Transfer balance cap – capped defined benefit income streams

Modified transfer balance cap rules

A capped defined benefit income stream, such as a lifetime pension, counts towards your transfer balance.

However, the transfer balance cap rules apply differently to capped defined benefit income streams as any excess transfer balance is generally 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
  • taken into account when we calculate if you're entitled to indexation of your personal transfer balance cap
• your super fund will calculate the 'special value' your capped defined benefit income stream according to a legal formula and report it to us, with the amount then recorded as a credit in your transfer balance account
• you may need to include income from these income streams in your assessable income and have a reduced entitlement to the super income stream tax offset if both
  • your income from your capped defined benefit income streams exceeds the defined benefit income cap
  • you're 60 years old or older – or under 60 years old (and receiving a death benefit income stream from a person who died at 60 years old or older).

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

• 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.

Capped defined benefit income streams

Capped defined benefit income streams include:

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

If you're receiving an income stream, ask your super fund if it's a capped defined benefit income stream.

Calculating the 'special value'

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

The following steps shows 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 started (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 won't have an excess transfer balance.

However, you may need to include part of the excess amount in your assessable income if both:

• you have credits in your transfer balance account from both a capped defined benefit income stream and an account-based income stream
• the annual income you receive from your capped defined benefit income streams exceeds your defined benefit income cap.

Your entitlement to the tax offset may also be affected.

For more information, see Capped defined benefit and account-based income streams.

Calculating the debit value for commutation

From 7 December 2024 relaxed commutation rules for legacy retirement products apply for 5 years, if you meet certain conditions. A full commutation will result in a debit in your transfer balance account.

For lifetime annuities or pensions the debit value will be the amount of the transfer balance credit that arose in your transfer balance account in respect of the income stream, less the following:

• the amount of any transfer balance debits (except from a payment split) that have arisen in your transfer balance account in respect of the income stream before that time.

For market linked and life expectancy pensions or annuities the debit value will be the amount of the transfer balance credit that arose in your transfer balance account in respect of the income stream, less the sum of the following:

• the amount of any transfer balance debits (except from a payment split) that have arisen in your transfer balance account in respect of the income stream before that time
• the total amount of superannuation income stream benefits the person was entitled to receive before the start of the financial year the commutation takes place, and
• the greater of
  • the sum of the superannuation income stream benefits paid during the financial year the commutation takes place
  • the minimum amount required to be paid under regulations 1.07B and 1.07C of SISR or regulation 1.08 of the Retirement Savings Account Regulations 1997 during the financial year the commutation takes place.

Where lifetime annuities, market linked and life expectancy pensions or annuities have been commuted and restarted on or after 1 July 2017, the income streams will no longer be capped defined benefit income stream (CDBIS).

As such, the debit value will be the value of the superannuation interest that supported the superannuation income stream just before the income stream ceased. Different rules apply for APRA regulated funds when a market linked or similar income stream recommences as part of a successor fund transfer, see Updated guidance – market linked pensions.

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 component – taxed element and tax-free components
• Taxable component – untaxed element
• Multiple components.

Taxable component – taxed element and tax-free components

If your defined benefit income is comprised of a taxed element, a tax-free component, or both - 50% of your defined benefit income (excluding any amounts from an untaxed element) that exceeds your defined benefit income cap is included in your assessable income.

Taxable component – untaxed element

If your defined benefit income is comprised of an untaxed element, this entire amount is included in your assessable income. However, the 10% tax offset you would normally be entitled to will be reduced if the total amount of your defined benefit income (including any amounts of taxed element and tax-free components) exceeds your defined benefit income cap.

The tax offset entitlement is reduced by 10% of the excess (but can't be reduced below zero). In other words, the 10% offset applicable to the untaxed element-sourced income only applies to the amount of the untaxed element-sourced income up to your defined benefit income cap, and no tax offset applies to the excess.

Multiple components

Both of these treatments apply if your defined benefit income includes an untaxed element as well as a taxed element, a tax-free component, or both, and the total amount of defined benefit income exceeds your defined benefit income cap.

Note your taxed element sourced income is counted first (‘stacked’) before your untaxed element sourced income when calculating your entitlement to tax offsets.

If you have an untaxed element in your income stream, your fund may 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 that will affect your entitlement to the offset. You will need to determine your entitlement to the offset when preparing your income tax return.

Capped defined benefit and account-based income streams

If you receive both a capped defined benefit income stream and an account-based 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 resolve the excess amount. You will also be liable for excess transfer balance tax.

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