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- The transfer balance cap (TBC) and indexation
- How do the transfer balance cap rules work?
- Does this mean I can’t have more than my TBC amount in super?
- What is a transfer balance account?
- What counts towards the transfer balance cap?
- What happens if I breach the TBC?
- What happens now the TBC has increased to $1.7 million?
- How does the TBC relate to SMSFs, death and defined benefit members?
One of the most significant changes to super – the introduction of the transfer balance cap (TBC) – came into effect on 1 July 2017. Already mind-numbingly complex, the application of the TBC became even more so on 1 July 2021 when the cap lifted by $100,000 to $1.7 million.
The introduction of the TBC limited how much super retirees could transfer into a tax-free super pension account. It was designed to reinforce the role of super to provide retirement income, not as a store of intergenerational wealth.
The transfer balance cap (TBC) and indexation
Anybody who retires has the choice of accessing their super either as a lump sum, an income stream or a combination of both. If they access any of their super as an income stream, the income earned on the capital supporting that income stream is concessionally taxed at 0%.
As of 1 July 2017, a cap on the amount that can be used to commence a pension in retirement phase was introduced for everybody in retirement.
When it was introduced, the ATO said the cap would be indexed periodically in $100,000 increments. As of 1July 2021 your indexed amount is calculated proportionally based on the remainder of your cap.
The indexation means that individuals will now have a personal transfer balance cap between $1.6 million and $1.7 million and no single TBC will apply to everybody. An individual can access their TBC via ATO online services through myGov.
How do the transfer balance cap rules work?
On retirement, an individual has a cap on how much capital they can use to start an income stream.
This value is static at the time of transfer. That means if, at the time of your retirement, the capital supporting your income stream is 1,000 shares in company X and 1,000 shares in company Y, valued at that point in time at $1.6 million ($1.7 million if you start the pension after 1 July 2021), then those investments represent your balance cap.
If those shares appreciate, you will not breach your transfer balance cap. The reverse applies as well. If the market falls, and the value of company X and company Y drops, then you will obviously have less than your cap amount in your transfer balance account but that does not mean you can top up the difference with other super money.
If you exceed the cap, you will be liable to pay tax on the excess transfer balance earnings. You will need to transfer any excess to your accumulation account in the fund or withdraw the amount from the fund as a lump sum.
Does this mean I can’t have more than my TBC amount in super?
You can have more than your cap in super, but you can only have up to your cap in retirement funds used to commence a retirement income stream.
If you have more than your transfer balance cap amount you can leave the remainder in your accumulation account and access it if you have retired after reaching your preservation age. The fund pays 15% tax on earnings in the accumulation phase rather than 0% if it was in retirement phase. You can also remove it from the super system tax free but, if the amount is then invested in your name, any income will be taxed at your personal tax rate.
What is a transfer balance account?
If you receive your super as an income stream, you will have a transfer balance account in your name with the ATO. That account will commence on either the date you first received a retirement income stream after 1 July 2017, or on that date if you were already receiving a retirement phase income stream on 30 June 2017.
A transfer balance account is a record of all the events that count towards your transfer balance cap and is kept by the ATO. If you have a number of separate super pension accounts, the amounts will all be recorded and added together in your transfer balance account report (TBAR) with the ATO. This account remains active until your death and you can access your TBAR at the ATO via your myGov account.
In the case of account-based super income streams, your fund is required to report the value of all the super interests that were used to commence the retirement income stream. If you had such a retirement income before 1 July 2017, they were required to report the value as at 30 June 2017. If you commenced an income stream after 1 July 2017, your fund will have reported the commencement value of that super income stream. You can always talk to your super fund if you disagree with the amount reported on your TBAR.
If you have a self-managed super fund (SMSF), as the trustee of that fund you will need to report transfer balance cap events at least annually and possibly quarterly depending on the members’ balances as outlined in the ATO’s guidance below:
SMSFs that have any members with a total superannuation balance of $1 million or more on 30 June the year before the first member starts their first retirement phase income stream, must report events affecting members’ transfer balances within 28 days after the end of the quarter in which the event occurs.
A transfer balance account report will include both credits and debits as shown in this example:
| Date | Transaction | Debit | Credit | Transfer balance |
|---|---|---|---|---|
| 1 Jan 2018 | Superannuation Income stream | $0 | $1,600,000 | $1,600,000 |
| 1 Jun 2018 | Partial commutation of the income stream to a lump sum | $200,000 | $0 | $1,400,000 |
What counts towards the transfer balance cap?
