- What is the $1.6 million transfer balance cap?
- How does the $1.6 million transfer balance cap work?
- Australians in pension phase before July 2017
- What is a person’s ‘transfer balance account’?
- What happens to super pension balances from 1 July 2017?
- Does the $1.6 million cap apply to each person?
- What counts towards a person’s transfer balance account?
- What happens to the transfer balance (TB) cap, and TB account, when a person dies?
- Are defined benefit fund members affected?
- Special rule applies to SMSFs and small APRA funds
- What happens to Australians in pension phase before July 2017?
- Seeking more information?
Since 1 July 2017, a cap of $1.6 million has been imposed on every Australian, limiting the amount of super that can be transferred into retirement phase (what we previously called pension phase). Although the transfer balance cap will be indexed in $100,000 increments, the transfer balance cap for both the 2017/2018 year, and the 2018/2019 year, is $1.6 million.
For Australians in retirement phase (pension phase) before July 2017 and who had more than $1.6 million in super pension accounts as at 30 June 2017, the new rules effectively forced Australians to remove the excess super benefits from retirement phase.
Note: Most retirees now need to monitor two lifetime superannuation amounts – their transfer balance cap, and their transfer balance account. The new policy applies to both pre-July 2017 super pension accounts in retirement phase, and post-July 2017 super pension accounts in retirement phase, which effectively means the policy applies retrospectively.
For those have been around the super industry for a long time, like myself, you might be feeling rather flat. Have we not been here before, and did we not have a previous Liberal government (and have these policies supported by subsequent ALP governments) who thankfully removed this mindless complexity to save retirees stress and cost in their later years?
The explanatory memorandum pages for the $1.6 million transfer balance cap runs to roughly 70 pages, then there are the numerous ATO Law Companion Guidelines (covering the transfer balance cap generally, the transitional provisions for CGT relief, two relating to death benefits and the transfer balance cap, two covering defined benefit pensions, and one dealing with commutations to meet the requirements of the transfer balance cap), plus a fact sheet, plus legislation and related materials. Throw in a suite of ATO Guidance notes. Phew!
As I have written many times before, using a sledgehammer on the retired population to deal with a small minority of retirees who may be receiving too much of a tax advantage from the super system is lazy policy and wastes good industry brains who now have to spend a ridiculous amount of time administering a flawed policy. What was needed were special rules to deal with the four or five thousand of Australians with many millions in super, rather than forcing this massive compliance cloud over all retirees who are just trying to live their lives.
What is the $1.6 million transfer balance cap?
The $1.6 million transfer balance cap policy formed part of the Coalition’s 2016/2017 Federal Budget announcement, and in turn formed an important component of the Liberal/Nationals 2016 Federal Election superannuation policy (for a summary of all of the now-legislated superannuation policies, see SuperGuide article Latest superannuation changes: 2017/2018 guide).
The $1.6 million transfer balance cap is designed to limit the total amount of superannuation savings that can be transferred from accumulation phase into “a tax-free retirement account”, according to the 2016 Federal Budget papers.
The $1.6 million transfer balance cap (to be indexed periodically) relates to the limit to what can be transferred into retirement phase, while the transfer balance account identifies how much an individual has used of his or her transfer balance cap.
The Coalition government claim very few Australians will be affected by this proposal because the average superannuation balance for a 60-year old Australian nearing retirement is $285,000, and that means that less than 1% of fund members will be affected by the transfer balance cap.
This claim is very misleading and to use a colloquial term, I consider the government’s claim is a load of codswallop!
The fact that the Coalition doesn’t state the numbers of Australians immediately affected by this policy, and doesn’t state the hundreds of thousands of Australians who will be affected by this cap over the next 25 to 30 years is misleading. Add the millions of Australian retirees who will now need to monitor their transfer balance cap (for periodic indexed increases of the cap), and the same millions who will also need to monitor their transfer balance account for new money going into retirement phase, or existing money being removed from retirement phase (commuting pensions into lump sums), and the claim of less than 1% of fund members being affected is text-book propaganda.
