The government’s release of the second tranche of proposed superannuation changes, which covers concessional contributions, catch-up concessional contributions and removing the earnings tax exemption for transition to retirement income streams, also proposes introducing a general pension transfer balance cap.
This will limit the amount of super a member can transfer to pension phase and enjoy the earnings tax exemption presently applying in pension phase. The cap is set at $1.6 million for 2017-18, will apply from July 1, 2017, and be subject to CPI in increments of $100,000. Treasury estimates the cap will therefore be around $1.7 million in 2020-21. (Click here for a Treasury fact sheet on the cap.)
How will the cap be applied? Julie Hartley, SMSF solicitor at Townsends Business & Corporate Lawyers, says the ATO will be required to create a transfer balance account for each member 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,” Hartley says. “If a member commences a pension that causes their transfer balance account to exceed the cap, the ATO will notify the trustee paying the pension that the pension is excessive and the amount of the excess.”
The process then would be for the fund trustee to commute the excess, and that excess pension (or portion thereof) can be either transferred back to accumulation phase or be paid as a lump sum super payment (provided the member meets a condition of release).
“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,” Hartley says. “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.”
Hartley says the transfer cap will be measured in percentage terms, not dollar amounts. “One reason for this approach is to diminish the advantage of the strategy that involves ‘saving’ a small portion of the transfer cap so that if and when the cap increases by indexation the entire increase is retained,” she says.
Importantly once the pension commences, any increase in the pension account balance due to earnings 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 transfer to pension phase,” Hartley says. “However, super capital that 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.”