The transfer balance cap

The transfer balance cap (TBC) has applied from 1 July 2017. It limits the total amount of superannuation monies that can be transferred into a retirement phase pension, where there is no tax on investment earnings, to an amount of up to $1.9 million. The cap of $1.9 million will only apply to clients who have not held a retirement phase income stream between 1 July 2017 and 30 June 2023. If they have held a retirement phase income stream prior to this date, their personal transfer balance cap will be between $1.6 million and $1.9 million in multiples of $1,000.

The cap applies to the combined balance of all superannuation monies transferred to retirement phase (regardless of how many accounts are held) and is monitored by the ATO.

Each time a client transfers money into a superannuation income stream, this amount counts towards their personal TBC. Importantly, amounts held in transition to retirement (TTR) pensions will not count towards a client’s TBC if they have not yet satisfied a full condition of release. The earnings on the assets supporting these pensions will be taxed at up to 15%, i.e. the same as accumulation phase.

For clients wanting to hold more than their TBC within the superannuation environment, the remainder will need to remain in accumulation phase. The general TBC amount is indexed periodically in increments of $100,000, in line with CPI.

There are special rules for defined benefit schemes to ensure the treatment of those members is broadly commensurate with members of other schemes. This applies even where the defined benefit scheme has no commutation value.

How the transfer balance cap works

A client’s personal TBC is equal to the general TBC at the time of first commencing a superannuation income stream. A client’s personal TBC may increase when the general cap indexes, but only by an amount in proportion to their unused cap space based on their highest ever transfer balance account credit value. If a client commences a superannuation income stream and reaches their TBC, they will be unable to move additional monies into a retirement phase superannuation income stream even if the general TBC is indexed to a higher amount, unless they commute some of their existing income stream monies. Where they have previously fully utilised their cap, they will also not benefit from any future indexation.

Example 1

Jenny commences an account based pension with $1.6 million on 1 August 2019. By 1 August 2021, the balance of Jenny’s account based pension has fallen to $1.5 million due to pension payments and investment earnings and in the meantime, the general TBC has been indexed to $1.7 million.

Despite Jenny’s account based pension balance now being $200,000 below the general TBC, she cannot move any further monies into an income stream.

On 1 October 2023, Jenny’s account based pension has fallen to $1.2 million due to pension payments and investment earnings and in the meantime, the general TBC has been indexed to $1.9 million. Again, despite Jenny’s account based pension balance being $700,000 below the general TBC, she cannot move any further monies into an income stream.

If a client uses up some of their TBC but has never utilised it in full, their personal TBC is subject to proportional indexation in line with CPI increases in the general TBC.

Example 2

Brad commences an account based pension on 1 August 2019 with a balance of $1.4 million. At this time, Brad has used up 87.5% of his personal TBC. For the purposes of calculating the amount of indexation, this percentage is rounded down to the nearest whole percentage, or 87%. This leaves an unused percentage of 13%. On 1 July 2021, the general TBC increased to $1.7 million, or by $100,000. Brad will only benefit from a proportion of the indexation, i.e. 13% of his unused cap or $13,000.This means his personal TBC will increase to $1.613 million.

On 30 November 2022 Brad commences a separate account based pension of $50,000. At this time he has used up 89% of his personal TBC, being the $1.4 million initial amount plus $50,000 as a proportion of his personal TBC at this time of $1.613 million. The percentage is rounded down to the nearest whole percentage. This leaves 11%.

On 1 July 2023, the general TBC increased to $1.9 million, or by $200,000. Brad will only benefit from a proportion of the indexation i.e. 11% of $200,000 or $22,000. This means his personal TBC will increase to $1.635 million.

Brad can transfer a further $185,000 ($1.635 million - $1.45 million) into an account based pension without exceeding his TBC.

Debits and credits to the transfer balance cap

The amount assessed against a client’s personal TBC is called their transfer balance. This is tracked by the ATO using near real-time recording from superannuation providers when any new retirement phase pensions are commenced, or amounts are withdrawn from pension accounts.

Changes to the value of a client’s income stream, such as a reduction due to pension payments or increases due to investment earnings do not impact the client’s transfer balance.

Their transfer balance will change using a system of debits and credits, with debits reducing the transfer balance.

This includes:

• commutations from superannuation retirement phase income streams (including where an amount is rolled back to accumulation or withdrawn as a lump sum benefit)
• structured settlement contributions which are then rolled into a superannuation income stream
• reductions in the income stream due to bankruptcy or where an amount is split due to a relationship breakdown
• where an income stream ceases to be a complying superannuation income stream

Example 3

Harry commences his first retirement phase pension on 1 August 2023 for $1.9 million. At this time, the general TBC is also $1.9 million.

On 1 August 2024, the account based pension is now valued at $2.1 million due to positive investment returns. Harry fully commutes the account based pension as a lump sum.

This creates a debit of $2.1 million leaving him with a transfer balance of minus $200,000.

Harry’s personal TBC is still $1.9 million regardless of whether the general TBC will be indexed in future as it was set when Harry first commenced an income stream and fully utilised the general TBC at the time. However, he can move up to $2.1 million into a new account based pension without exceeding his personal TBC.

Generally, credits for a client’s transfer balance will include:

• the value of all superannuation income streams (except TTR pensions) held on 30 June 2017
• any new superannuation income streams (except TTR pensions) commenced on or after 1 July 2017
• excess transfer balance earnings that accrue on excess transfer balance amounts.
  
  

Penalties for exceeding the transfer balance cap

If a client exceeds their TBC, excess transfer balance earnings will be compounded daily and credited to their transfer balance using the general interest charge (GIC) which is seven percentage points over the RBA 90 Day Bank Accepted Bill rate.

The effect of the earnings being added to the client’s personal transfer balance is that the client will have to commute a higher amount from their superannuation income stream to bring their transfer balance back within their TBC.

In addition to having to commute the excess and also the notional earnings, the notional earnings are also taxed.

The tax rate is 15 per cent for the first breach. Any future breaches are taxed at 30 per cent.

Example 4

Janice purchased a $1.9 million account based pension on 1 June 2023 (before the general TBC was indexed, so the cap that applied was only $1.7 million) and this was her first retirement phase pension. This means she is $200,000 in excess of the TBC limit. Janice rectifies this after 30 days.

Therefore, her total transfer balance equals $1,901,727¹. This includes the excess earnings.

To bring her balance under her TBC of $1.7 million, Janice needs to commute at least $201,727 instead of just the $200,000 excess amount.

She will also be assessed for tax on the notional earnings at 15%, resulting in a tax liability of $259.

Importantly, while the amount of notional earnings to be commuted is set at the time the ATO sends a determination to the client, this continues to accrue in terms of the amount calculated, until the excess is rectified.

Further penalties if the excess is not rectified

If the client receives an excess transfer balance determination from the ATO and still does not rectify it, the ATO will issue a commutation authority to the relevant superannuation fund instructing the fund to commute a sufficient amount to bring the client back under the cap.

The requirement to comply with a commutation order is a regulatory provision for SMSFs and failure to comply could result in serious penalties. In any event, the income stream in question will cease to be in the retirement phase from the start of the financial year in which the superannuation income stream provider failed to comply with the commutation authority, as well as all later financial years.

Things to consider

Where a client has funds in accumulation phase and which cannot be used to commence an income stream, consideration should be given whether to hold them inside or outside the superannuation environment. While accumulation funds are taxed concessionally, it may be even more tax effective holding them personally or in an entity controlled by the family.

This makes it essential to determine each client’s income stream history before providing advice.

1 Assumed GIC rate of 10.46%