfer balance determination’.

    The purpose of the determination is to advise you of your excess transfer balance and ‘crystallise’ the amount that you need to remove from the retirement phase. Crystallising the excess transfer balance sets a fixed amount that you need to remove from your super fund(s).

    A determination will state your ‘crystallised reduction amount’ which will equal your excess transfer balance on that date. This includes excess transfer balance earnings up to that date.

    You must remove the crystallised reduction amount from retirement phase to bring your transfer balance account back in line with your transfer balance cap. You can remove the excess at any time (including before you have received the determination), and the sooner you do this the less excess transfer balance tax you’ll need to pay.

    Commuting an excess amount

    To remove an excess amount from retirement phase, you need to commute part of the value of your income stream into a lump sum (and either transfer it into an accumulation account or withdraw it from super). You can either:

    • commute excess amounts voluntarily, or
    • we will take steps to get your super providers to commute them.

    Voluntary commutations

    If you know the amount of your excess transfer balance, you can voluntarily commute it at any time (before or after we issue you with an excess transfer balance determination). If you commute amounts voluntarily, your super provider will notify us about these commutations, in the approved form. This ensures we are aware that your transfer balance account is debited for these commutations, and we can determine whether you still have an excess transfer balance.

    ATO-initiated commutations

    You can still commute your excess amount voluntarily after you have received an excess transfer balance determination. However, the steps we will take to enforce a commutation begin from the time you receive the determination. The determination will include a default commutation notice. This notice will show which super income stream provider and income stream we have selected to commute the crystallised reduction amount from.

    If you have more than one super income stream, and you don’t want to commute voluntarily, you may elect an alternative income stream (or streams) to commute the excess from, provided the total amount equals the crystallised reduction amount. This election is irrevocable. If you do not notify us of any alternative, we will take steps to have the crystallised reduction amount commuted from the income stream in the notice.

    If you still have an excess transfer balance 60 days after you are issued with an excess transfer balance determination, we will issue a commutation authority to your super provider(s). A super provider that receives a commutation authority must commute the amount stated on that authority in most circumstances. If a super provider does not comply with a commutation authority, that entire income stream may lose its tax exemption on earnings.

    Excess transfer balance tax

    You are liable to pay ‘excess transfer balance tax’ if you have an excess transfer balance at the end of one or more days.

    Excess transfer balance tax is calculated on your excess transfer balance earnings for the period from when you start to have an excess transfer balance, to when your transfer balance account is no longer in excess. The earnings that attract excess transfer balance tax include earnings after a determination is issued (even though those earnings do not need to be removed from your super fund).

    The earlier you remove your excess, the less excess transfer balance tax you will have to pay. This is because the excess transfer balance earnings that attract excess transfer balance tax continue to accrue until you remove the excess.

    If you are liable for excess transfer balance tax, we will issue you with an excess transfer balance tax assessment. Excess transfer balance tax is due and payable 21 days after the assessment is issued to you, and general interest charge will accrue if any amount remains unpaid after the due date. Excess transfer balance tax cannot be paid by your super provider(s).

    The tax rate is set at 15% for an excess transfer balance in 2017–18.

    From 1 July 2018 onwards, the tax rate is:

    • 15% the first time you have an excess transfer balance, but
    • increases to 30% if you have an excess transfer balance for a second or subsequent time.

    If, on 1 July 2017, you are over your transfer balance cap by $100,000 or less and you remove this excess by 31 December 2017, you will not have to pay excess transfer balance tax. Note that this only applies to super income streams existing on or before 30 June 2017.

    What you need to do

    What you need to do on or before 30 June 2017

    Situation

    Action

    If you are already (before 1 July 2017) receiving, or may commence receiving one or more account-based income streams

    Check with your super provider(s) whether the total value of your account-based income streams is likely to be more than $1.6 million on 1 July 2017. If it is over, to avoid having an excess transfer balance you can:

    • transfer the excess back into an accumulation account, or
    • withdraw the excess from super as a lump sum.

     

    If you are receiving (or may commence receiving) a combination of one or more account-based income streams and capped defined benefit income streams

    Check with your super provider(s) to determine an estimate of the ‘special value’ of your capped defined benefit income stream(s) and the total value of your account-based income stream(s) at 1 July 2017.

     

    If the sum of the above values is more than $1.6 million, you will need to remove any excess from your account-based income stream(s) to avoid having an excess transfer balance. If you commute all of your account-based income stream(s), you will not have an excess transfer balance even if your ‘special value’ of your capped defined benefit income streams is over $1.6 million.

    What you need to do from 1 July 2017

    Situation

    Action

    On 1 July 2017, if you exceed your transfer balance cap by $100,000 or less, due to income streams existing on or before 30 June 2017

    You will have until 31 December 2017 to remove the excess from retirement phase to avoid having an excess transfer balance. You can remove the excess by commuting amounts from your income stream(s).

     

    Your super provider needs to advise us when you remove the excess amount.

