{"id":6857,"date":"2016-10-07T14:52:04","date_gmt":"2016-10-07T03:52:04","guid":{"rendered":"http:\/\/www.dbalawyers.com.au\/?p=6857"},"modified":"2016-10-27T15:51:20","modified_gmt":"2016-10-27T04:51:20","slug":"the-1-6-million-transfer-balance-cap-explained","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/announcements\/the-1-6-million-transfer-balance-cap-explained\/","title":{"rendered":"The $1.6 million transfer balance cap explained"},"content":{"rendered":"
The Department of Treasury on 27 September 2016 released the second tranche of exposure draft legislation and explanatory material in relation to the Federal Government\u2019s proposed superannuation reforms.<\/p>\n
These materials provide long-awaited detail on the workings of the $1.6 million transfer balance cap measure. This article explains some key take-away points about this measure.<\/p>\n
Treasury has confirmed that this measure impacts less than 1% of all fund members. However, the compliance systems and costs will impact every member for many years to come.<\/p>\n
Broadly, the $1.6 million balance cap measure is a limit imposed on the total amount that a member can transfer into a tax-free pension phase account from 1 July 2017.<\/p>\n
The general transfer balance cap is $1.6 million for the 2017-18 financial year subject to indexation (see below for further information on the indexation rules).<\/p>\n
An individual\u2019s personal transfer balance cap is linked to the general transfer balance cap. All fund members who are in receipt of a pension on 1 July 2017 will have a personal balance cap of $1.6 million established at that time. Otherwise, a fund member\u2019s personal balance cap comes into existence when they first become entitled to a pension. An individual\u2019s personal transfer balance cap is equal to the general balance cap for the relevant financial year in which their personal balance cap commenced.<\/p>\n
Usage of personal cap space will be determined by the total value of superannuation assets supporting existing pension liabilities for a member on 1 July 2017, as well as the capital value of any pensions commenced or received by a member from 1 July 2017 onwards.<\/p>\n
A member\u2019s available cap capacity over time is subject to a system of debits and credits recorded in a \u2018transfer balance account\u2019, which is a kind of ledger whereby amounts transferred into pension phase are credited to the account and amounts commuted or rolled-over are debited from the account.<\/p>\n
Earnings and capital growth on assets supporting pension liabilities are ignored when applying the personal transfer balance cap. Thus, a member\u2019s personal balance cap may grow beyond the $1.6 million cap due to earnings and growth without resulting in an excess. As such, a taxpayer who allocates growth or higher yielding assets to their balance cap will generally be better off if their pension assets appreciate in value. However, note the limitations with regards to the segregation method discussed below.<\/p>\n
Any amounts in excess of a member\u2019s personal transfer balance cap can continue to be maintained in their accumulation account in the superannuation system. Thus, members with superannuation account balances greater than $1.6 million can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase.<\/p>\n
The following items count as a credit towards an individual\u2019s transfer balance account and thereby their personal transfer balance cap:<\/p>\n
As can be seen from the above list, death benefit pensions count towards to the recipient\u2019s personal transfer balance cap.<\/p>\n
The inclusion of death benefit pensions as part of the reversionary beneficiary\u2019s transfer balance cap is in accordance with DBA Lawyers\u2019 prediction in our 1 August 2016 newsfeed article<\/a>. This aspect will have a significant impact on the succession plans of all fund members who collectively with their spouse have more than $1.6 million in superannuation.<\/p>\n Fortunately, there is an important concession. An excess will only occur as a result of a death benefit pension six months from the date that the reversionary beneficiary becomes entitled to receive the pension. This means there is a grace period for reversionary beneficiaries to commute their pension interest(s) to stay within their personal transfer balance cap without triggering any excess. The exposure draft explanatory memorandum (\u2018EM\u2019) explains the six month period as follows:<\/p>\n This gives the new beneficiary sufficient time to adjust their affairs following the death of a relative before any consequences \u2013 for example, a breach of their transfer balance cap \u2013 arise.<\/p>\n Typically, a surviving spouse suffers years of grieving following the loss of a spouse but only has a six month period to make a decision on a reversionary pension if that results in an excess of their personal transfer balance cap.