The Transfer Balance Cap

The purpose of the cap is to place a limit on the amount of super capital which can be transferred into pension phase – and thereby enjoy earnings tax exemption.  Essentially, the Transfer Balance Cap (“TBC”) operates to limit the tax concessions provided by superannuation.  The TBC only applies to super pensions and does not apply to Centrelink or Veteran’s Affairs pensions.

The initial value of the TBC will be $1.6m.   This value will be indexed but only adjusted in increments of $100,000.

When a pension commences on or after 1 July 2017 in respect of an individual, the ATO will create (somewhere in the ATO’s computer system) a transfer balance account for the individual and the initial value of the pension will be recorded as a credit to the account.  Each time an individual (on or after 1 July 2017) commutes their pension, the amount arising from the commutation will be recorded as a debit to the transfer balance account.  The balance of the account is simply the excess of credits over debits.  While certain other events can give rise to a debit to the transfer balance account, the most likely event will be the full or partial commutation of a pension.

Once the ATO has established a transfer balance account for an individual, this will determine the dollar value of the individual’s personal TBC.  If the transfer balance account is established during 2017/18 the personal TBC will be $1.6m (as this is the general TBC which applies to 2017/18).  If the transfer balance account is established during a financial year when the general TBC is, say, $1.8m, then the personal TBC will be $1.8m.  

While the general TBC will be indexed and increased in $100,000 increments, the personal TBC will only be increased if the balance of your transfer account has never exceeded your personal TBC.  In which case your personal TBC will only be increased by a proportion of the $100,000.  If your highest balance is, say, $400,000 and your personal TBC is $1.6m then when the general TBC increases by $100,000, your personal TBC will only increase by $75,000 (as you have only used up 25% of your personal TBC).  This proportional increase is intended to prevent individuals who are under their personal TBC by a few dollars being entitled to full $100,000 increase.  Also, by using the highest balance of the transfer account to determine the proportional increase (if any), attempts to reduce the balance to obtain a greater proportional increase are defeated.

If the ATO determines that the balance of your account exceeds your personal TBC, the ATO will require one or more pensions to be commuted to reduce the balance of your transfer account so that it no longer exceeds your personal TBC.  In order to remove any financial benefit in exceeding the TBC, a special tax will be imposed (at 15%) on the notional earnings of the excess balance.  The notional earnings will be determined by applying a statutory rate to the excess which will be calculated on a daily basis for each day the balance is in excess.  This tax is to reverse the earnings tax benefit arising from having excess super capital in pension phase.

If a taxpayer does not take action to commute one or more pensions to the extent necessary to reduce the excess, the ATO can force super trustees to make the necessary commutations.