The government recently released the second tranche of proposed superannuation changes covering the pension transfer balance cap, concessional contribution changes, catch-up concessional contributions and the removal of the earnings tax exemption for transition to retirement pensions.
We provide the following information on the issues surrounding the pension balance transfer cap.
What is the pension transfer balance cap?
The draft legislation proposes to introduce a general pension transfer balance cap of $1.6 million for the 2017-18 financial year. This cap will limit the amount of super a member can transfer to pension phase and receive the earnings tax exemption (ie tax free pension) which currently applies in pension phase. The cap will apply from 1 July 2017 and will apply on a member by member basis in respect of all of a member’s super accounts which move into pension phase with the exception for transition to retirement pensions that are exempt from the $1.6 million cap. The cap will be subject to CPI indexation in increments of $100,000.
How will the cap be applied in practical terms?
The ATO will create a transfer balance account for each taxpayer who has super benefits in pension phase. As and when a pension is commenced, the ATO will credit the transfer balance account with the initial balance of the pension. If a member commences a pension and their transfer balance account exceeds the cap, the ATO will notify the super fund trustee paying the pension that the pension is excessive and the amount of the excess. As part of this ATO notice, the trustee must then commute the excess and the excess pension (or excess portion of the pension) can either be transferred back to accumulation phase or be paid as a lump sum super payment (provided the member has met a condition of release). If the excess pension is a pension subject to SIS commutation restrictions – such as defined benefit pensions or market-linked pensions – a different treatment will apply.
A special tax at the rate of 15%, called the ‘excess transfer balance tax’, will apply on the notional earnings of the excess portion of the pension. This tax will be levied on the member, with the member having the choice to either pay the tax themselves or arrange for the super fund to pay the tax and to debit their pension balance.
How will the cap be calculated and tracked?
The reaching of the transfer cap will be measured in percentage terms and not dollar amounts. This diminishes the advantage of the strategy to ‘save’ a small portion of the transfer cap so that if and when the cap increases by indexation ($100,000 increments), the entire increase is retained.
While each new pension which is commenced will cause the ATO to credit the transfer account with the initial value of the pension, some events will give rise to a debit to the transfer account balance. Debits will arise if, after the pension commences, a portion of the pension balance has to be paid under a family law benefit split or the pension is subsequently affected by trustee or investment manager fraud.
Once the pension commences, any increase in the pension account balance due to earnings (income and capital growth) will not affect the transfer balance account. Equally, any decrease in the pension account balance due to negative earnings will not affect the transfer balance account.
Once a taxpayer has exhausted their pension transfer balance, no new super capital can be transferred to pension phase. However, super capital which is already in pension phase can move from one income stream to another income stream without exposing the growth in the pension account balance to assessment against the pension transfer cap balance.