What is the detail of the Transfer Cap and how does it operate?

The general pension transfer balance cap will limit, to an amount of $1.6m, the amount of super which can be converted to pension phase and thereby enjoy the earnings tax exemption which currently applies in pension phase.

The $1.6m cap will apply on a taxpayer by taxpayer basis and will apply to all super accounts (subject to one exception) which move into pension phase. The exception relates to transition to retirement pensions – this exception is considered later in this edition of SUPERCentral News.

The general transfer balance cap will apply from 1 July 2017.  The cap will be CPI indexed in increments of $100,000. The ATO will create a transfer balance account for each taxpayer who has super benefits in pension phase.  As and when a pension is commenced, the ATO will credit the account with the initial balance of the pension.  If a taxpayer commences a pension which causes their transfer balance account to exceed the cap, the ATO will notify the trustee paying the pension that the pension is excessive and the amount of the excess.  The trustee must then commute the excess and the excess pension (or excess portion of the pension) can either be transferred back to accumulation phase or be paid as a lump sum super payment.  If the excess pension is a pension subject to SIS commutation restrictions (such as defined benefit pensions or market-linked pensions) – a different treatment will apply – this is discussed later in this edition.

Additionally to commuting the pension, a special tax will be imposed to essentially claw back the benefit of the earnings tax exemption on the portion of the pension which is excessive.  This tax will be called excess transfer balance tax and will be at the rate of 15% on the notional earnings of the excess portion of the pension.  This tax will be levied on the taxpayer, with the taxpayer having the choice to either pay the tax themselves or arrange for the super fund to pay the tax and to debit their pension balance.

The exhaustion of the transfer cap will be measured in percentage terms and not dollar amounts.  This is illustrated by the example in the table below.  One reason for this approach is to diminish the advantage of the strategy that involves “saving” a small portion of the transfer cap so that if and when the cap increases by indexation the entire increase is retained.

While each new pension which is commenced will cause the ATO to credit the transfer account with the initial value of the pension, some events will give rise to a debit to the transfer account balance.  Debits will arise if, after the pension commences, the pension is subsequently affected by trustee or investment manager fraud.  Another situation where a debit will arise is where a portion of the pension balance has to be paid under a family law benefit split.

Importantly once the pension commences, any increase in the pension account balance due to earnings does not affect the transfer balance account.  Equally, any decrease in the pension account balance due to negative earnings does not affect the transfer balance account.

Once a taxpayer has exhausted their pension transfer balance, no new super capital can transfer to pension phase.  However, super capital which is already in pension phase can move from one income stream to another income stream without exposing the growth in the pension account balance to assessment against the pension transfer cap balance.