The government has just made retirement a lot more complicated for all Australians, including those Australians with nowhere near $1.6 million in super.
As super balances increase, and the cost of a reasonable lifestyle in retirement increases, the $1.6 million cap (indexed for inflation in $100,000 increments), is likely to be within the reach of a hefty percentage of middle-aged and younger Australians currently in the workforce. Not only will millions of retirees have two life-time amounts that they may need to be mindful of, but an increasing number of older Australians will have to monitor these figures for the rest of their lives.
Note: The $1.6 million transfer balance cap applies to each individual, which means a couple could have up to $1.6 million each in separate pension accounts. For many current retirees, a single pension account in an individual’s name supports a couple, and the $1.6 million transfer balance cap applies in this circumstance, rather than the cumulative $3.2 million cap.
Important: Any transition-to-retirement pension (TRIP) accounts do not count towards the $1.6 million transfer balance cap, because since 1 July 2017, TRIPs are not treated as super pension accounts in retirement phase (for the purposes of securing a tax exemption on TRIP account earnings). For more information on the tax treatment of TRIPs, and the special CGT relief that is available for TRIPs (only available until 30 June 2018) and other former pension assets, see later in the article, and also SuperGuide articles Super pensions: Reviewing the merits of keeping a TRIP and CGT relief and the $1.6 million transfer balance cap, and TRIPs.
Set out below is a summary of the new rules applicable to the indexed $1.6 million transfer balance cap (limit to what can be transferred into retirement phase) and the transfer balance account (how much an individual has used of his or her transfer balance cap).
How does the $1.6 million transfer balance cap work?
Taking effect since 1 July 2017, the Coalition has introduced “a $1.6 million superannuation transfer balance cap on the total amount of superannuation that an individual can transfer into retirement phase accounts.” The cap applies to “both current retirees and to individuals yet to enter their retirement phase.”
This $1.6 million superannuation transfer balance cap will be indexed in $100,000 increments, in line with increases in the consumer price index (rate of inflation). For the 2017/2018 year, and for the 2018/2019 year, the transfer balance cap is $1.6 million.
According to the explanatory memorandum accompanying the legislation (Chapter 1), “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.
“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 for 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.”
Important: Transitional arrangements applied for existing superannuation pensions as at 1 July 2017, if the individual was in breach of his or her transfer balance cap by less than $100,000 as at 1 July 2017. The transitional arrangements mean that “an excess transfer balance is disregarded if it is less than $100,000, is caused by existing superannuation income streams on 30 June 2017, [AND] the individual rectifies the breach within 6 months”. Within 6 months meant that the individual rectified the breach by 31 December 2017.
Note: Capital gains tax relief is available for a super fund which moves an asset or assets from retirement phase to accumulation phase, in order to satisfy the $1.6 million transfer balance cap rules which took effect from 1 July 2017. The CGT relief allows the cost base to be reset to market value as at 1 July 2017 (that is, the asset is deemed to be sold and repurchased at market value so the CGT rules are triggered, and only future capital gains are counted going forward). If a super fund uses the CGT relief, then the 12-month timeframe for the 33% discount also restarts. A super fund can choose not to take advantage of the CGT relief (for more information see SuperGuide article CGT relief and the $1.6 million transfer balance cap, and TRIPs).
Australians in pension phase before July 2017
If you had more than $1.6 million of superannuation in pension phase (called retirement phase since 1 July 2017), or you expected to have more than $1.6 million in pension phase by July 2017, then you needed to consider your circumstances, and potentially take action. Why? Anyone with more than $1.6 million of super in retirement phase as at 1 July 2017, is forced to withdraw the excess over the $1.6 million from retirement phase, and not withdrawn (or transferred to accumulation phase) an excess transfer balance tax will also apply (except for the first 6 months of the new rules).
Important: From 1 July 2017 through to 31 December 2017, provided the excess over $1.6 million was less than $100,000, no excess tax was payable if the excess savings in retirement phase were moved out of retirement phase by 31 December 2017.
