From 1 July 2017, superannuation fund members are subject to a $1.6 million transfer balance cap (TBC) which limits the tax exemption for assets funding superannuation pensions.
The TBC is tracked by the ATO and is updated using a Transfer Balance Account Report (TBAR) to ensure members remain under this cap to retain their 100% tax free income.
What needs to be reported?
Aside from the initial report which was lodged in 2018, an SMSF must report events that affect a member’s transfer balance account, including:
- New retirement phase income streams.
- Some limited recourse borrowing arrangement payments.
- Compliance with a commutation authority issued by the Commissioner.
- Commutations of retirement phase income streams.
How can I stay under the cap?
The TBC allows for the commencement of a maximum $1.6 million pension account where all earnings are tax free. The TBC is credited when you commence a pension and debited when you make a commutation.
For example at the start of the 2019 financial year you commenced an account based pension of $1 million. Your TBC would have this amount credited to the account leaving you with $600,000 available in the cap. Having reassessed your investments in 2020, you no longer which to withdraw a pension from the fund and keep as much money retained in the SMSF. The pension balance is currently $800,000. In March 2020 you commute this amount from a pension phase back to accumulation. Your TBC will have the amount of $800,000 debited taking it to $1.4 million. Should you wish to recommence a new pension you are now limited to the amount of $1.4 million rather than the original $1.6 million.
What if I receive a reversionary pension as well as my own pension?
This is where is gets complicated – the value of the pension is calculated on entitlement, usually the date of death of the original member, however the TBC is not credited until 12 months later. The ATO lays it out through the following example:
Mia retires and starts an account-based income stream valued at $1 million on 1 January 2018. Mia’s transfer balance account starts on 1 January 2018 and is credited with $1 million (the value of her retirement phase income stream). She still has $600,000 of personal transfer balance cap space available.
On 20 September 2018, Mia’s husband Marc dies. Marc’s reversionary account-based income stream (valued at $800,000 at the time of his death) reverts to Mia.
Mia’s transfer balance account will be credited with $800,000. However, the credit will not arise in her transfer balance account until 20 September 2019, 12 months after Marc’s death, giving Mia time to plan her financial affairs.
On 2 June 2019, Mia partially commutes $200,000 out of her account-based income stream as a lump sum, creating a debit of $200,000 in her transfer balance account.
On 20 September 2019, Mia’s transfer balance account is credited with $800,000 (the value of Marc’s income stream on the date of his death). Mia’s transfer balance is $1.6 million and she has no personal transfer balance cap space remaining.
On 1 July 2021, the TBC is being indexed up from $1.6 million to $1.7 million. However this is only for members who are yet to commence a pension at all. For those that have, the balance will remain at $1.6 million or be indexed proportionally based on the value of your unused cap.
Using my example above, if your transfer balance account is $1.4 million then you have an unused cap percentage of 12.5%. This will mean your cap will increase by 12.5% of the $100,000 indexation or $12,500 making your new cap $1,412,500.
As this amount will be specific to each individual member, please contact us if you wish to know your new cap after the indexation.
What if I exceed my cap?
If you exceed your TBC the ATO will issue you with an Excess Transfer Balance Determination. This is state the amount that you have exceeded your cap by and how much you will need to commute from your pension account. The Determination may also include an amount of Excess Transfer Balance tax – this is calculated as 15% of the earnings on the amount you have exceeded your cap by. The tax amount doubles to 30% of the earnings for any subsequent breaches. Any excess transfer balance tax will need to be paid to the ATO with 21 days of the determination being made.
How can we help?
If you would like to discuss your Transfer Balance Cap, please feel free to give us a call on 1300 392 544 or get in touch online and we will happily go over your options and help you understand your situation.