$1.6 Million Transfer Balance Cap

How does the transfer balance cap affect your SMSF and tax?

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$1.6 Million Transfer Balance Cap
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Transfer balance cap of $1.6 m

The $1.6 million transfer balance cap has been introduced in 2017 budget and limits the tax exemption for assets funding superannuation pensions.

This new limit on superannuation will applies from 1 July 2017 and creates additional responsibilities for SMSF trustees. The main issues you need to be aware of are:

  • All super fund members who are receiving a pension on 1 July 2017 will have a transfer balance cap of $1.6 million created at that time.
  • Those not receiving a superannuation pension on 1 July 2017, but will in the near future, their transfer balance cap will be created when they first receive a superannuation pension.
  • The amount of tax-exempt assets available to fund a super pension under the cap is determined by a system of debits and credits which are recorded in a transfer balance account.
  • Credits are created by:
  • The value of super assets supporting income streams on 30 June 2017,
  • Starting new superannuation income streams from 1 July 2017 onwards,
  • The value of reversionary income streams where an individual becomes entitled to them, and
  • Notional earnings accruing to excess transfer balance amounts.
  • Debits are created by:
  • Commutations of superannuation pensions,
  • Structured settle payments contributed to superannuation, and
  • Certain payments arising from family law splits, fraudulent or void transactions.
  • Reversionary pensions will count towards the cap, but members will have a 12 month period from the date of death to deal with the reversionary pension before a credit arises and counts towards their cap.

Going over the $1.6 million transfer balance cap will require the excess amounts to be removed from the retirement phase which will likely require the commutation of the relevant pension which has exceeded the cap.

Defined benefit pensions and certain pre-2007 superannuation pensions have special rules for the transfer balance cap recognising their non-commutable nature.

Any amounts in excess of a member’s personal transfer balance cap can continue to be maintained in their accumulation account in their fund.  This means if you have more than $1.6 million in super you can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase.

How can we help?

If you are concerned that the Government’s changes to the transfer balance cap affect you, please feel free to give us a call to arrange a time to meet so that we can discuss your particular requirements in more detail.

 

Frequently asked questions

You can have more than $1.6 million in superannuation, but you can only have up to $1.6 million in retirement funds used to commence a retirement income stream.

If you are in the fortunate position of having more than $1.6 million in superannuation, you can leave the remainder in your accumulation account and access it if you have retired after reaching your preservation age. The fund pays 15% tax on earnings in the accumulation phase rather than 0% if it was in retirement phase.

Any superannuation transferred into retirement phase from an accumulation account to support an income stream counts as a credit towards the cap.

Repayments from limited recourse borrowing arrangements will count as a credit towards the cap (see SMSFs section below).

Income earned does not count towards the cap though.

 

If you breach the cap you may receive an excess transfer balance determination from the Australian Taxation Office. But regardless of whether or not you receive a determination, you are required to pay tax on the excess transfer balance earnings for every day your account is in excess.