Any super transferred into retirement phase from an accumulation account to support an income stream counts as a credit towards the cap.
Both reversionary and non-reversionary death benefit income streams count as credits towards your cap.
Repayments from limited recourse borrowing arrangements will count as a credit towards the cap (see SMSF section below); whereas structured settlements generally will not.
A structured settlement is a payment for a personal injury you have suffered that is contributed to a complying super plan. Providing they meet certain criteria, as defined by law in the box below, structured settlement contributions do not count towards the cap in that a credit and a debit for the structured settlement amount will appear in your TBAR on the same day.
“The contribution must arise from:
(a) The settlement of a personal injury claim that is based on the commission of a wrong, or a right created by statute, effected by a written settlement agreement between the parties
(b) Settlement of a personal injury claim arising under an Australian workers compensation law, or
(c) The order of a court made in respect of a claim that is based on the commission of a wrong, or a right created by statute (not including a court order approving or endorsing a settlement agreement as mentioned above).”
An increase in earnings on your pension balance does not count towards the transfer balance cap. So, if your pension accounts are getting close to the cap purely because of an increase in your fund’s earnings, you don’t need to do anything.
However, if your pension account balance is getting close to your transfer balance cap and likely to breach it for any other reason (such as a repayment from a limited recourse borrowing arrangement), you need to consider moving some of those assets out of your pension, either by transferring the amount into accumulation phase or withdrawing it as a lump sum.
Any income earned on investments in accumulation phase is taxed at 15%. Any amount you receive as a lump sum and invest will be taxed on the earnings at your personal tax rate.
What happens if I breach the TBC?
If you breach the cap you may receive an excess transfer balance determination from the ATO. But regardless of whether or not you receive a determination, you are required to pay tax on the excess transfer balance earnings for every day your account is in excess. Those earnings are calculated by a daily pre-determined formula, which is part of the law, and is worked out as follows:
90-day bank accepted bill yield + 7 percentage points ÷ number of days in the calendar year.
The ATO says a notional amount is calculated using the above formula because it is difficult to work out earnings on a proportion of the account.
For 2017–18, the tax rate for excess transfer balance earnings was set at 15%. However, from 1 July 2018, the tax rate is 15% for your initial excess transfer balance amount, increasing to 30% for your next excess transfer balance amount.
The earnings compound daily and are credited to your transfer balance account and included in the next day’s earnings calculations. That only stops when the ATO issues an excess transfer balance determination (to crystallise the amount) or you commute (convert) the excess transfer balance; whichever is earliest.
If you don’t commute the amount by the required date on the determination, the ATO will send a commutation authority to your super fund to commute the amount even if the remaining amount is small.
Once you commute the amount to a lump sum it can be transferred to an accumulation account, which you can access if you are over 65 and meet the conditions of release (and where income is taxed at 15% rather than 0%) or it can be taken out of super and taxed accordingly.
What happens now the TBC has increased to $1.7 million?
The ATO announced earlier this year that, in line with increases in inflation as measured by the CPI, the transfer balance cap would increase to $1.7 million on 1 July 2021.
If you start a retirement phase income for the first time after 1 July 2021, your transfer balance cap will be $1.7 million. If you had a transfer balance account prior to 1 July 2021 your personal transfer balance cap will be indexed somewhere between $1.6 million and $1.7 million.
If at any time your transfer balance account has had a balance of $1.6 million prior to indexation on 1 July 2021, even if it was lower than that at 1 July 2021, your cap will remain at $1.6 million. Similarly, indexation of your new transfer balance cap will be based on the highest ever balance of your transfer balance account.
Indexation is calculated by dividing the highest ever balance of a transfer balance account by the transfer balance cap on the day a pension was commenced (prior to 1 July 2021 this will be $1.6 million for everyone). That number is then expressed as a percentage, rounded down to the nearest whole number and subtracted from 100. That percentage of $100,000 is then added to the prior cap of $1.6 million.
Confused? Here’s how it works.
It’s important to remember that if there are transfer balance events that reduce the amount supporting your pension – for example the pension was partially commuted – your indexation will depend on the highest ever balance of your TBA.
How does the TBC relate to SMSFs, death and defined benefit members?
Below we have included more detail on how the transfer balance cap affects SMSFs, when a member dies, and defined benefit members. Click on the title to view each section.
