• Transfer Balance Cap Introduction – March 2017 Webinar

     

    Introduction

    From 1 July 2017 there’s going to be a new limit on the amount of money you can transfer into a tax-free pension account.

    This new limit is called the transfer balance cap.

    The law introducing the new cap also contains some other new concepts, including “retirement phase” and “retirement phase recipient”.

    Retirement phase is a term that describes your super income stream at a particular time.

    Retirement phase recipient is a term that describes you.

    A super income stream is in the retirement phase when a benefit becomes payable, or if it’s a deferred superannuation income stream, when you meet a relevant condition of release. In basic terms, if a super income stream, pension or annuity is in retirement phase, this means it is not taxed.

    You are therefore a retirement phase recipient of a superannuation income stream at a time if the income stream is in the retirement phase at that time, and a benefit from it is payable to you at that time. If the income stream is a deferred super income stream and it’s in the retirement phase, you’re a retirement phase recipient if the benefit will become payable to you after that time.

    Note that transition to retirement income streams are specifically excluded from being in the retirement phase under the reforms.

    Foreign pensions and Centrelink pensions are also not in the retirement phase because they’re not super income streams by definition. However, there are some Government disability pensions that may be retirement phase super income streams, so you should contact your payer if you want to be sure.

    Today we’ll be working through the changes you need to be aware of in relation to the transfer balance cap and how it applies to you when you’re a retirement phase recipient. We hope that at the end of this webinar you’ll have a better understanding of what counts towards the cap, what happens if you exceed the cap and how we plan to administer the new law.

    This webinar is intended as an introduction to the main concepts. We intend to run a more thorough ‘Masterclass’ webinar soon to discuss the more advanced aspects of the measure in more detail.

    The general transfer balance cap and your personal transfer balance cap

    I’m going to start by talking about the transfer balance cap itself.

    From 1 July 2017, there’s going to be a general transfer balance cap of $1.6 million. This cap applies to all your retirement phase super income streams and annuities. This includes accounts in an SMSF, a retail fund, an industry fund or a government defined benefit scheme – even if you receive an annuity or have a deferred annuity product with a life insurance company.

    The new limit is applied over your lifetime, regardless of how many retirement phase accounts you hold or the number of transfers you make.

    As well as a general transfer balance cap, there will also be a personal transfer balance cap. This is the cap that will apply to you as soon as you start a retirement phase pension or annuity.

    It’s important to note that everyone has their own transfer balance cap. You don’t share it with your spouse or with any other members of your super fund. This means that if you have an SMSF, every member of the fund has their own cap. The cap also does not limit how much you can have in the super system. It limits what you can have funding a super income stream. The transfer balance cap does not limit how much you can have in an accumulation account.

    If you have a superannuation income stream now and still have it on 1 July, or if you start a new income stream in the 2017–18 financial year, your personal transfer balance cap will be $1.6 million. This is the same as the general transfer balance cap.

    In the future, the general transfer balance cap may be indexed. This means it will increase in line with the consumer price index. If the general transfer balance cap increases, it will increase in $100,000 increments.

    If the general transfer balance cap is increased, then your personal transfer balance cap may also increase, but it won’t always be in $100,000 increments like the general transfer balance cap. Any increases to your personal cap will depend on how much you’ve transferred to retirement phase accounts in the past.

    Your personal transfer balance cap is always the same as the general transfer balance cap in the year you start your first retirement phase pension.

    For example, if you start your first retirement phase super income stream after the general transfer balance cap is indexed to $1.7 million; your personal transfer balance cap will also be $1.7 million.

    If you already have a retirement phase super account when the general transfer balance cap is increased, your personal transfer balance cap may be increased proportionally. This means that if you haven’t ever reached your existing personal cap, the difference between the highest amount you’ve ever transferred into retirement phase and your cap at the time is used to work out how much of an increase you can have.

    Let me run through an example of how this might work:

    Let’s say you have an account based pension in your SMSF and just before 1 July 2017 your pension is worth $800,000. This means that in the 2017–18 financial year your personal transfer balance cap is $1.6 million and you’ve used up half your cap space. In this situation, the difference between the highest amount you’ve ever transferred into retirement phase and your personal cap is $800,000, or 50% of your cap. If the general transfer balance cap is indexed and increases by $100,000, then you’re entitled to 50% of this increase – that is, your personal transfer balance cap will be proportionally indexed, by $50,000 to $1,650,000.