For pre-July 2017 super pension accounts, if your super pension balance in retirement phase (from all pension accounts) does exceed $1.6 million, you had two options when reducing your super pension balance to below $1.6 million before July 2017 (and if the excess is less than $100,000, moving the excess by 31 December 2017). You can move the excess into accumulation phase within the super system (where earnings will be taxed at 15%), or you can withdraw the excess from the superannuation system. If you have an SMSF, such a requirement does not mean physical movement of assets from retirement phase to accumulation phase, but will generally require specific recording and reporting obligations (chat to an accountant or adviser).
For more information on pre-July 2017 super pensions and the $1.6 million transfer balance cap, see section near the end of this article.
What is a person’s ‘transfer balance account’?
As at 1 July 2017, each individual will have a “personal transfer balance cap reflecting the total amount they can transfer to the retirement phase”, and to track this cap, each individual will have a transfer balance account. The transfer balance account is created when an individual first commences a super pension in retirement phase, or other type of superannuation income stream in retirement phase.
According to the explanatory memorandum accompanying the legislation, the Australian Taxation Office (ATO) will be able to provide individuals with information “that it holds at the time” about their transfer balance account.
Note: If you fully utilise your $1.6 million transfer balance cap when moving in retirement, or fully utilise at a later date, then you cannot take advantage of the periodic $100,000 indexed increases in the transfer balance cap. If you have not fully soaked up your $1.6 million transfer balance cap, you can take advantage of the indexed increases to the cap, assuming of course you have the savings to do so.
What happens to super pension balances from 1 July 2017?
Once the transfer balance cap is applied to an existing pension balance as at 1 July 2017, or a new super pension balance on or after 1 July 2017, any subsequent increase in a retirement balance due to earnings, or drops in the balance due to pension payment withdrawals, are not counted towards (or deducted from) the $1.6 million transfer balance cap.
If an individual decides to commute (convert to a lump sum or revert to accumulation phase), or partially commute a super pension, then an individual’s transfer balance account will be reduced accordingly.
Note that post-July 2017 investment earnings or losses do not change the value of a person’s transfer balance account.
Important: Since 1 July 2017, partial commutations of super pensions will no longer be counted towards the annual minimum pension payment requirements for super pensions, to ensure retirees don’t recycle pension payments back into the pension phase. I never agreed with the interpretation that partially reverting a super pension to a lump sum, or into accumulation phase, would also satisfy the requirement to make a minimum annual pension payment. Moreso, the government’s main objective in banning this treatment is to stop those Australians retiring before the age of 60, from taking advantage of the low-rate cap for lump sum payments (the taxable component of super lump sums paid to Australians under the age of 60, but who have reached preservation age, was tax-free up to the lifetime low-rate cap of $195,000 (indexed) for the 2016/2017 year, and $200,000 for the 2017/2018 year), and $205,000 for the 2018/2019 year.
Note: Since the changes became law in late November 2016, the ATO released 7 Law Companion Guidelines (refer earlier) relevant to the transfer balance cap. The ATO has also released other LCGs, relating to other July 2017 super changes (for more detail, and links to these LCGs and Guidance Notes, see SuperGuide article Latest super changes: ATO Guidance Notes and Law Companion Rulings .
Background: On 27 September 2016, the government released an exposure draft of the proposed legislation for this measure and the submission period closed on 10 October 2016. Final legislation was passed by parliament on 23 November 2016, and the bill became an Act of parliament on 29 November 2016, when it received royal assent.
Does the $1.6 million cap apply to each person?
Yes, the transfer balance cap applies to each person, but note that if a pension account in retirement phase is in one person’s name, and that account is financing the retirement of a couple, the single pension account is eligible to use only one $1.6 million cap. If a couple have 2 separate pension accounts in separate names of each member of the couple, then the $1.6 million cap applies to each person’s pension accounts, potentially taking the transfer balances to $3.2 million.
What counts towards a person’s transfer balance account?
According to the explanatory memorandum (Chapter 3) accompanying the legislation, the following amounts are credited towards an individual’s transfer balance account:
- The value of all superannuation interests that support superannuation income streams in the retirement phase that the individual is receiving on 30 June 2017.
- The commencement value of new super income streams (including new superannuation death benefit income streams and deferred super income streams) in the retirement phase on or after 1 July 2017.
- The value of reversionary superannuation income streams at the time the individual becomes entitled to them (note that the surviving spouse does not inherit his or her spouse’s transfer balance cap).
- Excess transfer balance earnings that accrue on excess transfer balance amounts.
Note that investment losses or investment gains are not deducted or added, respectively, to a person’s transfer balance account. Pension benefit payments do not reduce a person’s transfer balance account either.
What happens to the transfer balance (TB) cap, and TB account, when a person dies?
An individual’s transfer balance account only closes when the individual dies (except in the case where a child of the deceased receives a superannuation death benefit pension).
If a fund member arranges for a superannuation death benefit pension, or a reversionary pension, to be paid to a spouse when the fund member dies, then the value of the pension is added to the surviving spouse’s transfer balance account (note that it is not added to the surviving spouse’s transfer balance cap).
In the exposure draft explanatory materials supporting the legislation, the government decided that the surviving spouse has less than 6 months to get his or her act together to reduce the transfer balance account to within his or her transfer balance cap. In October 2016, I highlighted the hardline nature of this timeframe and challenged the Treasury boffins to lengthen the time available for reducing the transfer balance accounts to give affected widows and widowers more time to grieve! Imagine having to worry about this issue mere weeks after losing your partner. The good news is that the decision-makers listened to certain sections of the super industry and commentators like myself and extended the timeframe to 12 months for reducing the transfer balance accounts of surviving spouses, BUT ONLY FOR REVERSIONARY PENSIONS.
The payment of regular death benefit pensions (commenced after the death of the fund member), and the timeframe for dealing with reducing the transfer balance account to within his or her transfer balance cap, still remains as 6 months (or more strictly ‘as soon as practicable’, which in the past the ATO has indicated to mean within 6 months). For more information on how the transfer balance cap works when a fund member dies (including the 6-month timeframe, see SuperGuide article, Superannuation death benefits and the $1.6 million transfer balance cap.
Are defined benefit fund members affected?
The short answer is ‘yes’. According to the Coalition’s 2016 Federal Budget papers, “to broadly replicate the effect of the proposed $1.6 million transfer balance cap, pension payments over $100,000 per annum paid to members of unfunded [untaxed] defined benefit schemes and constitutionally protected funds providing defined pensions, will continue to be taxed at full marginal rates, however the 10 per cent tax offset will be capped at $10,000 from 1 July 2017.
“For members of funded [taxed] defined benefit schemes, 50 per cent of pension amounts over $100,000 per annum will be taxed at the individual’s marginal tax rate.”
The treatment explained above is confirmed in the explanatory memorandum accompanying the legislation. The most recent information also confirms that individuals receiving defined benefit pensions only, that exceed a person’s transfer balance cap, will not mean the person has breached their cap (due to the difficulty in changing the structure of such a pension). The pension income payments derived from such pensions will be taxed at a higher rate (if income exceeds a separate defined benefit income cap) to recognise the excess capped defined benefit pension does not breach the person’s transfer balance cap.
If you receive both a defined benefit pension and an account-based super pension, and you exceed your transfer balance cap, then like the rest of the country, you will be expected to withdraw the excess from the super system, OR revert the excess to accumulation phase (using assets from the account-based pension to do so).
If you receive a defined benefit pension, or expect to receive such a pension, I suggest you chat to your super fund about how the new rules will affect your benefit. For more information about how the new cap affects defined benefit pensions, see SuperGuide article Defined benefit pensions and the $1.6 million transfer balance cap.
Note: Interestingly, one segment of the population is not affected by the super changes. Politicians (elected before 2004) and senior bureaucrats who retire before the age of 60 are not subject to the new rules until they turn 60, unlike the rest of the population (see SuperGuide article Super loophole still benefits politicians and senior public servants).
