Super Reforms - How does the Transfer Balance Cap affect you?
One of the new super reforms getting a decent amount of attention from industry experts and media is the new transfer balance cap (TBC). It limits the total balance that any individual can roll into a tax-free income stream to $1.6m. From 1 July 2017, every time any Australian rolls accumulated super into a pension, the transfer balance will be recorded. There’s no limit on the number of times you can transfer accumulated super into pension phase, as long as the $1.6m cap is not exceeded1.
For Australians already in pension phase, if your balance is over $1.6m, you must commute (remove) enough funds to bring your balance under the cap by 1 July 2017.
“There’s no limit on the number of times you can transfer accumulated super into pension phase, as long as the $1.6m cap is not exceeded.”
Why the Transfer Balance Cap?
Right now, people with large (even enormous) super balances can roll their entire savings into pension phase and enjoy entirely tax free pension income. The super reforms seek to create some equality around this behaviour, by limiting the amount of tax concessions high balance holders are entitled to. Individuals with high balances will now have to keep their extra savings in accumulation where it’s subject to 15% tax on earnings, or removed from super altogether as a lump sum2.
The government has provided transitional CGT relief for those individuals required to commute a portion of their balance. We will discuss this in detail in a later blog.
Any individual with a superannuation pension valued at over $1.6m should immediately begin taking steps to reduce the balance of their account to less than $1.6m before 1 July. If the cap is breached by less than $100,000 you have up to six months to bring your balance under $1.6m and suffer no penalty.
Case Study: Erin has $1.67 of superannuation in pension phase at 30 April 2017. If she reduces her balance to $1.6m or below by 31 December 2017 she will suffer no penalty, nor will she be subject to excess earnings tax.
Tip: don’t exhaust your personal transfer balance and give yourself some CPI wiggle room
The general transfer balance cap (TBC) will be indexed to CPI and grow in increments of $100,000. If you’ve exhausted your personal transfer balance cap you’re not eligible for any cap indexation and limited from adding any further funds to a superannuation income stream, but if you choose not to use up your entire TBC you can take advantage of the rising cap as CPI increases1.
Case study: Greg begins a pension in mid July 2017 with a transfer balance of $1.3m. He’s used up 81.25% of his TBC and has 18.25% left. In 2020 CPI has increased the general TBC to $1.8m. Greg can transfer up to $337,500 (1.8m x 18.25%) into an account based pension without breaching his personal TBC.
Growing investments does not mean a breach of cap
If the investments that make up your pension account balance grow in value and the balance exceeds $1.6m, this does not constitute a breach of the cap and funds are not required to be withdrawn1.
Case study: Andy’s superannuation pension account balance is valued at $1.54 million at 1 July 2017. At 1 July 2018, it’s valued at $1.61 million due to growth in the value of his investments. Andy is not in breach of the TBC.
Caution: taking advantage of CPI and transferring more funds into a pension as the TBC increases could be a savvy move, but be aware of the impact of the 15% tax payable on any earnings you retain in accumulation.
Tough rules for the bereaved
An area which some authorities consider harsh on retirees relates to those who have recently lost a spouse. When a bereaved spouse is entitled to a death benefit pension and yet already has a super balance of their own, both balances count toward their TBC. Bereaved spouses have just six months under the new laws to bring their new balance (death benefit pension plus existing pension) under $1.6m. Considering it can take over 12 months to arrange estate planning, this seems like an onerous task to place on a grieving widow or widower3.
Are there penalties if the cap is breached?
If your transfer balance exceeds $1.6m the Commissioner for Taxation will direct your income stream provider to commute your balance by the amount of the excess. Excess transfer balance tax is payable on any earnings above the cap to neutralise the benefit you have received from excess earnings in the tax-exempt pension phase1. If your breach is less than $100,000 you have a grace period of six months. But if you have a significant super balance, you will need to act now, giving yourself enough time to decide how you want to arrange your affairs and then put your plan into action.
The federal government insists that such a small percentage of Australians have a super balance close to $1.6m that these new rules will impact only a small (1%) slice of the population. Trish Power from Superguide believes this is a sledgehammer approach, with negative impact for many Australians (far more than the expected 1%), potentially making compliance difficult for many Australians3.
Whether you’re in favour of the new TBC or not, it will be part of the super rules from 1 July 2017. It’s important to speak to your financial adviser if you think you may be in any likelihood of breaching or even coming close to your transfer balance cap. The rules are complex and penalties are strict3, and we highly recommend you begin preparing for the changes ahead.
Are you ready for the new super reforms? The new super rules are complex and penalties are strict, and we highly recommend you begin preparing for the changes ahead. Do you think the transfer balance cap is a harsh measure?
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