    It’s important to note that for the purposes of determining whether you’re entitled to an increase for your personal transfer balance cap in the future, it’s the highest ever amount you’ve transferred into retirement phase that counts.

    With this in mind, if you have ever exhausted or exceeded your personal transfer balance cap, then you won’t ever have any cap space available according to your highest ever balance and can therefore never benefit from indexation to your personal cap.

    Participation quiz 1

    On 1 July 2017 Amy has a pension worth $1.2 million. On 1 December 2017 she commutes $800,000 back to an accumulation account. On 1 July 2020 the general transfer balance cap is indexed to $1.7 million. What is Amy’s personal transfer balance cap in the 2020–21 financial year?

    1. $1,725,000
    2. $1,700,000
    3. $1,675,000
    4. $1,625,000

    The correct answer is d – Amy’s highest ever transfer balance was $1.2 million, which means 25% of her cap was still unused at that time. Since the general transfer balance cap was indexed by $100,000, Amy’s cap is increased by 25% of $100,000 to $1,625,000.

    Your transfer balance account and your transfer balance

    The next two concepts I want to talk about are your transfer balance account and your transfer balance.

    Your transfer balance account is the mechanism through which transfers into and out of your retirement phase superannuation accounts are balanced.

    In simple terms, your transfer balance account is like a bank account in that it nets off deposits into the account against withdrawals out of the account to give you a balance on any particular day.

    In fact, your transfer balance account is more like having one bank account that can tell you the balance across all the bank accounts you own. This is because your transfer balance account measures your transfer balance for all of your retirement phase superannuation accounts combined.

    In a transfer balance account, your balance at the end of any day is called your transfer balance. As the name suggests, it’s your transfer balance that’s important when determining whether you’ve exceeded your transfer balance cap.

    You start to have a transfer balance account from the first time you become the retirement phase recipient of a superannuation income stream. However, if that time is before 1 July 2017, then your transfer balance account commences on 1 July 2017 – that is, if your existing income stream is still payable to you.

    Once you start to have a transfer balance account, you will always have one and it will never reset. It will record all your transfers into and out of retirement phase and use them to give you a transfer balance. Even if you subsequently cease to be a retirement phase recipient of a super income steam you don’t stop having a transfer balance account. You only cease to have one when you die.

    Transfer balance credits and debits

    Like a bank account, your transfer balance account uses credits and debits to record transfers into and out of your retirement phase super accounts.

    Broadly, amounts transferred into the retirement phase are credited to your transfer balance account. Credits increase your transfer balance. On the other hand, amounts you transfer out of the retirement phase give rise to transfer balance debits. Debits decrease your transfer balance.

    Note that credits and debits only arise when a transfer into or out of a retirement phase super account occurs, not when the balance in one of those accounts fluctuates. This means that it’s only the opening value of a new account that counts towards your cap, not ongoing investment earnings, losses, fees, charges or pension benefit payments.

    At the end of any given day, your transfer balance is the sum of your transfer balance credits less the sum of your transfer balance debits. Normally your transfer balance will be a positive credit amount; however, your transfer balance can be less than zero if your debits are higher than your credits.

    Let’s look at an example of debits and credits and how they determine your transfer balance:

    On 1 July 2017, John has a retirement phase super income stream account in his SMSF worth $1.6 million. He therefore has a transfer balance account with a credit of $1.6 million. His transfer balance is also $1.6 million.

    If John partially commutes this income stream – let’s say he commutes $600,000 – then a debit of $600,000 arises in his transfer balance account. John’s transfer balance is now $1.0 million.

    In 2022 John has a health scare and decides to wind up his SMSF and roll-over his super money to an APRA fund. While he’s been the trustee of his own fund, John’s investments have performed very well and the actual value of his pension interest is up to $1.2 million. These investment earnings in John’s SMSF don’t change John’s transfer balance.

    John commutes the full balance of $1.2 million, so a debit arises for $1.2 million. John now has a negative transfer balance of $200,000. This means he has $1.8 million cap space, or in other words, he can transfer up to $1.8 million into another retirement phase account without breaching his transfer balance cap.

