Introduction of Transfer Balance Caps
Successive Federal Governments have been concerned about the potential for super fund members to move large amounts into pension phase as a strategy to reduce tax. The tax saving comes from the combined effect of the fund paying no income tax on earnings from the pension account, and the member paying no income tax on the pension if they are over 60.
The Government has addressed this with the introduction, from 1 July 2017, of a dollar limit on the total amount that a member can transfer into “retirement phase”, the term used to describe pension accounts which are exempt from tax in the fund.. The dollar limit a member can transfer into retirement phase is called their “transfer balance cap” (TBC). In order to track the amount transferred into retirement phase, the ATO will maintain a “transfer balance account” (TBA) for each person. A person commences to have a TBA at the time they first start to receive a pension in retirement phase, and their TBA ceases on death.
Generally a transition to retirement income stream (TRIS)is not classified as being in retirement phase, and income on the assets supporting a TRIS is not exempt from tax in the fund. However, this classification changes once the member has reached age 65 or has satisfied the retirement, terminal medical condition or permanent incapacity condition of release.
A person’s TBC is a lifetime cap which is set when a person first commences to have a TBA. The TBC for people who commenced a TBA in the year ended 30 June 2018 is $1.6m. For people who commence a TBA in later years, the TBC will be indexed by movements in the CPI in increments of $100,000.
If you commence a TBA but do not use your entire TBC at that time, the “cap space” available in future will be the indexed general TBC at that time multiplied by your unused percentage. For example, if you transfer $1.0m to a pension account to commence a retirement phase pension on 1 July 2018, the unused cap amount of $0.6m represents $0.6m/$1.6m = 37.5% of your TBC at that time. If at some time in the future you choose to transfer further funds to another retirement phase pension account, the balance of the TBC available to you at that later time will be the indexed general TBC at that time, multiplied by 37.5%.
The opposite describes the most common TBA events. Changes in the value of an income stream account after the initial valuation, such as through investment gains or losses, are not taken into account.
The following events result in a credit to your transfer balance account:
- Being in receipt of a retirement phase income stream on 30 June 2017: Your TBA is credited on 1 July 2017 with the30 June 2017 value of the income stream.
- Commencing a retirement phase income stream on or after 1 July 2017: Your TBA is credited on the date of commencement with the value of the income stream.
- Turning 65 while being in receipt of a TRIS: Your TBA is credited on the date you turn 65 with the value of the TRIS on that date.
- Meeting the retirement, terminal medical condition or permanent incapacity conditions of release while being in receipt of a TRIS: Your TBA is credited on the date you notify the fund trustee of the event with the value of the TRIS on that date.
- Commencing a new superannuation death benefit income stream: Your TBA is credited with the market value of the pension capital on the day the pension commences.
- Receiving an income stream in retirement phase as a reversionary beneficiary: Your TBA is credited 12 months after the death of the deceased member’s death with the value of the pension capital at the date of the deceased member’s death.
- Being notified by the ATO of excess transfer balance earnings accrued on an excess balance amount: Excess transfer balance earnings accrue daily to your TBA from the first day you have an excess transfer credit to the day the ATO issues an excess transfer balance determination.
The following events result in a debit to your transfer balance account:
- Partial or full commutation of a retirement phase income stream account: Your TBA is debited with the amount of the commutation on the date of the commutation.
- Failure of a retirement phase income stream to comply with pension standards: Super pensions are required to comply with certain minimum standards. The most common failure is not making the required minimum pension payments in a financial year. When this happens, the pension ceases to be regarded as a pension for super purposes, and your TBA is debited on the last day of the financial year with the capital value of the pension account at that date.
- Failure to comply with a commutation authority: If you have an excess transfer balance and fail to rectify the situation, the ATO can issue your super fund with a direction to commute part of your pension interest. If your super fund fails to comply with this direction, your pension will cease to be in retirement phase, and a debit will arise in your TBA, at the end of the period specified in the commutation authority. The amount of the debit is the capital value of your income steam on that date.
