The Transfer Balance Cap in Super : Moving Beyond the Theory

14 Aug

1 Introduction

The transfer balance cap (TBC) was introduced on 1 July 2017 to limit the amount that can be transferred into a member’s retirement phase to support a super income stream (pension). Whilst simple enough in theory, the concept can have intricacies that advisers should be aware of to ensure maximum benefits are derived from its application.

2 The distinction between TBC and total superannuation balance

2.1 Your total superannuation balance (TSB) is the combined value of all your superannuation balances across all superannuation funds. It is generally calculated by adding all the entitlements you have in accumulation and pension accounts.

Depending on the structure of your entitlements in superannuation, your TSB may be different to the combined value of your superannuation balances. For example, because you:

(a) have structured settlement contributions (contributions from a personal injury claim); or

(b) an outstanding limited recourse borrowing arrangement with an associate of the Fund or have satisfied a condition of release with a nil cashing restriction.

2.2 Your TSB is relevant when determining your eligibility to:

(a) carry forward unused concessional contributions from 1 July 2018;

(b) make non-concessional contributions and utilise the bring forward of your non-concessional contributions cap;

(d) receive government co-contributions; and

(e) use the segregated asset method for calculating exempt current pension income.

2.3 To be eligible to access some of these measures, your TSB must be below the general transfer balance cap (TBC) (or other threshold amount) for the relevant financial year.

2.4 Your personal TBC is a lifetime limit on the total amount of you can transfer into one or more retirement phase (pension) accounts. Amounts within your TBC that have been added to pension accounts are eligible for a tax exemption on the income from those amounts.

2.5 The general TBC has been indexed several times since it was introduced on 1 July 2017. Each person has their own personal TBC depending on their circumstances.

3 Calculating a person’s TBC and indexation

General TBC and personal TBC

3.1 Each person has their own personal TBC which will be between $1.6 million and $1.9 million depending on their circumstances.

3.2 When you first commence a pension using superannuation, your personal TBC will be equal to the general TBC for that financial year.

3.3 The below table shows the general TBC for each financial year since it was introduced:

Year General Transfer Balance Cap

2024 - 25 $1.9 million

2023 - 24 $1.9 million

2022 - 23 $1.7 million

2021 - 22 $1.7 million

2020 - 21 $1.6 million

2019 - 20 $1.6 million

2018 - 19 $1.6 million

2017 - 18 $1.6 million

3.4 On 1 July 2021, the general TBC was indexed for the first time in line with the consumer price index in a $100,000 increment.

3.5 If you have never used the full amount of your personal TBC when the general transfer balance cap is indexed, your personal TBC will also be indexed based on the highest ever balance of your transfer balance account.

Only the unused portion of your personal TBC will increase from the indexation. This is known as proportional indexation.

3.6 Your entitlement to indexation of your personal TBC is calculated by:

(a) identifying the highest-ever balance in your transfer balance account;

(b) using that to work out the unused cap percentage of your transfer balance account; and

3.7 Your ‘unused cap percentage’ is calculated by:

(a) dividing the highest-ever balance of your transfer balance account by your transfer balance cap on the first day you had that balance;

(b) expressing that as a percentage rounded down to the nearest whole number; and

3.8 The Australian Taxation Office (ATO) will calculate an individual’s entitlement to indexation and their personal TBC after indexation based on the information reported to and processed by the ATO when the indexation occurs.

You can confirm your personal TBC on MyGov under the ATO’s online services. However, the amount determined by the ATO will only be accurate if all relevant transactions have been reported to the ATO.

Example – Calculating personal TBC

3.9 On 1 July 2019, Phoebe commenced a pension with $700,000. Phoebe’s personal TBC at 1 July 2019 will be $1.6 million (being the general TBC at that time).

This means Phoebe can commence an additional pension and transfer up to an additional $900,000 into the retirement phase in 2019-20 without breaching her personal TBC.

3.10 If Phoebe had not commenced another pension before 1 July 2021, her personal TBC would have been indexed on 1 July 2021 as follows:

(a) Phoebe’s highest transfer balance was $700,000 on 1 July 2019.

(b) The balance of Phoebe’s transfer balance account as a percentage of her personal TBC would be calculated as $700,000 / $1.6 million = 43.75%. This percentage is then rounded down to the nearest whole number, 43%.