    John rolls over $1.8 million to an APRA fund and starts a new allocated pension. A credit of $1.8 million arises in his transfer balance account but his transfer balance is only back to $1.6 million.

    For the next few years financial markets are in a downturn and John’s new pension loses money for a while. John also draws regular pension payments of 10% of his balance each year. By 2026 his interest is worth $1.0 million. These losses and drawdowns don’t change John’s transfer balance, so even though the value of his interest is diminishing, his transfer balance stays the same – $1.6 million.

    Types of transfer balance credits and debits

    I hope that the example I’ve just worked through has helped you understand how transfer balance credits and debits determine your transfer balance. In a minute I want to move on and start talking about what happens if you have excess transfer balance – that is, if your transfer balance becomes higher than your transfer balance cap.

    Before I start talking about excess transfer balance, let me just finish talking about your transfer balance account and your transfer balance by quickly listing the different types of credits and debits that can arise.

    In terms of credits, there are only three:

    • A credit for an income stream you have on 1 July 2017 that existed before the new measure started.
    • A credit for a new income stream you start on or after 1 July this year.
    • A credit for excess transfer balance earnings (and I’m going to talk a bit more about what this is soon).

    There are more transfer balance debits than credits, but the most common one is probably going to be a debit for a full or partial commutation.

    The other debits are:

    • Structured settlement contributions you make to an accumulation account. These debits are for certain personal injury payments you may receive.
    • Losses your super interest suffers due to fraud or dishonesty.
    • Payments you may have to make because of a bankruptcy order.
    • Family law payment splits.
    • A superannuation income stream that stops being in the retirement phase because a superannuation provider does not comply with a commutation authority (we’ll discuss this more a little later in the webinar).
    • A superannuation income stream that stops being in the retirement phase for another reason besides full commutation or non-compliance with a commutation authority.
    • Non-commutable excess transfer balance (I’ll mention this again soon).

    What happens if I exceed my transfer balance cap and I only have account-based income streams?

    The next topic I want to talk about is what happens if you exceed your transfer balance cap.

    First, I just want to point out that the legislation governing the new transfer balance cap is mainly concerned with account based super income streams or allocated pension or annuity interests. The law then introduces a new concept called a ‘capped defined benefit income stream’. I’ll explain what this is and how the law is modified if you only have one of these types of interests. Finally, I’ll talk about what happens if you have a combination of account based interests and capped defined benefit interests.

    This is only going to be a quick introduction to the consequences for exceeding your transfer balance cap. We will cover the scenarios I’m discussing here in more detail in our ‘Masterclass’ webinar – coming soon.

    For account-based pensions, the value of the superannuation income stream will generally be the starting value of that pension account.

    Your superannuation provider will report this value to us when you start your income stream and this will raise a credit in your transfer balance account. If this credit causes your transfer balance to exceed your transfer balance cap, you’ll have excess transfer balance.

    If you do exceed your transfer balance cap after 1 July, and you only have account based pension interests, excess transfer balance earnings will begin to arise in your transfer balance account. Excess transfer balance earnings arise daily and are calculated at the same rate as the general interest change.

    You will continue to accrue excess transfer balance earnings in your transfer balance account until you either remove the excess or until we make a written determination to notify you about the excess.

    If you have an existing pension when the new measure starts to take effect on 1 July, you will have a transfer balance cap of $1.6 million on 1 July 2017. Unfortunately, we can’t tell you the current value of your super interests because super funds only report information to us annually. Therefore, if you want to know what your interest is currently worth we recommend you talk to your superannuation provider if you’re currently in pension phase.

    As soon as superannuation providers start reporting to us after 1 July 2017 we will be able to help you manage your transfer balance cap. Until then, if your pension account balance is over $1.6 million, you should start seeking advice to work out how to reduce your balance before 30 June.

    If you have an account based pension you may be able to reduce its value by commuting part of the interest to an accumulation account or cashing a lump sum out of the superannuation system. Before 1 July you can also reduce the amount that will count towards your transfer balance cap by taking a larger than normal pension payment. After the new measure starts, large pension payments will have no effect on your transfer balance because they do not give rise to a debit in your transfer balance account.

    Excess transfer balance determinations

    We will send you a written excess transfer balance determination as soon as we become aware that you have excess transfer balance – which will usually happen as soon as your superannuation provider reports to us that you’ve started a new income stream.