SMSFs and the transfer balance cap
There aren’t any special rules for SMSFs, but there are some aspects of the law that will mean they must be extra vigilant. It is up to trustees, for example, to report the amounts supporting the pensions in their SMSFs (and how assets are segregated) on a regular basis. They have always had to do this with quarterly or annual reporting dates, depending on the SMSF’s balance.
The ATO has said they will calculate an individual’s personal TBC when indexation occurs based on the information received and processed by them at that time. This may mean there will be some delay for SMSF members, which only report transfer balance events annually with their SMSF Annual Return (SAR). If a transfer balance event occurs during the year, their transfer balance cap – which appears in their myGov account – will only be updated once the ATO receives their SAR.
Limited recourse borrowing arrangements (or LRBAs), which are an investment peculiar to SMSFs, will also apply to an individual’s transfer balance cap in a specific way.
If an SMSF trustee enters into a LRBA to acquire an asset that will support their account-based pension, any payments (from their accumulation interest in the SMSF) towards the borrowing under the LRBA will add to their transfer balance account if the LRBA was entered into on or after 1 July 2017.
Death and the transfer balance cap
If you die while you have been receiving a retirement income stream, that income stream, and the capital supporting it, has to go somewhere. Your death will create a compulsory cashing requirement for the superannuation provider, which needs to cash your super interests to your beneficiaries, or to your legal personal representative, as soon as it can. That payment is called a superannuation death benefit.
If you were receiving a reversionary income stream then it will be transferred to the nominated beneficiary. If it was a non-reversionary income stream the super fund has discretion over who will receive your super benefit as a death benefit income stream.
Either way, it will then be added to the nominated beneficiaries’ transfer balance cap. However, there are some allowances that help beneficiaries get their super affairs in order.
- A recipient of a reversionary death benefit income stream will not have it credited to their transfer balance account until 12 months after the date of the original recipient’s death.
- Where the beneficiary is a child under 18, they may have a modified transfer balance cap and they are also, unless they are permanently disabled, required to cash out all their death benefit income streams when they turn 25.
The modification of the transfer balance cap for a child depends on the deceased parent’s super interests – that is, whether they were in accumulation or retirement mode – and the child dependent’s share of the super interests. These modification calculations are called cap increments.
For example, for two siblings who were equal beneficiaries of their parent’s reversionary income stream, their cap increment will be half of the amount that was being used to support the parent’s income stream.
Defined benefit members and the transfer balance cap
The transfer balance cap affects people receiving a defined benefit pension differently, depending on the type of defined benefit fund. For corporate funds and public sector funds (which no longer accept new members but still pay out defined benefits to existing members) there is an annual income cap, instead of a transfer balance cap. For 2019–20 this was $100,000 – or the general transfer balance cap divided by 16. If you turned 60 years old during the year, or you were 60 years old and started the defined benefit pension during the year, this amount will be reduced proportionally.
The defined benefit income cap is indexed as set out in the Income Tax Assessment Act section 303.4 as it is based on the general transfer balance cap for the financial year divided by 16.
When the transfer balance cap increased to $1.7 million on 1 July 2021, the new defined benefit income cap increased to $1.7 million divided by 16, or $106,250.
Retirees who receive a defined benefit income stream will also be eligible for a 10% tax offset if they are below this limit. Amounts above the new cap will be treated as taxable at the individual’s personal income tax level.
While the rules appear relatively simple if you are in receipt of just a defined benefit pension, it gets trickier if you receive another income stream, say from an SMSF. In those cases, to calculate your total transfer balance amount you need to calculate a ‘special value’ for the defined benefit pension. This is worked out by annualising the next payment from the pension, and then multiplying that annual calculation by the number of years remaining in the pension. Then, if the total of that ‘special value’ and the value of the assets supporting the pension in your SMSF are greater than your transfer balance cap, you need to adjust the pension in your SMSF.
The law refers to ‘capped defined benefit schemes’, which are basically lifetime pensions, lifetime annuities, life expectancy pensions and annuities and market-linked pensions and annuities that existed prior to the changes introduced on 1 July 2017. Most of these types of pensions are payable from SMSFs.
A word of warning – don’t expect any help from your super fund in dealing with the nuances of Transfer Balances. My experience with HostPlus and Aust Super was that their support people have been told to freeze at the mention of “transfer balance” and start repeating “ATO, ATO, ATO” until you hang up. So not only did I find myself grappling with the verbose and confusing info from the ATO, but no assistance from the Super Funds who appear to be paralysed by the new transfer balance system. My independent financial advisor at least was helpful.