Pension Transfer Balance Cap

The Pension Transfer Balance Cap will be set out in Division 294 of the Income Tax Assessment Act.  The comments below are based upon the application of the draft legislation (as released on Wednesday 28 September 2016).  It is possible that the draft legislation will subsequently be changed as it is considered by Parliament.

In summary:

• Pension transfer cap applies on and from 1 July 2017.
• Cap applies to net transfers to retirement phase - earnings (positive or negative) received in retirement phase and pension payments not relevant.
• The general pension transfer cap is $1.6m.  This figure will be indexed to CPI and adjusted in increments of $100,000.
• Each taxpayer will have their own individual pension transfer cap – this will be determined by reference to the general pension transfer cap applying to the financial year in which they first commence a pension (or 2017/18 if they are in pension phase at 30 June 2017) and a percentage of any increase in the general pension transfer cap.
• Utilisation of the pension transfer cap will be by means of a “transfer balance account” to which net transfers into pension phase will be credited and net transfers out of pension phase will be debited.
• When a pension commences on or after 1 July 2017 – the initial account balance will be “credited” by the ATO against the transfer cap.
• Pensions which commenced before 1 July 2017 – the pension account balance at 30 June 2017 will be “credited” by the ATO against the transfer cap.
• Once 100% of a taxpayer’s cap is used, they no longer benefit from any indexation in the general transfer balance cap.
• Where a taxpayer exceeds their pension transfer cap, the ATO will direct the super fund to commute the pension (or the excess portion of the pension) and transfer the commuted amount plus notional earnings on the excess to accumulation phase or to be applied as a lump sum benefit.
• The taxpayer will be liable to pay excess transfer balance tax on their notional excess earnings at the rate of 15% (this will claw back the effect of the earnings exemption on the excess portion).
• Where a pension transfers to a reversionary beneficiary, the value of the transferred pension (at the date of death) will be assessed against the pension transfer cap of the reversionary beneficiary – however, the assessment will be delayed for 6 months to allow the reversionary beneficiary time to determine whether to commute or retain the pension.
• Death benefit pensions will be assessed against the recipient’s transfer cap.
• Child pensions will generally not be assessed against the recipient’s transfer cap if the pension terminates on or before age 25 (however, they will be assessed against a different cap).
• Transferring a pension from one super fund to another super fund will not cause the increase in the pension account balance to be assessed against the transfer cap.
• Cashing out a pension which has been previously assessed against the transfer cap will result in a “debit” to the transfer cap account of the entire pension account balance.
• Cashing out a pension previously assessed against the transfer cap may result in a negative balance of transfer cap account.
• Cashing out a pension previously assessed against the transfer cap reduces the exhaustion of the cap and permits other super capital to transfer to pension phase – however this is not a means to fully access any indexation increase in the pension transfer cap.
• For pensions which have SIS mandated commutation restrictions (such as lifetime pensions, life expectancy pensions and market-linked pensions) – special provisions will apply.
• Deferred superannuation income streams will be permitted.  Essentially, these will be deferred annuities (whether individual contracts or group policies) and will benefit from earnings tax exemption from the time the taxpayer attains age 65 (or retires earlier or becomes permanently incapacitated).  They will be assessed against the transfer cap from the date the taxpayer benefits from the earnings tax exemption.