    You can object to an excess transfer balance determination if you think we’ve made a mistake or applied the law incorrectly. If you lodge a valid objection we will work with you to understand your contentions and resolve it with you. When we’ve made a decision we’ll notify you in writing.

    If you receive an excess transfer balance determination your super provider will need to remove the excess amount. This includes excess transfer balance earnings that accrue from the date of the excess to the date of the determination. You will need to remove this amount from a retirement phase interest.

    When we send you a determination, we will tell you the amount you need to remove from a retirement phase interest to get back under your transfer balance cap. This amount is called the “crystallised reduction amount”. It’s the sum of the excess capital and the notional earnings that are above your cap, up to the date of the determination.

    You will generally have only 60 days to contact your fund, arrange for the commutation and for you or the fund to report that this has occurred after receiving a determination. You will only have a longer period if you ask us for an extension of time and we agree to your request.

    When you receive an excess transfer balance determination, it will include a ‘default commutation notice’. This is a notice explaining what we will do if you do not voluntarily commute the crystallised reduction amount from a retirement phase interest – and notify us of the commutation - all within the 60 day determination period.

    What does a default commutation notice include?

    A default commutation notice will tell you that if you do not voluntarily initiate a commutation, then we will send a commutation authority to one or more of your superannuation providers.

    The default commutation notice will tell you which superannuation provider or providers and which super interest or interests we will instruct to be commuted, as well as the amounts.

    A commutation authority will require your provider to commute the crystallised reduction amount from the account we specify.

    We recommend that if you are able to arrange a voluntary commutation with your super provider, you should do this when we send you a determination, rather than waiting for us to issue a commutation authority. The reason we encourage you to do this is because this will mean your excess is rectified sooner than if you wait for the determination period to end and for us to issue a commutation authority. Because of the way excess transfer balance tax is calculated (which I’ll be explaining soon), the less time you are in excess, the less tax you will have to pay.

    In a minute I’m going to explain what you can do if you want us to send a commutation authority to your super provider, but if you choose a different provider or account to the one we’ve nominated in the default commutation notice.

    Just before I move on, I think it’s a good time to give you a chance to participate in another quick quiz.

    Participation quiz 2

    Jill has an existing account based pension on 1 July 2017. It’s worth $1.0 million. On 1 January 2018 Jill starts another account based pension. This one is also worth $1.0 million. Jill’s super provider reports the new pension to us on 29 January and we issue a determination to Jill on 30 January.

    Three of the four following statements are correct. Which statement is incorrect?

    1. The determination is sent to Jill’s super provider
    2. The determination states the crystallised reduction amount
    3. The determination includes a default commutation notice
    4. The determination period is 60 days

    (The incorrect statement is a – an excess transfer balance determination is a notice issued to Jill to tell her she has excess transfer balance. Jill then has 60 days to initiate the commutation and ensure the fund actions and reports the commutation, otherwise the Commissioner will send a commutation authority to Jill’s super provider in accordance with the default commutation notice).

    What if I want to choose a different super provider or account?

    Before we did the quiz I mentioned that I was going to explain what you can do if you want us to send a commutation authority to your super provider, but not the provider we stated on the default commutation notice.

    If you receive an excess transfer balance determination and default commutation notice and you have more than one retirement phase interest, you can make an election and ask us to send a commutation authority to a different provider or nominate a different account to the one stated in the default commutation notice.

    You must elect for the commutation authority to be issued to a super provider and account where you are the retirement phase recipient (that is, you can’t nominate someone else’s account or an accumulation account).

    Your election must also be in the approved form and must be given to us within 60 days or a longer period if we give you an extension of time.

    If you make a valid election, then when the 60 day determination period is over we will send a commutation authority to the provider you elected and the account you nominated. You can also nominate two or more accounts to commute an amount adding up to the crystallised reduction amount.

    What happens if my super provider receives a commutation authority?

    If you have received a determination and haven’t taken any action to arrange a voluntary commutation within 60 days we will issue a commutation authority to your super provider.

    Your super provider will then have 60 days to take action to commute the amount stated in the authority and notify us of the commutation. The law does not allow us to extend this time period, even if your super provider asks us to.

    Your super provider also needs to tell you when they action a commutation authority.