    If you exceed your transfer balance cap in other circumstances

    You will need to determine the amount of the excess, including excess transfer balance earnings, and remove this amount from retirement phase by commuting amounts from your income stream(s).

     

    Your super provider will also need to advise us when you remove the excess amount.

     

    Your excess transfer balance earnings will also attract excess transfer balance tax and we will issue you with an excess transfer balance tax assessment.

    If you exceed your transfer balance cap and do not remove the excess voluntarily

    We will issue an excess transfer balance determination and a default commutation notice. The default commutation notice will specify a super income stream that the excess will be removed from.

     

    If you have more than one income stream, and would prefer the excess be removed from an alternative income stream, you will need to make an election to us in the approved form. If the excess is not removed voluntarily we will issue a commutation authority to the chosen income stream(s).

     

    Your excess transfer balance earnings – up until the excess is removed – will also attract excess transfer balance tax. We will issue you with an excess transfer balance tax assessment.

    Examples

    Examples

    Main points

    Example

    Glen is receiving an account-based income stream valued at $1.65 million at the end of 30 June 2017

    On 1 July 2017, Glen’s transfer balance account begins and receives a credit of $1.65 million.

     

    Glen is over his transfer balance cap of $1.6 million by $50,000. However, because he is over by $100,000 or less, due to a pre-existing income stream, transitional rules apply. Glen has until 31 December 2017 to remove the excess to avoid having an excess transfer balance.

     

    Glen commutes $50,000 from his income stream into an accumulation account on 3 November 2017. He does not need to remove excess transfer balance earnings from his fund, or pay excess transfer balance tax.

    On 1 August 2018, Andrew commences an income stream valued at $2 million

     

    Transfer balance cap is $1.6 million

     

    Has an excess transfer balance of $400,000 on 1 August 2018

    Andrew decides to address his excess transfer balance on 31 August 2018 (which is 30 days after he first has an excess transfer balance).

     

    Over the 30-day period, Andrew’s transfer balance account is credited with excess transfer balance earnings of $3,036 (assuming an excess transfer balance earnings rate of 9.2%).

    On 31 August 2018:

    • the balance in Andrew’s transfer balance account is $2,003,036
    • his excess transfer balance is $403,036.

     

    On 31 August 2018, Andrew commutes $403,036 from his income stream into an accumulation account. His super fund notifies the ATO in the approved form.

     

    Andrew’s transfer balance account is debited $403,036 (the amount of the commutation). This brings the balance of his transfer balance account down to $1.6 million, and he no longer has an excess transfer balance.

     

    Andrew will also be liable to pay excess transfer balance tax, at a rate of 15% on the earnings of $3,036. Andrew will receive an excess transfer balance tax assessment for $455.40 which is due and payable 21 days after it is issued. Also, he cannot transfer any further amounts to the retirement phase as he has reached his transfer balance cap.

    Bill previously had an excess transfer balance in 2018–19

     

    Receiving an income stream, transfer balance account at $1.6 million

     

    On 1 July 2019 commences a second income stream valued at $1 million

     

    Has an excess transfer balance of $1 million on 1 July 2019.

    Bill does not take action to remove his excess transfer balance. Sixty days later, on 30 August 2019, the ATO issues Bill with an excess transfer balance determination.

     

    The determination states a crystallised reduction amount of $1,015,236 ($1 million excess plus $15,236 excess transfer balance earnings, assuming an excess transfer balance earnings rate of 9.2%).

     

    On 3 November 2019, 65 days after issuing the determination, the ATO issues a commutation authority to Bill’s super fund.

     

    On 13 November 2019 (after contacting Bill), Bill’s super fund complies with the authority and commutes $1,015,236 out of Bill’s income stream, paying it to him as a lump sum.

     

    Bill is liable for excess transfer balance tax on the excess transfer balance earnings from 1 July 2019 to 13 November 2019.

    Bill’s excess transfer balance earnings are $34,608, being the sum of:

    • $15,236 between 1 July 2019 and 30 August 2019 (the period from when Bill started having an excess transfer balance to when the ATO issued an excess transfer balance determination), and
    • $19,372 between 31 August 2019 and 13 November 2019 (the remaining period up to the date Bill removed the excess).

     

    Since this is the second time Bill has had an excess transfer balance since 1 July 2018, he is liable to pay excess transfer balance at 30%. Therefore, he is liable to pay $10,382 (30% of $34,608). Bill will receive an excess transfer balance tax assessment for $10,382, which is due and payable 21 days after it is issued.

    See also:

    • Guidance notes for super changes
    • LCG 2017/1 Superannuation reform: capped defined benefit income streams – pensions or annuities paid from non-commutable, life expectancy or market-linked products
    • LCG 2016/9 Superannuation reform: transfer balance cap
    • LCG 2016/10 Superannuation reform: capped defined benefit income streams – non-commutable, lifetime pensions and lifetime annuities
    Last modified: 20 Jun 2017QC 52573