<\/p>\n A member\u2019s transfer balance account is debited when they commute (partially or fully) the capital of a pension. When a commutation occurs, the debit entry to the transfer balance account is equal to the amount commuted. Accordingly, it is possible for an individual\u2019s transfer balance account to have a negative balance if their debits exceed their credits. For example, a full commutation of a pension where the assets supporting that pension have grown from $1.6 million to $1.7 million will result in a transfer balance account of negative $100,000.<\/p>\n Ordinary pension payments do not count as debit entries for the purposes of the transfer balance account. Proposed legislative amendments will ensure that partial commutations do not count towards prescribed minimum pension payments. This proposal may also impact a member with an account-based pension electing to convert an amount to a lump sum for claiming their low rate cap.<\/p>\n In addition to the above recognised debits, relief will be available in relation to certain events where an individual loses some or all of the value of assets that are held in pension phase. The proposed relief concerns family law payment splits, fraud and void transactions under the Bankruptcy Act 1966<\/em> (Cth). In these circumstances, an individual will be able to apply to the ATO for relief so that their transfer balance account can be debited to restore their personal transfer balance cap, eg, if a member is defrauded of their super savings and the perpetrator is convicted, then a debit (or restoration) can be made to their transfer balance account.<\/p>\n At this stage, there is no relief proposed in relation to a major economic downturn eroding the value of fund assets held in pension phase. Therefore, if another global financial crisis were to occur, any adverse economic effects on the assets supporting pensions could substantially impair a member\u2019s personal transfer balance cap.<\/p>\n Individuals who exceed their personal transfer balance cap will have their superannuation income streams commuted (in full or in part) back into accumulation phase and notional earnings (see below) on the excess will be subject to an excess transfer balance tax.<\/p>\n Notional earnings accrue on excess transfer balances based on the general interest charge. Notional earnings accrue daily until the breach is rectified and are generally credited towards an individual\u2019s transfer balance account (subject to a transfer balance determination being made by the Commissioner).<\/p>\n The draft EM provides the following example of an excess transfer balance (refer to example 1.14):<\/p>\n On 1 July 2017, Rebecca commences a superannuation income stream of $1 million from the superannuation fund her employer contributed to (Master Superannuation Fund). On 1 October 2017, Rebecca also commences a $1 million superannuation income stream in her SMSF, Bec\u2019s Super Fund.<\/p>\n On 1 July 2017, Rebecca\u2019s transfer balance account is $1 million. On 1 October 2017, Rebecca\u2019s transfer balance is credited with a further $1 million bringing her transfer balance account to $2 million. This means that Rebecca has an excess transfer balance of $400,000.<\/p>\n On 15 October 2017, the Commissioner issues an excess transfer balance determination to Rebecca setting out a crystallised reduction amount of $401,414 (excess of $400,000 plus 14 days of notional earnings). Included with the determination is a default commutation authority which lets Rebecca know that if she does not make an election within 60 days of the determination date the Commissioner will issue a commutation authority to Bec\u2019s Super Fund requiring the trustee to commute her $1 million superannuation income stream by $401,414.<\/p>\n As can be seen from the above example, there is some flexibility built into the system for proactive rectification where an excess transfer balance occurs.<\/p>\n An excess transfer balance tax is payable on the accrued notional earnings of the excess amount to neutralise any benefit received from having excess capital in the tax-free retirement phase. The excess transfer balance tax is assessed for the financial year in which a member breaches their transfer balance cap. The excess transfer balance tax is 15% on notional earnings for the first breach and 30% for second and subsequent breaches.<\/p>\n The transfer balance cap is indexed in increments of $100,000 on an annual basis in line with the Consumer Price Index.<\/p>\n A person\u2019s eligibility to receive indexation increases in relation to their personal transfer balance cap is subject to a proportioning formula based on the highest balance of the member\u2019s transfer balance account compared to the member\u2019s personal balance cap.<\/p>\n The proportioning formula as applied to an example increase of $100,000 is as follows:<\/p>\nWhat counts as a debit?<\/h3>\n
Excess personal transfer balance cap<\/h3>\n
Indexation of the balance cap<\/h3>\n