The changes to superannuation announced in the 2016 Federal Budget have been passed by Parliament. Amongst those changes was the introduction of a $1.6 million transfer balance cap which limits the tax exemption for assets funding superannuation pensions.
This new limit on superannuation will apply from 1 July 2017 and creates additional responsibilities for SMSF trustees. The main issues you need to be aware of are:
- All super fund members who are receiving a pension on 1 July 2017 will have a transfer balance cap of $1.6 million created at that time.
- Those not receiving a superannuation pension on 1 July 2017, but will in the near future, their transfer balance cap will be created when they first receive a superannuation pension.
- The amount of tax-exempt assets available to fund a super pension under the cap is determined by a system of debits and credits which are recorded in a transfer balance account:
|Debits are created by||Credits are created by|
|o Commutations of superannuation pensions,||o The value of super assets supporting income streams on 30 June 2017|
|o Structured settle payments contributed to superannuation, and||o Starting new superannuation income streams from 1 July 2017 onwards,|
|o Certain payments arising from family law splits, fraudulent or void transactions.||o The value of reversionary income streams where an individual becomes entitled to them, and|
|o Notional earnings accruing to excess transfer balance amounts.|
- Reversionary pensions will count towards the cap, but members will have a 12 month period from the date of death to deal with the reversionary pension before a credit arises and counts towards their cap.
What are my options if my pension balance exceeds the $1.6m transfer cap at 1 July 2017?
Going over the $1.6 million transfer balance cap will require the excess amounts to be removed from the pension phase either by:
- withdrawing any excess as a lump sum payment (ie. cash withdrawal) or
- transferring it back to accumulation phase through pension commutations.
Transitional CGT relief and cost base reset election maybe available to fund members where they exceed the $1.6m transfer balance cap and reallocate benefits from retirement phase to accumulation phase:
- applicable for assets held on or after 9 November 2016 to 30 June 2017
- special rules apply if fund had segregated assets as at 9 November 2016
This was covered in greater detail in the December 2016 newsletter article.
What happens if I exceed the $1.6m transfer cap?
Breaches of the cap will require the excess amounts to be removed by commuting (either full or in part) those commutable pensions to bring them back under the $1.6m transfer cap.
The ATO will impose “notional earnings” on the excess amount charged at the 90 day bank accepted bill rate plus 7%, should the excess not be rectified within the specified time frame, and this will also count towards the transfer cap. This notional earnings will also attract a 15% excess transfer balance tax rate at 15% for the first year, and at 30% for subsequent financial years.
Transitional provisions: for members with pensions at 1 July 2017, they can exceed the transfer cap by up to $100,000 without penalty if the excess is reduced within 60 months.
I already have a Transition to Retirement (“TTR”) Pension – does this $1.6m transfer cap also apply?
Yes this $1.6m transfer cap also applies hence the above options also apply. Furthermore:
- the earnings on assets supporting a TTR will no longer be tax-free and will be taxed at 15%, regardless of the TTR start date
- payments from a TTR can no longer be classified as lump sum payments
How about Non-Commutable Pensions– what happens there?
Defined benefit pensions and certain pre-2007 superannuation pensions have special rules for the transfer balance cap recognising their non-commutable nature. These include lifetime pensions, lifetime expectancy pensions and market linked pensions.
Unlike the traditional commutable pensions, the transfer cap credit value for these non-commutable pensions is determined by a formula. For fixed term pensions, such as life expectancy and market linked pensions, this is calculated by multiplying the annual entitlement by the remaining term of the pension. In comparison, for lifetime pensions this is calculated by a valuation factor of 16 multiplied by the annual entitlement, regardless of the age of the pensioner, whether the pension is indexed or not over time or if the pension is reversionary or not.
Under the draft legislation, the commutation value of the pension is limited to only the amount of the excess over their transfer balance cap and it could be kept in accumulation phase or paid out of super.
Furthermore, from 1 July 2017 there will be a new defined benefit income cap of $100,000 (based on the general pension cap dividend by 16) which will limit the amount of tax-free defined benefit pension that can be received. 50% of the excess amount will be subject to tax at normal marginal tax rates with no tax offset on payments on both payment of tax-free and taxable components, even if the member is over age 60.
In summary, any amounts in excess of a member’s personal transfer balance cap can continue to be maintained in their accumulation account in their fund. This means if you have more than $1.6 million in super you can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase.