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Pension Transfer $1.6M Balance Cap

The ATO has released Law Companion Guideline LCG 2016/9 to explain aspects of the new $1.6m pension transfer balance cap. Transfer balance cap As part of the super reform legislation, new Div 294 of ITAA 1997 introduces the concept of a “transfer balance cap” from 1 July 2017 to limit the amount of capital individuals can transfer to the retirement phase of superannuation to support superannuation income streams. If an individual commences a superannuation income stream, income earned by the fund on the assets that support the income stream is exempt from tax. Accordingly, an individual’s “transfer balance cap”, will effectively limit the amount of superannuation fund earnings that are exempt from tax from 1 July 2017. ATO LCG 2016/9 provides guidance on how the transfer balance cap (set at $1.6m for 2017-18) operates for account-based superannuation income streams. It provides specific guidance on the new concepts and definitions, including:

  • a transfer balance account, including the general transfer balance cap and personal transfer balance cap;
  • credits (increases) and debits (decreases) to the transfer balance account;
  • the consequences of a transfer balance account exceeding a individual’s personal transfer balance cap, resulting in an “excess transfer balance” including:
  • the excess transfer balance tax and how this is calculated;
  • when the Commissioner will issue determinations; and
  • the effect of transfers and/or commutations on an individual’s transfer balance account.

Transfer balance accounts A person will commence to have a transfer balance account from the first time they are the “retirement phase” recipient of a superannuation income stream. A superannuation income stream is in the “retirement phase” when a superannuation income stream is currently payable. A transition to retirement income stream (TRIS) is not included in an individual’s transfer balance account. By definition, a TRIS is not in the retirement phase as superannuation funds will be taxed on earnings from assets supporting a TRIS from 1 July 2017. If a person is receiving a superannuation income stream (other than a TRIS) immediately before 1 July 2017, their transfer balance account commences on 1 July 2017. The individual’s transfer balance account is credited (increased) by the value of that superannuation interest just before 1 July 2017. If a person has more than one superannuation fund, their transfer balance account will be the sum of the value of all those income stream superannuation interests just before 1 July 2017. Commutations of income streams While a commutation of a pension will be debited (decrease) against an individual’s transfer balance account, investment earnings/losses and pension payments are not debit or credit events. Importantly, a debit for a commutation arises at the time the person “receives” the commuted superannuation lump sum, and not at the time that they instruct the superannuation fund to commute the income stream. For example, if a person instructs their superannuation fund to commute an income stream on 1 June 2017, and due to processing delays the superannuation fund doesn’t commute the pension until 7 July 2017, the debit arises on 7 July 2017. Death benefits and reversionary pensions Under s 294-25 of ITAA 1997, a credit will arises in a reversionary beneficiary’s transfer balance account but is deferred for 12 months after the starting day to provide the beneficiary with time to adjust their pensions within the transfer balance cap. The “starting day” for reversionary beneficiaries is the date of the death of the original superannuation member. The credit arises 12 months from the starting day (ie date of death), and the amount is equal to the market value of the superannuation interest supporting that superannuation income stream on the starting day.

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