Child pensions commencing on or after 1 July 2017

The application of the new rules depend on whether the source of the pension is a deceased member who had or did not have a transfer balance account.

A deceased member having a transfer balance account simply means whether at the date of death, the deceased was or had ever been in pension phase (at any time since 1 July 2017).  If the deceased had never been in pension phase since 1 July 2017, then the deceased does not have a transfer balance account.

No transfer balance account at date of death

In this case, the cap increment will be the general transfer balance cap – which for 2017/18 will be $1.6m.  

However, the cap increment will be shared amongst all beneficiaries of child pensions which are sourced from the superannuation interests of the deceased member.

Example 5

Donald died on 31 December 2017 with an aggregate superannuation balance of $2.5m (whether in one super fund or in two or more super funds) and had never been in pension phase since 1 July 2017.

Donald’s death benefit is allocated as follows:

• $1.5m to Ivana, his spouse which is paid as an account-based pension
• $550,000 to his daughter aged 14 which is paid as an account-based pension
• $450,000 to his son aged 16 which is paid as account-based pension.

The pension Ivana will be counted against her pension transfer cap.  As this is her first pension, her pension transfer cap is $1.6m.  Consequently, no part of the pension payable to Ivana will be excessive.

The pension payable to the daughter is a child pension and the daughter will be entitled to a cap increment of $880,000 (being 55% of $1.6m).

The pension payable to the son is also a child pension and the son will be entitled to a cap increment of $720,000 (being 45% of $1.6m).

The cap increment is shared between the children as both pensions have the same source: namely Donald’s superannuation interest.  Consequently, the cap increment is shared in proportion to their initial account balances.

Example 6

Assume that same facts as in Example 5 but that Ivana dies one year after Donald and at the date of her death the account-based pension is $1.8m.  Ivana has a binding death nomination which specifies her death benefit is to be paid 40% to daughter and 60% to her son.

At the time of Ivana’s death, the pension transfer balance cap remains at $1.6m.

In this situation, Ivana’s death benefit exceeds the transfer cap by $200,000.  Consequently, this amount must be paid as a superannuation lump sum to the daughter (as to 40%) and to the son (as to 60%).

The portion of Ivana’s death benefit which is does not exceed the transfer cap, is $1.6m and this cap is shared between the daughter and the son.  The daughter will have a cap increment of $640,000 (40% of $1.6m) and the son will have a cap increment of $960,000 (60% of $1.6m).  Consequently each child’s benefit can be paid as a child pension.

There is no aggregation of the cap increment arising from Donald’s superannuation interest as this is a separate superannuation interest to Ivana’s.

So each child will have two pensions payable from two different sources with each pension subject to its own cap increment.

Transfer balance account at the date of death

If the deceased did have a transfer balance account – then the deceased was either in pension phase at the date of death or had previously (since 1 July 2017) been in pension phase.

In this situation, the treatment of any child pension payable from the deceased’s superannuation interests depends on whether the child pension is sourced wholly from superannuation interests in retirement phase or sourced wholly from superannuation interests entirely in accumulation phase.  Whether an interest of a deceased member is in retirement phase or accumulation phase is determined immediately before the member’s death.

Example 7

Sarah on 1 July 2018 with the following superannuation interests:

• Pension interest in Fund No 1 with a balance of $700,000
• Accumulation interest in Fund No 2 with a balance of $800,000
• Pension interest in Fund No 3 with a balance of $400,000.

(balances are at the date of death)

As Sarah commenced her first pension during the 2017/18 financial year she had a transfer balance account at the date of her death.

Sarah is survived by her husband Simon and their two children Jessica (aged 15) and Emily (aged 12).

Clearly Sarah had a transfer balance account at her death as she was in pension phase.  Also, any pensions payable to Jessica and Emily will be child pensions.

The allocation of the various superannuation interests are as follows:

• Fund No 1 – pension to Jessica for $700,000.
• Fund No 2 – pension to Emily for $800,000
• Fund No 3 – pension to Jessica for $250,000 and pension to Emily for $150,000.

At 1 July 2018, the total value of Sarah’s interests which were in retirement phase was $1.1m while Sarah had an accumulation interest of $800,000.  As the value of Sarah’s retirement interests is less than the general transfer cap – the all child pensions payable from Sarah’s superannuation interests which were in retirement phase will share a cap increment of $1.1m.   As each child is entitled to receive 50% of Sarah’s death benefit, then each child will have a cap increment of $550,000 (ie 50% of $1.1m).  However, only pensions payable from superannuation interests which were in retirement phase will be qualified as falling within the cap increment.  Pensions which are payable from superannuation interests which were in accumulation phase will not fall within the cap increment and so will necessarily be excessive.

Jessica’s pensions will have the following cap increment treatment:

• her pension from Fund No 1 is wholly attributable to a superannuation interest that was in pension phase.  Consequently, this pension will qualify for her share of the increment cap.  As her share of the cap increment is $550,000, then $150,000 of the pension will be treated as being excessive and must be commuted and cashed out.  The balance ($550,000) will be within the cap increment.
• her pension from Fund No 3 is also wholly attributable to a superannuation interest that was in pension phase.  However as Jessica is only entitled to a cap increment of $550,000 (which has been completely exhausted by her pension from Fund No 1), this pension will be entirely excessive and will have to be cashed out.

Emily’s pensions will have the following cap increment treatment:

• her pension payable from Fund No 2 is sourced from a superannuation interest which was not in pension phase.  Consequently, this pension is not qualified for the cap increment and therefore this pension is entirely excessive and must be cashed out;
• her pension payable from Fund No 3 is sourced from a superannuation interest which was in pension phase.  Consequently, the pension is qualified for the cap increment and will be entirely within her cap of $550,000.  

The end result is summarised in the following table

Post death increases in superannuation interests due to investment earnings

The provisions dealing with child pensions provide that investment earnings of a superannuation interest post death retain the character of the source superannuation interest.  

Consequently, post death investment earnings on a superannuation interest which was immediately before the death of the member in pension phase are treated as forming part of the pension interest for the purposes determining whether the child pension is or is not wholly attributable to pension interests.

Similarly, post death investment earnings on a superannuation interest which was immediately before the death of the member in accumulation phase are treated as forming part of the accumulation interest.

Post death increases in superannuation due to insurance proceeds and transfers from reserves

These increases are treated as forming part of the accumulation interests of the deceased member.

It should be noted that while the legislation expressly refers to life insurance proceeds (whether from external insurance cover or self-insurance cover) as forming part of the accumulation interest, only the Explanatory Memorandum refers to transfers from reserves (for example investment reserves, operational reserves) as forming part of the accumulation interest.

Excessive pension interests

If a parent has an excessive pension interest (for example the parent has exceeded their transfer balance cap and the parent dies before the excess portion has been commuted) then that excessive portion will retain its character and any pensions sourced from that interest will retain a proportionate share of that excess.