From 1 July 2017, the government will introduce a $1.6 million cap on the total amount that can be transferred into the tax-free retirement phase.
A cap will be placed on the amount of capital that can be transferred from concessionally taxed accumulation phase accounts to tax-free retirement phase accounts.
- The changes impose a transfer balance cap from 1 July 2017 to limit the amount of capital individuals can transfer to the retirement phase to support superannuation income streams. This, in turn, limits the amount of superannuation fund earnings that are exempt from taxation.
- An individual’s transfer balance cap is $1.6 million for the 2017-18 financial year and is subject to proportional indexation on an annual basis in $100,000 increments in line with the Consumer Price Index (CPI). The value of superannuation interests that support superannuation income streams as at 30 June 2017, together with the commencement value of new superannuation income streams that start after that date, count towards an individual’s cap.
- The transfer balance cap is directed towards net transfers to the retirement phase and does not value earnings, losses or draw-downs that occur within the retirement phase.
- If an individual exceeds their transfer balance cap, the Commissioner of Taxation (the Commissioner) will direct an individual’s superannuation income stream provider to commute (reduce) their retirement phase interests by the amount of the excess (including excess transfer balance earnings) to rectify the breach. The individual will also be liable for excess transfer balance tax on their excess transfer balance earnings to neutralise the benefit received from having excess capital in the earnings tax exempt retirement phase.
- Breaches in the 2017-18 financial year attract a single tax rate. The tax rate on excess transfer balance earnings increases for second and subsequent breaches occurring in the 2018-19 financial year or a later financial year.
- The transfer balance cap that applies to child dependants in receipt of a death benefit income stream from a deceased parent is subject to modifications. The modifications generally allow the child to receive their share of the deceased’s retirement phase interest without prejudice to the child’s future retirement. This recognises that most child dependants are currently required to commute the death benefit income streams by age 25.
- The ATO will need information about amounts moving into and out of retirement phase accounts to track an individual’s Transfer Balance Account. Any SMSF paying a superannuation income stream will be required to report these amounts to the ATO.
The Transfer Balance Account
- The policy intent of the transfer balance cap is achieved by using the structure of a transfer balance account. This section explains when superannuation income streams are added to an individual’s transfer balance account (a credit), as well as when the transfer balance account is reduced by amounts removed from the retirement phase (a debit). The transfer balance account operates in a similar way to a bank account balance or the balance of a general account ledger. Amounts an individual transfers to the retirement phase give rise to a credit (increase) in their transfer balance account. Similarly, certain transfers out of the retirement phase give rise to a debit (decrease) in the individual’s transfer balance account. The balance in an individual’s transfer balance account (their transfer balance) at a particular time is determined by looking at the sum of credits in the account at that time less the sum of any debits in the account at that time.
- An individual can transfer amounts to the retirement phase provided it does not cause their transfer balance to exceed their personal transfer balance cap. By comparing the balance of their transfer balance account with their personal transfer balance cap, it is possible to determine how much an individual can transfer to the retirement phase without exceeding the cap (their available cap space).
- An individual breaches their transfer balance cap if their transfer balance exceeds their personal transfer balance cap. Excess transfer balance earnings accrue on the excess transfer balance and are credited to the transfer balance account, compounding the excess until it is rectified.
|Summary of Credit Events (Increases Balance)
|Summary of Debit Events (Decreases Balance)
|Superannuation income streams on 30 June 2017
|Reversionary income streams commenced between 1 July 2016 and 30 June 2017
|Structured settlement contributions
|Superannuation income streams commenced on or after 1 July 2017
|Losses due to fraud and Void transactions under the Bankruptcy Act 1966
|Reversionary income streams commenced on or after 1 July 2017
|Family law payment splits
|Excess transfer balance earnings
|Superannuation income streams that cease to be in the retirement phase
|Death benefit income streams generally
|Superannuation income streams that fail to comply with the standards
|Capped defined benefit income streams credits generally
|Write off of excess transfer balance where excess cannot be reduced
|Capped defined benefit income streams generally
Opportunities/Planning in Simple Fund 360
- Using the Analytical Insights screen you can currently identify which fund members have a Pension Balance or Account Balance greater than $1.6 million. Remember that you will need to consider super balances outside of this SMSF e.g. an Industry Fund balance as this filter will not include those balances.
You can click on the More Information panel to see the individual pension accounts for the fund including account balances and Tax Free Proportions.
Changes to Simple Fund 360
- A letter and minute can be now generated for members requested that any excess balance over the $1.6 million Transfer Balance Cap be moved from Pension to Accumulation Phase.
- The Transfer Balance Dashboard helps you track the net amounts that have been transferred into transfer balance account for each member. Users also have the ability to add manual adjustments where required. The dashboard will display data for funds which are in the 2017/2018 Financial Year and onwards. Simple Fund 360 will display the pension balance for any active member with a pension balance to show whether the member has exceeded the $1.6 million cap.
- ATO reporting for the Transfer Balance Account Report (TBAR) see Event-based reporting (Transfer Balance Cap)
ATO and Further References
- ATO Law Companion Guideline 2016/D9 Superannuation reform: transfer balance cap
- ATO Law Companion Guideline 2016/D8 Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds
- ATO Practical Compliance Guide PCG2017/5: Superannuation reform: commutation requests made before 1 July 2017 to avoid exceeding the $1.6 million transfer balance cap
- Federal Register of Legislation