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  • 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 count towards your 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 you are:
      • 60 years old or older
      • under 60 years old and in receipt of a death benefit income stream from a person who died at 60 years old or over.

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

    • the 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.

    Find out about:

    See also:

    • Transfer balance cap
    • Defined benefit income 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

    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.

    Example – annualise your entitlement

    Jane retired and commenced a lifetime pension on 1 May 2016. Jane's superannuation fund will calculate the special value of her lifetime pension. The special value of her lifetime pension at 1 July 2017 is 16 times her annual entitlement for 2017–18.

    To work out the annual entitlement of her pension, Jane's superannuation fund needs to 'annualise' her first fortnightly payment after 1 July 2017, which is $5,753.42. To do this, they first calculate the daily rate by dividing her gross fortnightly payment by 14. They then multiply this amount by 365 days:

    $5,753.42 ÷ 14 × 365 = $150,000.

    End of example

    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.

    Example 2 – calculate your special value

    Malcolm retired on 1 January 2018. His superannuation fund needs to calculate the special value of his lifetime pension.

    The special value of his lifetime pension at 1 January 2018 is his annual entitlement for 2017–18 multiplied by the remaining term. The pension's remaining term of 18 years and one month is rounded up to the nearest whole year, 19.

    To calculate the annual entitlement of his pension, Malcolm's superannuation fund needs to 'annualise' his first weekly payment after 1 January 2018, which is $575.35. This is calculated by working out the daily rate by dividing the gross weekly payment by seven and multiplying this amount by 365 days.

    $575.35 / 7 × 365 = $30,000

    The special value of his pension is 19 × $30,000 = $570,000.

    End of example

    If your special value exceeds your 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 and will not need to commute the excess from your income streams or be liable to pay excess transfer balance tax.

    However, if your annual income that 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 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:

    Taxed and tax-free components (taxed source)

    If you receive a taxed component only or both taxed 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.

    Untaxed component

    If you receive an unfunded (untaxed) component 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 you receive:

    • taxed and untaxed components, or
    • tax-free and untaxed components, or
    • all three components.

    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 component 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.

    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:

    • 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 transfer balance cap. You will also be liable to pay excess transfer balance tax.

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

    See also:

    Example 1

    June is 65 years old and is receiving both:

    • a capped defined benefit income stream (estimated special value of $2 million)
    • an account-based income stream (estimated value of $500,000).

    June calculates that the value of her interests in retirement phase on 1 July 2017 will exceed her transfer balance cap. That is, the total of the special value of her capped defined benefit income stream, and the value of her account-based income stream, will be $2.5 million.

    Before 1 July 2017, June transfers her account-based income, valued at a $500,000 stream, back to an accumulation account.

    On 1 July, the special value of her capped defined benefit income stream ($2 million) will count towards her transfer balance cap. She will still exceed her transfer balance cap by $400,000. However, as this excess is solely from a capped defined benefit income stream, she does not have an excess transfer balance.

    As June’s benefits in 2017–18 exceed her defined benefit income cap, she may need to include amounts in her assessable income. Her entitlement to an offset may also be affected.

    End of example

     

    Example 2

    Greg is receiving a capped defined benefit income stream with a special value of $1.8 million on 1 July 2017. He also has $300,000 in accumulation interests.

    Greg’s transfer balance cap is $1.6 million. His capped defined benefit balance is $1.8 million.

    Greg exceeds his transfer balance cap by $200,000 on 1 July 2017. He does not exceed his capped defined benefit balance, and so does not have an excess transfer balance.

    However, if Greg commences an account-based income stream using his accumulation interests, the combined total that counts towards his transfer balance cap and capped defined benefit balance will be $2.1 million ($1.8 million plus $300,000). Greg will exceed his transfer balance cap by $500,000, and his capped defined benefit balance by $300,000.

    In this case, Greg will have an excess transfer balance of $300,000 (the lesser of the two amounts above). Greg will need to commute the excess from his account-based income stream, along with notional earnings on the excess. He will also need to pay excess transfer balance tax.

    Additionally, if Greg’s benefits in 2017–18 exceed his defined benefit income cap he will need to include amounts in his assessable income from 1 July 2017. His entitlement to the tax offset may also be affected.

    End of example
      Last modified: 23 Jul 2019QC 54353