FAQs on John-Marie's Transfer Balance Accounts

If John-Marie commences his first account-based pension on 1 July 2021 with an amount of $1,080,000 at which time the TBC limit has been increased to $1.8, how does his transfer balance account operate?

As this is the first time a pension is payable to John-Marie, the ATO will establish a transfer balance account on 1 July 2021.  The ATO will credit the account with $1,080,000.  John-Marie’s personal TBC will be $1.8m.

What happens if John-Marie’s pension balance increases to $1.4m due to investment earnings?

An increase in the pension account does not give rise to a credit to the transfer balance account.  This is because the TBC operates as a limit to the account of super capital which can transfer to pension phase: it is not a cap on how much can remain in pension phase.

Consequently, the balance of John-Marie’s transfer balance remains at $1,080,000.

What happens if John-Marie’s pension balance decreases due to pension payments and negative investment returns?

Pension payments do not qualify as debits to the transfer balance account.  Equally, negative investment returns do not qualify as debits to the transfer balance account.  

However, investment losses due to fraud or dishonesty may give rise to a debit to the transfer balance account for the amount of the established loss.

Consequently, the fact that John-Marie’s pension account has reduced from $1,080,000 to $900,000 (because of pension payments and investment losses) is irrelevant.  The balance of his transfer account is unchanged at $1,080,000.

What happens if John-Marie partially commutes his pension (commutes 40%) at a time when his pension account is $1,200,000 and he uses the lump sum arising from the commutation to acquire another pension?

A pension commutation (whether full or partial) gives rise to a debit to the transfer balance account.  In this case as the commutation is 40% of the value of the pension, the commutation amount is therefore $480,000.  Once the ATO is advised of the commutation (and the obligation is upon John-Marie to notify the ATO) the commutation amount will be debited to the transfer balance account.  After the debiting, the transfer balance will be $600,000 (ie $1,080,000 less $480,000).

Once John-Marie commences the additional pension, the super fund issuing the pension will notify the ATO of the commencement of the additional pension and its initial value of $480,000.  Consequently, the ATO will credit the transfer balance account with $480,000 returning John-Marie’s transfer balance account to $1,080,000.

If John-Marie did not notify the ATO of the partial commutation of his pension, the ATO would not be aware of the partial commutation and, therefore, there would be no debit to the transfer balance account.  However, as the fund which issues the additional pension will advise the ATO of the commencement of the additional pension, the ATO will credit the transfer balance with $480,000 thereby causing the balance of John-Marie’s transfer account to be $1,560,000.  The importance of promptly notifying the ATO of any commutation of a pension is obvious.  

What if John Marie consumed $300,000 of the commutation payment and only used $180,000 to commence another pensions?

In this case, the ATO would still debit the transfer balance by $480,000, reducing the balance to $600,000.  When the new pension commenced, the ATO will credit the transfer balance account with $180,000.  The balance will then be $780,000.

If the balance of John-Marie’s is now reduced to $780,000 will he enjoy the benefit of greater increase in his personal TBC?

In short, no.  John-Marie’s personal TBC is $1.8m.  Any proportional increase in his TBC will be based upon the highest balance of the transfer balance.  While the current balance is $780,000 his highest balance is $1,080,000.

As the general TBC has increased from $1.8m to $1.9m, John-Marie will be entitled to an increase of $40,000.  This is because his highest balance ($1,080,000) is 60% of his personal TBC.  His unused portion of his TBC is 40% and consequently his personal TBC will be increased by 40% of $100,000.

If John-Marie had commenced an account-based pension on 1 January 2016 with $1,400,000 what happens on 1 July 2017 when his pension account balance is $1,550,000?

The new TBC system commences on 1 July 2017.  As John-Marie had an account-based pension on 1 July 2017, the ATO will establish his transfer balance account on 1 July 2017 and this personal TBC will be $1.6m.

The value of his pension just before 1 July 2017 is treated as the credit to the transfer balance account (and not the initial pension account balance).  In this case, the credit will be $1,550,000 and John-Marie will have utilised almost 97% of his TBC.

John-Marie’s pension which commenced on 1 January 2016 is commuted in full on 1 July 2020 when the pension account balance is $1,950,000.  He subsequently commences a replacement pension with that amount. How has the transfer balance account been affected?

From the previous FAQ, the transfer balance account for John-Marie was established on 1 July 2017 and the initial credit was $1,550,000.  His personal TBC is $1.6m.

The full commutation on 1 July 2020 gave rise to a $1,950,000 payment.  The ATO will debit his transfer balance account with $1,950,000 giving rise to a negative balance of $400,000.  When the replacement pension issued to John-Marie the issuing fund will notify the ATO of the commencement of the pension.  The ATO will then credit his transfer balance account with $1,950,000 returning balance to $1,550,000.

Consequently pension amounts can be transferred within the system without causing any growth in the pension account to be caught by the transfer balance cap.  

If John-Marie’s pension was a transition to retirement pension rather than an account-based pension, what would happen on 1 July 2017?

Transition to retirement pensions will, from 1 July 2017, no longer enjoy the earnings tax exemption.  As they no longer enjoy the earnings tax exemption, they are not relevant for transfer balance account purposes.  Consequently, the ATO will not establish a transfer balance account for John-Marie on 1 July 2017.  (This answer assumes that John-Marie has other pensions.)

What is the position if John-Marie‘s transition to retirement pension converts to an account-based pension on 1 July 2019 when the pension account-balance is $1,900,000?

Given the fact that transition to retirement pensions will cease to enjoy the earnings tax exemption from 1 July 2017 many of these pensions will be commuted on or before 30 June 2017.  However, this is not an issue to John-Marie (and if it wasn’t an issue we would not have an example).

As the pension is a transition to retirement pension for the period 1 July 2017 to 30 June 2019 – no transfer account balance is established for John Marie in respect of his 2017/18 or 2018/19 financial years.

However, as at 1 July 2019, the pension is now an account-based pension.  A transfer balance account will be established and the initial credit will be $1,900,000 (as this is the value of the pension when it first commences to confer the earnings tax exemption).  

As the TBC has only been indexed to $1,700,000, John-Marie will have an excess transfer balance of $200,000.  He has reached his personal TBC and so is no longer entitled to any increase in the personal TBC due to indexation.

John-Marie partially commutes his pension and generates a $250,000 lump sum payment which he decides to transfer back to accumulation phase.  This commutation occurred on 1 October 2019.

John-Marie will have incurred notional earnings for 3 months on his excess transfer balance of $200,000 – which, for purposes of the example is, say, equal to $20,000.  He will have incurred tax of $3,000 (15% on $20,000) and had to commute his pension to ensure a commutation value of at least $220,000 (excess amount plus notional earnings).  

As a result of the partial commutation, John-Marie’s transfer account balance is now $1,650,000 (which is within his personal TBC of $1,700,000).  

As John-Marie exceeded his personal TBC, he is not entitled to any proportionate increase in this personal TBC.  It is irrelevant that his current balance is now less than his personal TBC.

The above examples illustrate the board principles applying to the TBC for account-based pensions.  Special rules apply to non-commutable pensions (eg defined benefit, market linked pensions).  Additionally special rules apply when a pension is subject to payment splitting on a relationship breakdown.