Special rule applies to SMSFs and small APRA funds
If you are a member of a self-managed super fund (SMSF) or a small APRA fund, and you, or a fund member, has substantial superannuation savings then you need to be aware of a special rule that applies to small funds (SMSFs and small APRA funds). Quoting from the explanatory memorandum (Chapter 10) accompanying the new legislation:
“SMSFs and small APRA funds will not be able to use the segregated method to determine their earnings tax exemption [on pension assets] for an income year if:
- at a time during the income year, there is at least one superannuation interest in the fund that is in retirement phase; AND
- just before the start of the income year:
- a person has a Total Superannuation Balance that exceeds $1.6 million (for more information on Total Superannuation Balance, see SuperGuide article Total Superannuation Balance: 7 reasons why your TSB matters); and
- the person is the retirement phase recipient of a superannuation income stream (whether or not the fund is the superannuation income stream provider for the superannuation income stream).
Note: Under the pre-July 2017 rules, there was no restriction on super funds using either segregated or proportional method (subject of course to meeting the respective compliance requirements). Before July 2017, all super funds could use either the segregated and proportional methods when calculating the amount of earnings on pension assets that are tax exempt (that is, determining earnings on assets that are used to discharge current pension liabilities).
What happens to Australians in pension phase before July 2017?
Note: Australians already in retirement as at 1 July 2017, and holding pension balances of more than $1.6 million were forced to take action, to avoid excess transfer balance tax on their excess transfer balance earnings, and to avoid further tax on continued breaches of the $1.6 million cap.
If you fall into this category, you have two choices:
- You can transfer the excess above $1.6 million into an accumulation account within your existing super fund (in the case of an SMSF, this generally involves a recording and reporting change, rather than physical asset transfer), or another super fund, OR
- You can withdraw the excess above $1.6 million out of the super system.
Important: If the individual was in breach of his or her transfer balance cap by less than $100,000 as at 1 July 2017, then “an excess transfer balance is disregarded if it is less than $100,000, is caused by existing superannuation income streams on 30 June 2017, [AND] the individual rectifies the breach within 6 months”. Within 6 months means that the individual rectified the breach by 31 December 2017.
The financially disruptive consequence for pre-July 2017 retirees is if they have more than $1.6 million in retirement phase, they will need to withdraw the excess balance out of the super system, OR to revert the excess amount to accumulation phase by 1 July 2017. Superannuation savings in accumulation phase are subject to 15% earning tax. Subsequent earnings on the remaining $1.6 million pension balance while in retirement phase, since July 2017, will not be required to be withdrawn.
Important: You may be eligible to take advantage of capital gains tax (CGT) relief, which effectively resets the cost base (as discussed earlier in this article). We cover these complex CGT relief provisions in SuperGuide article CGT relief and the $1.6 million transfer balance cap, and TRIPs.
RETROSPECTIVE: The introduction of a $1.6 million transfer balance cap is RETROSPECTIVE, because it applies to Australian super balances that have been accumulated in the past, under existing laws. The lack of grandfathering (grandfathering means allowing individuals subject to the old rules to continue under the old rules) indicates this policy applies retrospectively. For more information on the implications of applying laws retrospectively, see SuperGuide article Guest contributor: Super changes – why grandfathering the rules must be considered.
Seeking more information?
For a summary of the superannuation policy changes planned by the Coalition government, see SuperGuide article Latest superannuation changes: 2017/2018 guide and for more detailed guidance on the $1.6 million transfer balance cap and related measures, see the following SuperGuide articles:
- Defined benefit pensions and the $1.6 million transfer balance cap
- Superannuation death benefits and the $1.6 million transfer balance cap
- CGT relief and the $1.6 million transfer balance cap, and TRIPs
- Latest super changes: ATO Guidance Notes and Law Companion Rulings
- Super loophole still benefits politicians and senior public servants
- Guest contributor: Super changes – why grandfathering the rules must be considered