    If for some reason your super provider can’t action the commutation authority, they must let us know, but there are only a few valid reasons for not complying. The reasons a super provider may not be able to comply with a commutation authority are:

    1. you have died
    2. the interest is a capped defined benefit income stream
    3. the commutable amount stated in the commutation authority is higher than the balance in your account.

    If the super interest isn’t enough to commute the full amount in the commutation authority, the fund must fully commute the interest. If you have any other super income stream accounts, we’ll then send additional commutation authorities to the super providers of those accounts, according to the default commutation notice.

    If all of your super providers with account based interests have been fully commuted and you still have an amount of excess transfer balance then we will send you a notice of non-commutable excess transfer balance. When we issue this notice to you a transfer balance debit arises in your transfer balance account equal to the remaining, uncommuted, crystallised reduction amount. This debit will bring your transfer balance back to your cap.

    I think it’s a good time to run through another example, to illustrate the excess transfer balance process from start to finish:

    Marcus started an account based pension worth $1.0 million on 20 February 2018. He also has another income stream, which he started before the new measure took effect on 1 July 2017. This pension was also worth $1.0 million just before 1 July 2017. Marcus was surprised when he received a determination stating that he has a crystallised reduction amount of $405,000 (note that this includes $5,000 of notional earnings). Marcus realised he had misunderstood the new measure – he thought existing pensions didn’t count towards the cap.

    When Marcus received the determination he decided he would let the ATO send a commutation authority to his super provider. The default commutation notice stated that the Commissioner would issue the authority to the pension account he started on 20 February, but Marcus preferred for the other interest to be partially commuted because he still had an accumulation account with this provider.

    Marcus made an election in the approved form within 60 days of the date the determination was made, so when the determination period was over the Commissioner sent a commutation authority to the provider holding the account that existed before 1 July 2017.

    Marcus’ super provider did a partial commutation of $405,000 to transfer into Marcus’ accumulation account. The provider notified the Commissioner and Marcus when this was actioned.

    Marcus no longer has an excess transfer balance.

    Excess transfer balance tax

    The determination process and the election and commutation authority processes that happen if you don’t voluntarily arrange a commutation, are about removing any excess transfer balance necessary to get you back under your transfer balance cap.

    As soon as you no longer have excess transfer balance we’ll send you an excess transfer balance tax assessment.

    Under the new measure, you are liable to pay excess transfer balance tax if you have an excess transfer balance period. An excess transfer balance period is a continuous period of one or more days where you have excess transfer balance at the end of the day.

    At the end of your excess transfer balance period – that is, as soon as you no longer have excess transfer balance – we will calculate your excess transfer balance tax liability and send you an assessment for that period.

    Your tax liability is based on your excess transfer balance earnings, which are calculated daily on your excess transfer balance. The earnings calculated for your assessment are worked out in the same way as the earnings calculated for your determination; however, the earnings calculated for your assessment aren’t posted to your transfer balance account as a credit. They also don’t stop being calculated when the determination is issued to you.

    Excess transfer balance earnings for your assessment are based on the general interest charge and compound daily from the date of excess to the date that the total excess (including the excess transfer balance earnings credit) is removed from retirement phase.

    The rate of excess transfer balance tax is 15% or 30% of the excess transfer balance earnings for the entire excess period. The 15% tax rate applies for any excess periods that start in the 2017–18 financial year and for your first excess period starting from 1 July 2018. The 30% rate applies for any subsequent breaches.

    Let’s have a look at an example of how excess transfer balance tax could apply:

    Lorraine breached her transfer balance cap on 1 August 2017 when she started a $2.0 million account based pension. After receiving a determination, she instructed her super fund to commute $404,000, which was the crystallised reduction amount. Her fund made the commutation to her accumulation account on 25 August 2017.

    Lorraine will receive an excess transfer balance tax assessment for the period 1 August 2017 to 24 August 2017.

    Her assessment tax rate is 15%.

    Lorraine misunderstood the transfer balance cap measure and thought it was an annual cap, so on 1 July 2018 she started another allocated pension worth $500,000.

    When Lorraine rectifies this breach, she will receive another tax assessment for the new excess transfer balance period. This assessment will also be taxed at 15%.

    If Lorraine ever breaches her transfer balance cap again, her next assessment will be taxed at the higher 30% tax rate.

    What is a capped defined benefit income stream?