(d) The increase in Phoebe’s personal TBC would be calculated as 57% x $100,000 = $57,000.

(e) Phoebe’s new personal proportionally indexed TBC would be calculated as $1.6 million + $57,000 = $1,657,000.

3.11 As Phoebe’s new TBC is $1,657,000, she can now transfer an additional $957,000 (in addition to her earlier $700,000) to her retirement phase without breaching her personal TBC.

Example – Second indexation on 1 July 2023

3.12 Joey started a pension on 1 July 2019 with $1.2 million. Joey’s personal TBC at 1 July 2019 will be $1.6 million (being the general TBC at that time).

3.13 At 1 July 2021, Joey’s new indexed personal TBC would be calculated as follows:

(a) Unused cap percentage is 25%

(i) ($1,600,000 - $1,200,000) / $1,600,000) = 25%.

(b) Indexation = 25% x $100,000 = $25,000

3.14 If Joey has not commenced an additional pension before 1 July 2023 then:

(a) There is no change to his transfer balance account so Joey is entitled to the same indexation (his unused cap percentage is still 25%).

(b) Indexation = 25% x $200,000 = $50,000

3.15 If Joey commenced a second pension on 1 October 2021 for $300,000 then the indexation he would have been entitled to at 1 July 2023 is different.

(a) Joey’s personal TBC at 1 October 2021 will be $1.5 million (being the commencement value of his first pension – $1.2 million – plus the commencement value of his second pension – $300,000).

(b) Joey’s unused personal TBC percentage will be 7%

(i) ($1,625,000 - $1,500,000) / $1,625,000 = 7.69% rounded down to the nearest whole number.

(ii) Indexation = 7% x $200,000 = $14,000

3.16 This means Joey’s indexed personal TBC becomes $1,639,000.

4 Implications of exceeding personal TBC

4.1 If the amount you transfer into a pension exceeds your personal TBC then you will have an ‘excess transfer balance’.

4.2 Your excess transfer balance is the sum of:

(a) the amount that exceeds your personal TBC; plus

(b) the notional earnings on the excess amount.

4.3 If you exceed your personal TBC and have an excess transfer balance then you will need to:

(a) remove the excess by commuting the excess transfer balance (ie. transferring it back to your accumulation account); and

(b) pay excess transfer balance tax.

4.4 The ATO may also issue you with an excess transfer balance determination which will state the amount you have exceeded your personal TBC by and how much you need to commute.

4.5 After the excess is removed, you will be issued with an excess transfer balance tax assessment.

4.6 Taking an additional or larger pension payment will not rectify the excess (as this will not create a debit in your transfer balance account – see 5.1 to 5.5). Instead, the amount must be commuted from the retirement phase as soon as possible. This will limit the amount of excess transfer balance tax you must pay.

The tax is 15% for the first time you have an excess transfer balance. This increases to 30% for subsequent breaches.

4.7 The earnings on your excess transfer balance are ‘notional earnings’ and are calculated using a formula. A notional amount is used because it is difficult to determine actual earnings on a specific portion of the overall assets.

4.8 Excess transfer balance earnings compound daily. Each day the earnings are calculated and credited to your transfer balance account. This increases the amount that excess transfer balance earnings are calculated on for the following day. This process continues until the ATO issue an excess transfer balance determination, or you stop having an excess transfer balance, whichever is earlier.

4.9 The excess transfer balance determination will also include a default commutation notice. This notice outlines the superannuation fund and pension account the ATO will send a commutation authority to if you do not resolve the excess by the relevant due date. The commutation authority will require the superannuation fund’s trustee to commute the excess transfer balance amount.

4.10 If you exceed your personal TBC, the superannuation fund will not receive the additional exempt current pension income tax concessions on the amount over your TBC. This means only the income from the amount in your pension account that is within your personal TBC will be taxed at 0%. Any amount in excess of your personal TBC will be treated as remaining in an accumulation account, where the earnings will be taxed at 15% (or at 30% for subsequent breaches).

4.11 If your transfer account balance ever equals or exceeds your personal TBC then you will cease to be entitled to any proportional indexation (as the indexation will only ever apply to the portion of your personal TBC you have never used).

