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  • New transfer balance cap – payment splits

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    This information is for people who are:

    • receiving part of a former spouse’s super due to a payment splitting arrangement (payment split)
    • paying part of their super to a former spouse due to a payment split
    • expecting to be part of a payment split in the future.

    From 1 July 2017, there is a $1.6 million cap on the total amount that can be transferred and held in the tax-free retirement phase for account-based pensions. This is known as the 'transfer balance cap'. Special rules apply for payment splits arising from a divorce or relationship breakdown.

    How payment splits affect your transfer balance cap

    Following a divorce or other relationship breakdown, superannuation interests may be split as part of the division of property. Payment splits may arise from a court order or a superannuation agreement between the parties (see Part VIIIB of the Family Law Act 1975).

    There are two ways in which a payment split may affect your super income stream for transfer balance cap purposes. This depends on how the payment split occurs.

    A payment split may involve the member spouse:

    • converting part of their super income stream into a lump sum ('commuting' it), which is then paid to the non-member spouse, or
    • retaining complete ownership of their super interest but having a portion of each payment from their super income stream directed to the non-member spouse.

    Commuting super into a lump sum

    If the super income stream is partially commuted and paid to the non-member spouse as a lump sum, this will create a debit in the member-spouse’s transfer balance account. 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 member spouse’s super lump sum amount to start a new super income stream, the new income stream will give rise to a credit in their transfer balance account and will count towards their transfer balance cap.

    If the non-member spouse does not use the lump sum to start a super income stream, their transfer balance account will not be affected.

    Directing a portion of payments

    If a portion of the member spouse's super income stream payments is directed to the non-member spouse, both spouses will have the entire value of the super income stream credited to their transfer balance account. This is because both parties are receiving it.

    However, as the member spouse and non-member spouse only receive part of the super income stream payments:

    • the member spouse’s transfer balance account is debited by the proportion of the super income stream the non-member spouse is entitled to
    • the non-member spouse's transfer balance account is also debited by the member spouse’s portion of the super income stream.

    In order for these debits to occur. one spouse must notify the ATO in writing. The transfer balance accounts are debited when the payment split becomes operative under the Family Law Act 1975, or when you start to have a transfer balance account, whichever is the later. This timing ensures that a spouse will not exceed the transfer balance cap solely due to the crediting of the entire value of the super income stream to both recipients.

    In some circumstances, the credit amounts to each spouse's transfer balance accounts might be different. For example, the credits may differ where:

    • the member spouse receives a credit for the value of the super income stream on 1 July 2017, and
    • the non-member spouse receives a credit for the value of the super income stream at a later date when the payment split becomes operative.

    If the member spouse’s super income stream is later commuted, both spouses will receive a super lump sum. Both the member spouse and the non-member spouse will receive a debit in their transfer balance accounts for the value of the super lump sum they receive.

    Other kinds of debits (for example, due to fraud, or because the super income stream ceases to be in retirement phase) are modified to account for the debit that has already been applied for the payment split.

    What you need to do

    What you need to do before 30 June 2017

    Situation

    Action

    If, as part of a payment split, you have:

    • commuted part of your super income stream and paid it to your former spouse, or
    • received a commuted lump sum from a former spouse

     

    Check with your super fund(s) whether the total value of your retirement phase interest(s) is likely to be more than $1.6 million on 1 July 2017. This includes any lump sum received from a former spouse that has been used to commence a super income stream.

     

    If the total is more than $1.6 million, you can:

    • transfer the excess back into an accumulation account, or
    • withdraw the excess from super.

     

    If on 1 July 2017, you are over your $1.6 million cap by $100,000 or less after the payment split, and you remove this excess by 31 December 2017, you won’t have to pay excess transfer balance tax or account for notional earnings on the excess.

    If, as part of a payment split, you are:

    • paying a portion of your super income stream payments to your former spouse, or
    • receiving a portion of your former spouse’s super income stream payments

     

    You or your former spouse will need to notify the ATO (in writing) of the proportion of the income stream payments you are receiving.

     

    The proportion of the overall super income stream that you are receiving will count towards your transfer balance cap.

     

    Check with your super fund(s) whether the total value of your retirement phase interest(s) is likely to be more than $1.6 million on 1 July 2017 (taking into account the proportion of the split income stream that you are entitled to).

    If the total is more than $1.6 million, you can:

    • transfer the excess back into an accumulation account, or
    • withdraw the excess from super.

     

    If on 1 July 2017, you are over your $1.6 million cap by $100,000 or less after the payment split, and you remove this excess by 31 December 2017, you won’t have to pay excess transfer balance tax or account for notional earnings on the excess.

    What you need to do from 1 July 2017

    Situation

    Action

    If you commute part of a retirement-phase super income stream and pay the commuted lump sum to your former spouse as part of a payment split

    Your transfer balance account will be debited by the commuted amount.

    If, as part of a payment split, you pay a proportion of the super income stream payments from your retirement-phase super income stream to your former spouse

    Your transfer balance account will be debited by the proportion of the total value of your super income stream that represents the proportion being paid to your former spouse.

    If, as part of a payment split, you start to receive a proportion of the income stream payments from your former spouse’s retirement-phase income stream

    Your transfer balance account will be:

    • credited for the full value of your former spouse’s super income stream, as you are now a recipient of that income stream
    • debited by the proportion of the super income stream that is still being retained by your former spouse.

     

    The overall effect is that your transfer balance account will be credited to reflect the proportion of the super income stream you are entitled to.

    Examples

    Main points

    Examples

    Nancy

    • 62 years old and retired
    • Commences a super income stream valued at $1 million on 1 October 2017
    • In 2018, divorces her spouse, Michael

     

    Nancy’s transfer balance account is credited with $1 million on 1 October 2017.

     

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

     

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

     

    If Michael uses the $500,000 of the amount he receives to start his own super income stream, he will receive a $500,000 credit in his transfer balance account.

    Bradley

    • 60 years old and retired
    • Receiving a super income stream valued at $1.6 million on 1 July 2017
    • The income stream cannot be commuted until 2025
    • In 2020, divorces his spouse, Angie

     

    On 1 July 2017, Bradley’s transfer balance account starts and is credited with $1.6 million.

     

    In 2020, Bradley and Angie get divorced and Bradley is required by family law to split 50% of his super with Angie.

     

    As Bradley’s income stream cannot be commuted, the payment split applies to the monthly payments from the income stream, with Bradley and Angie each receiving approximately $4,000 per month, commencing on 1 October 2020. Bradley notifies the ATO of the payment split.

     

    On 1 October 2020, Bradley’s income stream is still valued at $1.6 million. Bradley’s transfer balance account is debited by $800,000, being the proportion of all the income stream payments to be paid to Angie. This leaves Bradley’s transfer balance at $800,000.

     

    On 1 October 2020, Angie’s transfer balance account is credited with $1.6 million, as she is also receiving Bradley’s income stream for transfer balance cap purposes.

     

    Angie’s transfer balance account is then debited by $800,000. This reflects the proportion of Bradley’s income stream payments that he remains entitled to.

     

    Angie’s transfer balance is now $800,000, which reflects the proportion of Bradley’s income stream that Angie is entitled to.

     

    If Bradley fully commutes his income stream in 2025, 50% of the resulting lump sum will be paid to Angie under the terms of the payment split. Bradley and Angie will each receive debits of 50% of the lump sum in their transfer balance accounts.

    See also:

    Last modified: 19 Jun 2017QC 52048