    Until now I’ve only been talking about how the transfer balance cap applies to account based retirement phase super income streams.

    Special rules apply to certain pensions and annuities, which from 1 July 2017 will be referred to as ‘capped defined benefit income streams’.

    Strictly speaking, the types of retirement phase interests that will be capped defined benefit income streams are specified in the new law by reference to the standards in particular sub regulations of the Superannuation Industry (Supervision) Regulations 1994.

    Broadly speaking they include:

    • lifetime pensions you’re receiving before 1 July 2017 and any new lifetime pensions you start after that date
    • as well as lifetime annuities, life expectancy pensions and annuities and market linked pensions and annuities you’re receiving just before 1 July 2017.

    For transfer balance cap purposes a credit will arise when one of these income stream starts to become payable to you.

    To work out the value of the credit your super provider will calculate your ‘annual entitlement’.

    The ‘annual entitlement’ is worked out by:

    1. dividing the gross (pre-tax) amount of the first superannuation income stream benefit you are entitled to receive from the income stream after 1 July 2017 by the number of whole days to which that benefit relates; and
    2. multiplying the result by 365.

    For lifetime pensions and annuities, once the annual entitlement is calculated, then your fund multiplies this value by 16, to work out the value of the transfer balance credit.

    Life expectancy and market linked pensions and annuities being paid on or before 30 June 2017 are valued by multiplying the annual entitlement by the number of years (rounded up to the next whole number) remaining on the term of the product.

    The outcome of these two calculations is known as the special value. Your super provider will report this amount to us.

    Can I have excess transfer balance if I only have capped defined benefit income streams?

    If you only have capped defined benefit income streams you can’t have excess transfer balance. This is because in order to have excess transfer balance when you have a capped defined benefit income stream your transfer balance has to exceed both your transfer balance cap and your capped defined benefit balance. This is the balance in your transfer balance account attributable only to credits and debits from capped defined benefit income streams.

    Because you can’t have excess transfer balance with only capped defined benefit income streams, you won’t have to remove any amounts from your capped defined benefit interests, which are generally non-commutable anyway.

    Excess transfer balance tax is also not imposed for a breach of the transfer balance cap if you only have capped defined benefit interests.

    Do I have a defined benefit income cap?

    Instead of being subject to the same excess transfer balance tax consequences as account based retirement phase interests, you are subject to a new defined benefit income cap for benefits paid to you from a capped defined benefit income stream.

    The defined benefit income cap will be $100,000 for the 2017–18 financial year. This cap is linked to the general transfer balance cap so it will increase if the general transfer balance cap is indexed. Also, in some circumstances the cap is reduced where you only start to have a pension or annuity part way through the financial year, or a component of the pension or annuity is not subject to concessional tax treatment. We can explain more about this in our ‘Masterclass’ webinar.

    This means any defined benefit income you receive in excess of $100,000 annually is subject to additional income tax rules if you are 60 years old or older or if you receive a reversionary benefit from the death of someone who was 60 or over.

    If you receive income in excess of your defined benefit income cap in a financial year you may have to lodge an income tax return to report that income to us. Your super provider may also withhold tax from your benefit payments throughout the year and they will give you a PAYG superannuation income stream payment summary at the end of the year.

    What type of defined benefit income will I need to include in my income tax return?

    The type of defined benefit income you may need to declare in your income tax return and the offsets you can claim against that income depends on your age, whether your income exceeds the defined benefit income cap and the components of that income.

    Defined benefit income can include income from a tax free component and income from a taxable component. The taxable component is further broken down into two different elements – the taxed element and the untaxed element.

    The sum of your income from both your tax free component and the taxed element only needs to be included in your taxable income if it exceeds $100,000 in total. If it does, you will need to include half of the excess above $100,000 in your taxable income.

    The income from your untaxed element all has to be included in your assessable income. This is currently the case and doesn’t change with the introduction of the transfer balance cap reform. What has changed is that you can only claim a 10% offset for any income from this element below the $100,000 threshold. This threshold takes into account the tax free component and taxed element first, before adding the untaxed element.

    Let me try and illustrate this with an example:

    Barry is 64 years old and has a capped defined benefit income stream and receives $150,000 in the 2017–18 financial year. He doesn’t have any account based pensions, so he won’t have any consequences for exceeding his transfer balance cap. But he will need to work out how much assessable income he needs to include in his income tax return.