5 The effect on your TBC when commuting a pension either back to accumulation phase or paying as a lump sum

5.1 Every person who has superannuation entitlements also has a transfer balance account (TBA). Your TBA records the value of your superannuation entitlements which have been transferred into the retirement phase (pension accounts), minus any amounts that have been transferred from the retirement phase, back to an accumulation account or paid out from the fund as a lump sum. This means this account is credited when money is transferred into the retirement phase and debited when money is removed from the retirement phase.

5.2 A member’s TBA is tracked by the ATO from reporting by superannuation fund trustees. For example, trustees are required to report any amounts added to a pension account and amounts taken out of the pension account (other than pension payments).

5.3 Generally, a credit arises in your TBA when you become the recipient of a pension. Credits can include:

(a) the value of all superannuation income streams that were in existence on 30 June 2017 (when the TBA concept was introduced);

(b) new superannuation pensions commenced on or after 1 July 2017 (including death benefit pensions);

(d) excess transfer balance earnings that accrue on excess TBC amounts.

These credits increase your TBA and reduce your available personal TBC space (ie. the additional amounts you can use to commence a new pension).

5.4 Debits can include:

(a) commutations (ie. where an amount is rolled back to accumulation);

(b) structured settlement contributions (from personal injury claims);

(d) where an income stream ceases to be a complying superannuation income stream.

5.5 However, changes to the value of a member’s TBA due to pension payments or income generated by assets do not impact the member’s TBC.

Example – How TBC can be affected by commutation

5.6 Chandler commences his first retirement phase pension on 1 August 2023 for $1.9 million. At this time, the general TBC is also $1.9 million so Chandler’s personal TBC is $1.9 million.

This creates a credit in Chandler’s TBA of $1.9 million.

5.7 On 1 August 2024, the pension is now valued at $2.1 million due to positive investment returns (after Chandler has also withdrawn his minimum pension amount for the relevant financial years). Chandler fully commutes the pension.

This creates a debit of $2.1 million leaving him with a transfer balance account of minus $200,000.

5.8 Chandler’s personal TBC remains at $1.9 million (and will continue to remain at $1.9million as he will no longer be entitled to future indexation given Chandler has fully exhausted his personal TBC). However, because Chandler commuted his first pension when its value exceeded its commencing value (therefore creating a negative in his transfer balance account), Chandler can now start a new pension with up to $2.1 million exceeding his personal TBC.

6 Ways in which a member’s transfer balance account can be affected

Receiving a transition to retirement income stream

6.1 A transition to retirement income stream (TRIS) is a type of pension or income stream that allows those who have reached their preservation age to access their superannuation benefits without needing to retire.

6.2 The commencement of a TRIS won't count as a credit to your TBA. This means the earnings from the assets supporting the TRIS will not be eligible for exempt current pension income while it is not in the retirement phase. Consequently, the earnings on the assets supporting these pensions will be taxed at 15%.

6.3 A TRIS is structured similarly to an account based pension with the following two additional restrictions (until the member meets a condition of release with a nil cashing restriction):

(a) A member may only receive a maximum of 10% of the account balance through a TRIS in a financial year. In the first year, this is calculated on the day the TRIS commenced. In subsequent years, it is calculated on 1 July.

(b) The TRIS cannot be converted into a lump sum (except in limited circumstances).

6.4 Your TRIS will start to count towards your personal TBC (and will be treated as a debit to your TBA) on the day it becomes a retirement phase income stream, based on its value on that day. A TRIS isn't in retirement phase until you meet a condition of release with a nil cashing restriction (for example, you turn 65 or retire after age 60).

Example – TRIS

6.5 On 1 July 2019, 62-year-old Monica commences a TRIS with $1.2 million. The TRIS is not in the retirement phase, and Monica does not meet any of the conditions of release with a nil cashing restriction. Monica does not have a superannuation income stream in the retirement phase, so no credits have been made to her TBA.

6.6 On 30 June 2021, Monica retires (before she turns 65), satisfying a condition of release with a nil cashing restriction. She notifies the superannuation provider that pays the TRIS on 15 July 2021. The TRIS is in the retirement phase on 15 July 2021 (the time when the superannuation provider was notified of Monica’s retirement). The credit to Monica’s TBA occurs on that date. The credit to her TBC is the amount equal to the value of the superannuation interest supporting the TRIS on 15 July 2021.