Consequences of an Excess TBA
You have an excess transfer balance if the credit balance of your TBA exceeds your TBC at the end of a particular day. In addition to amounts transferred into retirement phase, the excess also includes “excess balance earnings” accrued on a daily basis, calculated for the period from when you first had an excess transfer balance until you either cease to have an excess transfer balance or the ATO issues you with an “excess transfer balance determination”, whichever is earlier.
The issue of a determination by the ATO in effect crystallises the amount you need to remove from retirement phase. If you know the amount of your excess transfer balance (including any excess balance earnings) you can voluntarily commute it before you receive an excess transfer balance determination.
It is often best to commute any excess transfer balance as early as possible, to minimise excess “transfer balance tax”. The rate of tax is 15% in the 2018 tax year, then from 1 July 2018 it is 15% the first time you have an excess transfer balance, then 30% for subsequent occasions.
If you still have an excess transfer balance 60 days after the issue of an excess transfer balance determination, the ATO will issue a commutation authority directly to your super providers (which may include your SMSF), requiring them to remove the amount form retirement phase. Failure to comply may result in the income stream losing its tax exemption on earnings.
In the event you receive an excess transfer balance determination, or your SMSF receives a commutation authority, you should contact your Nexia advisor immediately, so that we can advise on the best course of action.
The ATO will gather the data it needs to implement the TBA regime through transfer balance account reports (TBAR) which super providers (including SMSFs) must provide by specified lodgement dates.
The timing of the required reporting depends on the total superannuation balances of the members in the fund. A member’s total superannuation balance is the total value of all their superannuation interests in all funds and pension schemes as at the preceding 30 June.
Where all the members of a fund have total superannuation balances of less than $1 million, TBAR reporting can be done by the fund at the same time as its annual return is due. In other words, any reportable transactions can be reported on an annual basis.
Where any member of the fund has a total superannuation balance of $1 million or more, TBAR reporting must be done within 28 days of the end of the quarter in which a reportable event occurs.
Reportable events which have occurred during the 2018 financial year need to be reported:
- if the fund is eligible to report annually, when its 2018 annual return is due, or
- if the fund must report quarterly, by 28 October 2018.
Even if your SMSF is eligible to report TBA events annually, there may be situations where it is desirable to report early. For example, if you commute a pension in retirement phase in your SMSF and roll the amount into a public offer fund, it is possible that the public offer fund will report the credit to your TBA before your SMSF is due to report the offsetting debit. This will result in an excess transfer balance which will then need to be corrected.
The TBAR reporting regime imposes obligations on SMSF trustees to ensure that events are reported by the relevant due date.
Our super software is able to report such events to the ATO in a convenient electronic form, but our SMSF clients should make sure we have current automated data feeds, and should consider providing us with the information for their funds on at least a quarterly basis so that fund transactions are up to date. Please contact your Nexia Edwards Marshall NT Advisor if you would like to discuss this issue.
Transfer to Retirement Income Streams
Transition to retirement income streams (TRIS) have raised particular problems for the TBA regime. As the law was originally enacted, all TRISes were excluded from the definition of retirement phase income streams. Consequently, the fund earnings on TRISes were not exempt from tax, and existing or new TRISes did not affect a member’s TBA. However, the ATO has conceded that when the recipient of a TRIS turns 65 or satisfies one of the conditions of release relating to retirement, terminal medical condition or permanent incapacity, the special restrictions which apply to the payment of a TRIS cease to apply (subject to the fund’s trust deed and the pension rules). The law has now been amended so that a TRIS is regarded as being in retirement phase from the date the recipient turns 65 or notifies the fund trustee that they have satisfied one of these conditions of release.
A further problem arises where the beneficiary of a reversionary TRIS dies, and the TRIS commences to be paid to a beneficiary (such as a surviving spouse) who has not turned 65 or satisfied one of these conditions of release. Under the current law, the TRIS would again revert to not being in retirement phase, with the result that it cannot be paid as a death benefit income stream. There is currently a Bill before Parliament to amend the law so that such a reversionary TRIS will be regarded as being in retirement phase for the surviving spouse. The change will be effective from 1 July 2017.
How can Nexia Edwards Marshall NT help you?
Please contact Sarah McEachern or your Nexia Edwards Marshall NT Advisor if you wish to discuss.