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Transfer balance cap

Exceeding the transfer balance cap

Section: 19.9

Excess transfer balance

A client's transfer balance account is measured against their personal transfer balance cap on a daily basis. Where a client's transfer balance account exceeds their personal transfer balance cap on a particular day, the amount of excess plus a 'notional earnings amount' representing the earnings the excess amount generated in the tax-free pension environment, will be required to be commuted from one or more retirement phase income stream(s), either back to accumulation or out of the superannuation environment.

In addition, the client will generally be required to pay excess transfer balance tax on the amount of notional earnings.

Notional earnings

Notional earnings are calculated, on a daily basis, from the date the client first exceeds their transfer balance cap using the General Interest Charge interest rate (for the July -September 2017 quarter the annual GIC rate is 8.73%).

Notional earnings are used to determine how much excess transfer balance tax must be paid, and are themselves also a credit to a client's transfer balance account. However, the amount of notional earnings credited to a client's transfer balance account, and the amount of notional earnings a client pays tax on may differ.

Notional earnings for transfer balance account credits

The amount of notional earnings credited to a client's transfer balance account is the amount of earnings, calculated on a compounding basis, for the period from the date of breach to the earlier of:

  • the date of rectification, or
  • the date of the excess transfer balance determination from the ATO.

To rectify a breach, a client needs to commute the total of the original excess transfer amount plus the notional earnings credited to their transfer balance account. This is known as the crystallised reduction amount.

Disregarding some excess transfer balances

Where a client's transfer balance account exceeds their personal transfer balance cap, there are some situations where any excess is disregarded.

Excess transfer balance transitional rules

Transitional rules apply between 1 July 2017 and 31 December 2017 for clients who exceed their transfer balance cap by less than $100,000 on 1 July 2017.

Where, at 1 July 2017, a client has transfer balance credits of between $1,600,000 and $1,700,000 from retirement income streams commenced prior to 1 July 2017, no excess transfer balance will arise (and therefore no excess transfer balance tax will be payable) provided no further transfer balance account credits arise, and the excess amount is removed from the retirement phase, by the end of the six month period (ie by 31 December 2017).

It is important to note that access to the transitional rules is based on a client's existing transfer balance credits rather than their excess transfer balance. This means that where a client has a capped defined benefit income stream (commenced prior 1 July 2017) with a special value greater than $1.6 million, the full special value is taken into account when determining whether the client can access the transitional rules. While a client won't have an excess transfer balance relating to their capped defined benefit income stream, it will impact their ability to use the transitional rules in respect of other income streams.

Example

At 30 June 2017, Greg has an existing capped defined benefit income stream with a special value of $2 million, and an account based pension with a current value of $80,000. As Greg's total transfer balance credits at 1 July 2017 are $2,080,000, he is unable to use the transitional rules, even though his excess transfer balance is only $80,000.

Capped defined benefit income streams

A modification in the calculation of a client's excess transfer balance applies where the client has a capped defined benefit income stream, as they are generally non-commutable.

The modification prevents a client from having an excess transfer balance, to the extent the excess is attributable to capped defined benefit income streams.

This ensures they cannot breach their transfer balance cap if they only have capped defined benefit income streams. However, clients who also have other types of retirement phase income streams will be required to commute any excess amounts (to the extent possible) from those income streams.

To ensure equivalent tax treatment of capped defined income streams with other types of retirement phase income streams, a separate defined benefit income cap of $100,000 pa will apply. Broadly, pension payments over $100,000 pa will be subject to additional taxation, depending on whether they are from a taxed or untaxed pension.

The rules are complex where a client has both capped defined benefit income streams and other retirement phase income streams.

Excess transfer balance tax

Excess transfer balance tax applies to notional earnings at the standard rate of 15 per cent, as it is intended to neutralise the advantage of the tax-free pension environment.

However a tax rate of 30 per cent applies to additional breaches to discourage client's from intentionally breaching the cap.1

The ATO will issue an excess transfer balance tax assessment imposing the above mentioned tax liability after the breach has been rectified. An excess transfer balance tax assessment is due and payable 21 days after the ATO issues the assessment.

Where the amount of excess transfer balance tax is not paid by the required time, the general interest charge will start accruing on the unpaid amount.

1 This higher rates does not apply to excess transfer balance tax assessments in the 2017-18 financial year, where a rate of 15% applies to all assessments

Notional earnings for excess transfer balance tax

Excess transfer balance tax of 15% applies to the amount of notional earnings accrued from the date of the breach to the date the excess amount is removed (ie partial or full commutation of a retirement phase income stream(s)).

The amount of notional earnings used to calculate excess transfer balance tax may be higher than the amount credited to the client's transfer balance account and included in the ATO notice, where the retirement phase income stream is commuted after the ATO notice is issued. In other words, tax applies to notional earnings accrued between the date of breach and the date the breach is rectified.

Excess transfer balance determinations

Where a client has an excess transfer balance, the ATO will issue an excess transfer balance determination to the client.

The determination will specify the amount (known as the crystallised reduction amount) that must be commuted and removed from commutable retirement phase income streams.

The crystallised reduction amount is generally the amount of the excess plus the amount of notional earnings credited to the client's transfer balance account.

The determination will also include a default commutation notice. The ATO will issue a notice to the superannuation fund listed in the default commutation notice (generally the superannuation income stream provider that caused the excess transfer balance) to commute the crystallised reduction amount, unless the client makes a valid election to nominate another superannuation income stream.

Where a client is receiving multiple retirement phase income streams from different providers they can elect for the commutation authority to be issued to a different provider.

To be valid the election must be made to the ATO in the approved form within 60 days of the date of the excess transfer balance determination.

Funds must comply with a commutation authority

Once the member has made an election to choose a different fund or where the 60 day period has lapsed, the ATO will issue the commutation authority.

The trustee must generally comply and commute the amount specified in the notice within 60 days. A superannuation provider may choose not to comply with the commutation authority if the income stream is a capped defined benefit income stream.

The trustee is also required to notify the ATO of compliance with the notice within 60 days. During the 60 day period, there is an expectation that the fund will make reasonable efforts to contact the member to seek instructions (eg which investment option / product does the member want commuted). The commuted amount can then be rolled back to accumulation phase or paid as a superannuation lump sum benefit payment.

Where a fund fails to comply with a commutation authority, the entire income stream will cease to be in retirement phase (and no longer qualify for the earnings tax exemption), from the start of the financial year in which the fund failed to comply with the commutation authority and all later financial years. In this case the client's transfer balance account will be debited by the value of the income stream.

Last modified: Thursday, August 24, 2017