Receiving a reversionary pension

6.7 A reversionary pension is a pension that continues to another beneficiary on the death of the original pensioner.

6.8 One of the main influences on estate planning after 1 July 2017 is that a death benefit pension creates a credit in the TBA of the recipient, and therefore counts toward that recipient’s personal TBC.

6.9 This means that if the recipient has already used up their personal TBC on their own pension, any amount paid to them as a pension because of the death of their spouse will cause them to exceed their personal TBC.

6.10 This applies whether a pension is reversionary or not – the main difference is the timing of the credit.

6.11 On the death of a member, there are two ways the death benefit can be paid as a pension:

(a) the pension automatically continues to the new recipient (a reversionary pension); or

(b) the trustee decides to pay a death benefit as a pension (a death benefit pension).

6.12 For a reversionary pension, the credit to the TBA of the recipient occurs 12 months after death. For a pension that is not reversionary, the credit arises when the decision is made to pay the death benefit as a pension.

6.13 Where a pension is reversionary, the credit to the transfer balance account is inevitable at the end of the 12-month period. This means that it is critical that appropriate action is taken within the 12-month period to deal with any possible personal TBC excess of the recipient. If the reversionary pensioner is unable to deal with these issues for some time after death (which we do see after the death of a spouse), or there are other issues that delay dealing with the death benefit, then an excess amount may be triggered because of the failure to act.

6.14 Where a person may delay with financial matters after the death of the other person (usually their spouse), it is likely to be better for the pension not to revert in order that the client may choose the time when the credit to the transfer balance account occurs.

6.15 The 12-month period before the transfer balance credit arises is not enough in itself to justify a pension being made reversionary. It is really an estate planning decision.

6.16 The other factor to consider is the amount of the credit. For a reversionary pension, it is the account balance of the deceased at death, and, for a pension that is not reversionary, it is the account balance at the time of the payment. This means that, where there will be significant investment returns between death and payment, a reversionary pension may result in a smaller credit to the transfer balance account, and vice versa.

6.17 The main options for the recipient to ensure that they do not breach their personal TBC are to:

(a) Commute some or all their own existing pension back to accumulation phase or remove it from the superannuation system so the combined balance of their pension plus the reversionary pension do not exceed their transfer balance cap; or

(b) if the pension is not reversionary, take enough of the deceased’s death benefit as a pension to get them to their transfer balance cap, with the excess of the death benefit as a lump sum death benefit payment.

Failure to make minimum pension payments

6.18 For account based pensions (which are generally the only type of pension members can commence using their superannuation entitlements since 1 July 2007), a minimum amount must be paid to the person receiving the pension each year under the superannuation law.

6.19 The minimum amount of pension payable for a year changes with the age of the member and is also sometimes changed by the government.

6.20 Pensions that satisfy this minimum payment requirement will generally entitle the fund can claim exempt current pension income (ECPI) for the income received by the fund from assets supporting the pension. This means the income from the assets supporting the pension will be taxed at the rate of 0% in the fund.

6.21 If the minimum pension requirement is not met in a particular financial year, then any payments the member receives and the assets held by the fund to support the pension will not be treated as a pension under the superannuation and tax law.

6.22 There are two major consequences of failing to satisfy this requirement:

(a) The fund cannot claim ECPI for the particular pension for the particular financial year.

(i) This has the practical effect of increasing the tax payable on the income received from the assets held by the fund to support the pension from 0% to 15%.

(ii) From a timing perspective, the pension is treated as having ceased at the start of the relevant financial year even though the minimum payment amount did not fail to be made until the end of the financial year.

(iii) Any payments made during that year will be treated as superannuation lump sums and not pension payments.

(b) There is a TBA reporting event because the pension ceases to be a superannuation income stream in retirement phase.

(i) For reporting purposes, the pension is treated as having ceased at the end of the financial year in which it failed to meet the minimum pension requirement. This means the member’s TBA is debited by an amount equal to the value of the pension at the end of that financial year.

(ii) In most cases, this will not equal the original credit to the member’s TBA when the pension was commenced due to the value of pension payments made over time and investment returns credited to the pension account.