    Barry’s pension is made up of the following components:

    • tax free component – $40,000
    • taxed element – $80,000
    • untaxed element – $30,000

    The total of Barry’s tax free component and taxed element is $120,000, so this is above the $100,000 defined benefit income cap in and of itself. So Barry includes 50% of the excess in his assessable income. This comes to $10,000.

    The total of Barry’s untaxed element is $30,000. He includes it all in his assessable income. Seeing the entire $100,000 limit is used up by the other components, Barry cannot claim a 10% tax offset in relation to the $30,000. Barry’s total assessable income from his capped defined benefit income is $40,000.

    We will discuss these new taxation rules for defined benefit income in more detail later in an upcoming webinar.

    What happens if I have a mixture of account based income streams and capped defined benefit income streams?

    So far, we’ve looked at the consequences for someone who has either all account based income streams or all capped defined benefit income streams, but many people have both types.

    If you have a mixture of account based pensions and capped defined benefit income streams then you need to add them together to work out the consequences.

    The way that capped defined benefit interests and account based interests are added together for transfer balance cap purposes is referred to as ‘stacking’.

    Imagine you’re stacking boxes on top of each other and there’s a law that says a stack of boxes can only be so high if a particular type of box is being stacked.

    If those boxes represent your retirement phase income stream accounts and the size of each box is represented by the credit value for each income stream, then the height limit is your transfer balance cap.

    The way you work out whether you need to remove any capital from your account based interests is to count the capped defined benefit interests first, before you count your account based interests.

    If you reach your transfer balance cap, then you need to remove any amounts above the cap that are from an account based interest.

    Here’s an example of how this stacking process works:

    Rachel has two retirement phase super income streams; one is a lifetime pension with an annual entitlement of $110,000. The special value of this interest is $1,760,000 (i.e. $110,000 multiplied by 16). The other interest is an account based pension with a credit value of $400,000.

    Altogether, Rachel’s transfer balance is $2,160,000, while her transfer balance cap is $1.6 million.

    Rachel’s transfer balance exceeds both her transfer balance cap and her defined benefit balance, so she has excess transfer balance.

    Because her lifetime pension is a capped defined benefit income stream, this is counted first. Because the special value of this interest exceeds her transfer balance cap on its own, Rachel must commute $400,000 plus an amount of excess transfer balance earnings, so this probably means she’ll need to fully commute her account based income stream.

    I hope by now I’ve been able to explain the core processes under the new transfer balance measure for anyone with an account based super income stream or capped defined benefit interest. To conclude the webinar I’m going to quickly touch on some of the more advanced aspects of the new law, noting that we’ll cover these in more detail in our ‘Masterclass’ webinar soon.

    More advanced aspects of the transfer balance cap reform

    Modifications for death benefit income streams

    The first modification to the general rules I want to discuss is in relation to death benefit income streams.

    Fundamentally, when someone who is in receipt of a retirement phase income stream dies on or after 1 July, their transfer balance account will cease.

    Any amount paid as a death benefit income stream to a beneficiary will count towards the beneficiary’s own transfer balance cap. The timing of when this amount will be credited to the beneficiary’s transfer balance account will depend on whether the beneficiary is receiving a reversionary death benefit income stream or not.

    If you receive a reversionary death benefit income stream you will have an amount credited to your transfer balance account 12 months after the primary pensioner’s death. The 12 month period of grace is to give you time to adjust your superannuation affairs before any transfer balance cap consequences take effect.

    For a reversionary income stream, the amount of the credit will be equal to the market value of the pension interest at the time of the primary pensioner’s death.

    If the benefit is not reversionary, you will receive a credit in your transfer balance account when the pension starts to be payable to you.

    The same rules apply if a child death benefit beneficiary starts receiving a reversionary or non-reversionary death benefit income stream. However, for a child recipient, there are modifications to the transfer balance cap.

