There will be a $1.6m cap on the amount of capital that a person can transfer into retirement products such as superannuation, pensions and annuities.
The transfer balance cap applies from 1 July 2017 and applies to both existing and new pensions.
The cap is an individual cap and applies on an individual-by-individual basis taking into account the total amount of superannuation held by the individual irrespective of how many accounts that individual may have (ie. aggregated balance).
The effect of the cap is to limit the tax-exempt investment earnings that can be derived through a superannuation pension. Pension Earnings on balances up to $1.6m per person can qualify for the 0% tax rate however, earnings on balances above $1.6m will be taxed at the standard super fund tax rate of 15%.
The following will be counted against your transfer balance cap:
- The value of superannuation balance income streams as at 30 June 2017;
- The value of superannuation balance income streams commencing on or after 1 July 2017;
- The value of any reversionary and/or death benefit income streams at the time the beneficiary becomes entitled to them. However, reversionary pensions are not counted for up to a further 12 months to allow for restructuring, and
- Excess transfer balance earnings.
The $1.6m cap only limits the amount that can be transferred into a “pension account” and does not apply to the balance of a members account. Once a pension is commenced, fluctuations in pension account balances on a year by year basis are ignored for the purposes of assessing whether the cap is exceeded or not. Investment gains/losses and annual pension drawings are not counted and therefore have no impact on the amount of the transfer balance cap you have used. For example if the value(s) of pension assets grow following commencement of a pension any subsequent increase in value is not taken into account in determining how much of the $1.6m cap has been utilised.
For existing pensions, where the individual’s “pension account” balance at the 1 July 2017 is greater than the $1.6m cap, the individual is required to either withdraw these excess amounts from superannuation or transfer these excess amounts back into an accumulation account. The latter is generally the preferred option as there are no penalties for having an amount in excess of the cap in super and there are also caps on the amount of contributions (concessional and non-concessional) that an individual can make to super (discussed later) thereby limiting the potential to get funds into superannuation.
If you use more than your transfer balance cap, an excess position eventuates and a notional earnings rate is applied to the excess amount and taxed at 15% (first time the cap is breached) and then at 30% for any subsequent breaches.