(iii) In addition to the TBA reporting consequences, if the member chooses to commence a replacement pension on 1 July in the following financial year, the tax components of the previous pension will have been blended with the other components in the member’s accumulation account (if they had one) which will result in the tax components of the new pension being recalculated under the proportioning rule.

6.23 In limited circumstances, the ATO may allow a pension to continue where the minimum payment requirement is not satisfied in a particular year. To do this, the following conditions must be satisfied:

(a) The minimum payment was not paid due to an honest mistake or matters outside the control of the trustee.

(b) The underpayment did not exceed 1/12th of the minimum annual payment (although the ATO has the discretion to waive a larger underpayment upon written request).

(c) Access to ECPI would have continued but for the trustee failing to pay the minimum payment amount (ie. there are no other breaches of the pension payment standards).

(d) The trustee makes a catch up payment as soon as practicable (ie. within 28 days of becoming aware of the underpayment).

(e) The catch up payment, if taken in the correct income year, would have satisfied the minimum pension requirement.

(f) The trustee treats the catch-up payment, for all other purposes, as if it was made in the prior income year.

6.24 Provided all the above conditions are satisfied, the ATO allows a fund to self-assess this exception provided the fund has not applied the exception before.

Relationship breakdowns involving superannuation

6.25 Following a divorce or relationship breakdown, there may be a splitting of superannuation interests as part of the division of property. One party (the member spouse receiving a pension) may be required to provide a proportion of their retirement phase super interests to the other party (the non-member spouse).

6.26 This splitting will be treated differently for TBA purposes on whether the non-member spouse was entitled to a lump sum amount or a percentage of the superannuation income stream. This is because a payment split may involve the member spouse either:

(a) commuting part of their super income stream into a lump sum, which is then paid to the non-member spouse; or

(b) retaining complete ownership of their super interest but having a portion of each payment from their pension directed to the non-member spouse.

Example – family law split – lump sum transfer

6.27 Ross starts and pension on 1 October 2017 and his TBA is credited with $1 million.

6.28 On 30 September 2018, as part of finalising his divorce, Ross needs to transfer $500,000 of her super to Rachel. Ross partially commutes his super income stream by $500,000 and transfers it to Rachel’s super fund.

6.29 Ross’ transfer balance account is debited by $500,000.

6.30 If Rachel uses the $500,000 she receives to start her own super income stream, she will receive a $500,000 credit in her transfer balance account.

Example – family law split – income stream payment split

6.31 On 1 July 2023, Ross commenced a pension with a value of $1.6 million, which is credited to his transfer balance account.

6.32 In September 2023, Ross and Rachel divorce, and Ross is required under their family law settlement to split 50% of his future pension benefits with Rachel.

6.33 The payment split applies to the monthly payments from the income stream, with Ross and Rachel each receiving approximately $4,000 per month, commencing on 1 October 2023.

6.34 On 1 October 2023, Ross’ income stream is still valued at $1.6 million.

(a) Ross’ TBA is debited by $800,000, being the proportion of all the income stream payments to be paid to Rachel. This leaves Ross’ TBA at $800,000 and gives him additional space in his personal TBC to commence a new pension using other assets in superannuation.

(b) Rachel’s TBA is credited with $1.6 million, as she is also receiving Ross’ income stream for transfer balance cap purposes

Simultaneously, Rachel’s TBA is debited by $800,000 so only the portion of Ross’ pension payments Rachel is entitled to is reflected in her TBA.

6.35 If Ross then fully commutes his income stream in 2025, 50% of the resulting lump sum will be paid to Rachel under the terms of the payment split. Ross and Rachel will each receive debits of 50% of the lump sum in their TBAs.

7 Conclusion

While the concept of the TBC is simple in theory, its application in practice can have varying outcomes and there are many things advisors need to be aware when assisting their clients to manage their personal TBC.

8 Contact details

If you have any questions, please contact me.

Steven Jell

Special Counsel

T 61 8 9792 0922

E steven.jell@sleeanderson.com.au

The content of this publication is correct at the date of publication. It is always possible the law could change which may result in the content of this publication no longer being correct.

This publication is only intended as a general overview of issues relevant to the topic and is not legal advice. If there are any matters you would like us to advise you on in relation to this publication, please let us know.

Sarah Rowlands