Tuesday, 16 May 2017

$1.6m super transfer balance cap


by Ben Miller *


With the announcement of the federal Budget on 2 May 2016, superannuation laws regarding pensions were tipped to change. After the ensuing re-election of the Coalition, it can be easy to forget that we have had almost a year to get used to the idea of the transfer balance cap.

The questions surrounding this new legislation have been varied and expansive:

  • What specifically is the new law, and what are the opportunities for clients and practitioners?
  • What are the issues when a member has more than $1.6m? 
  • What are the options when there is more than one member in the fund? 
  • How should we deal with succession or estate planning? 

The ability to articulate tax changes to your clients, with examples and practical guidance, is invaluable for any major new law coming into effect.



The new law


The transfer balance cap is a lifetime limit of superannuation an individual can transfer into a tax-free pension account.

The $1.6m cap will apply from 1 July 2017, and will include:
  • the value of superannuation interests supporting an income stream on 30 June 2017;
  • the commencement of a new income stream after 1 July 2017; and the value of any reversionary income streams.
A member of a superannuation fund will begin to have a transfer balance account on the later of 1 July 2017 and the first day the member becomes a retirement phase recipient of a superannuation income stream.

The term “retirement phase” is determined to be when the member meets a full condition of release and hence the superannuation benefit becomes unrestricted non-preserved. A superannuation income stream is in the retirement phase when the income stream is currently payable. Effectively, the income stream is payable when the member elects to commence an income stream.

Any amount in excess of the $1.6m cap will also accrue a notional amount of earnings that will be credited against the cap, and no further non-concessional contributions will be allowed.

Importantly, only the amounts listed above are “credited” against the $1.6m cap. Any earnings or income stream payments after 1 July 2017 on pension accounts will not add or reduce the total. Balances above $1.6m in pension phase could be reduced (“debited”) to the transfer balance cap by a full or partial commutation. The amounts could either be transferred back into accumulation phase or paid as a lump sum.

The legislation also stipulates that any lump sum payments from 1 July 2017 will not count towards the prescribed minimum pension standards.

The transfer balance cap will be most important to members who are near or are over $1.6m in superannuation. In these situations, the member will want to know exactly what is the maximum amount that can go into retirement phase and how it can best be utilised. In most cases, the important thing to remember is to endeavour to avoid an excess transfer balance, hence avoiding the associated tax that goes with it.

Read the rest of the article here (PDF 10mb).

* Ben Miller is Senior CCH iQ Writer at Wolters Kluwer. This article first appeared in Taxation in Australia, Volume 51(10), May 2017.

Find out more about CCH iQ by visiting the website here.