    A child recipient’s transfer balance cap is calculated by reference to a new concept called ‘cap increments’. Cap increments arise in the following circumstances:

    1. If a child recipient is a beneficiary just before 1 July 2017, they will have a cap increment of $1.6 million on 1 July when the new measure starts.
    2. If a child recipient starts to receive a new pension after 1 July 2017, and the deceased person did not have a transfer balance account, and the child is the only beneficiary, the child will have a cap increment of $1.6 million for each income stream. If the benefits are paid to multiple beneficiaries, then the child’s cap increment is equal to their proportion of the general transfer balance cap.
    3. If a child recipient starts to receive a new pension after 1 July 2017, and the deceased person did have a transfer balance account, the child will have a cap increment equal to the amount of the transfer balance credit they receive attributable to the deceased person’s retirement phase interests.

    There are other modifications for a child recipient’s transfer balance cap where the deceased person had excess transfer balance at the time of their death or where the child is also in receipt of a non-death benefit retirement phase income stream. We’ll aim to look at these scenarios in another webinar.

    Transitional excess transfer balance concessions

    The next topic I want to touch on is in relation to transitional provisions that apply at the start of the new measure.

    Ordinarily, if your transfer balance exceeds your transfer balance cap at the end of a particular day, you have breached your transfer balance cap and have an excess transfer balance.

    However, the transitional provisions provide that you won’t have excess transfer balance in the first six months after 1 July 2017 if you meet three conditions. These are:

    1. the only credits in your transfer balance account are from existing superannuation streams at the end of 30 June 2017
    2. your transfer balance is in excess of your transfer balance cap but not more than $1.7 million
    3. your transfer balance is reduced below your transfer balance cap before the end of 31 December 2017.

    As we discussed earlier in the webinar, there are a number of ways a debit can arise in your transfer balance account, but generally a superannuation income stream will need to be commuted in part or in full to reduce your transfer balance below your transfer balance cap.

    The transitional provision operates only to disregard your excess transfer balance for this 6 month period and stop you from having any excess transfer balance earnings or a liability for excess transfer balance tax – and only if the three conditions are strictly met.

    You should note that if you do have a small excess and rectify this within the transitional window, your highest transfer balance amount isn’t modified. If you remember our discussion earlier, this is important for determining whether your transfer balance cap can be subject to proportional indexation in the future. That is, even though your excess transfer balance is disregarded for the transitional period you will not be entitled to increase your transfer balance cap if the general transfer balance cap is indexed.

    CGT relief for qualifying superannuation funds

    Finally, and very briefly, I want to mention transitional provisions available for super funds to provide capital gains tax (CGT) relief in some circumstances if the fund has taken steps to comply with the new transfer balance cap and transition to retirement stream (TRIS) measures.

    This is a specific measure targeted at superannuation providers, so we’re going to run another webinar devoted to the topic in the near future. For now, I’ll just mention that the transitional CGT relief enables funds to reset the cost base of assets to their market value where those assets are reallocated or re-apportioned from the retirement phase to the accumulation phase prior to 1 July 2017 to comply with the new transfer balance cap start date.

    How the ATO will administer the transfer balance cap measure

    I really hope this webinar has been useful to you.

    I’ve tried to touch on the main features of the new transfer balance cap rules to give you an overview of how the reform is going to impact you if you have a retirement phase super income stream or capped defined benefit income stream.

    As I’ve mentioned, we’re going to run some more webinars soon, including a transfer balance cap ‘Masterclass’ and a session focussed on CGT relief. So please watch this space.

    To conclude today, I want to let you know that we will be working hard to help you understand everything you need to know about the transfer balance cap. We’re also developing the capability to provide you with information online as soon as possible after 1 July – and as soon as we start receiving information from you and your super providers – we want to show you your personal transfer balance cap and your transfer balance account transactions in as close to ‘real-time’ as possible.

    After 1 July we will be asking you to provide us with information to determine your transfer balance credits and debits in relation to fraud, bankruptcy and payment splits, as well as structured settlement contributions you may have made prior to 8 May 2006. Otherwise, we expect to be able to determine your transfer balance from information we’re going to ask your super providers to send us on a regular basis.

    In short, we will administer the new measure by:

    • monitoring your transfer balance credits and debits and your transfer balance
    • issuing determinations to you if you exceed your cap
    • processing elections you may like to make
    • issuing commutation authorities to your super providers
    • assessing you for any excess transfer balance tax liabilities
    • keeping you up-to-date about the information we have received about your transfer balance account.

    Well, that brings me to the end of the presentation. I hope it’s been useful for you and helped you understand how the new transfer balance cap is going to impact you or your clients.

      Last modified: 03 May 2017QC 51923