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Transfer balance cap

Modifications for capped defined benefit income streams

Section: 19.17

Where a member only holds capped defined benefit income stream(s), a modification applies to ensure that they will not be subject to excess transfer balance tax where the balance of their capped defined benefit income stream(s) exceeds their personal transfer balance cap.

However, where a member has one or more capped defined benefit income streams as well as one or more types of non-capped defined benefit income streams, such as an account based pension, they will have an excess transfer balance amount to the extent that it can be attributed to non-capped defined benefit income stream(s).

Modified excess transfer balance

Where a member holds a capped defined benefit income stream, the value of the member's excess transfer balance is calculated as the lesser of:

  • the value of their transfer balance account minus their personal transfer balance cap, or
  • the value of their transfer balance account minus their capped defined benefit balance.

The 'capped defined benefit balance' is the sum of all transfer balance credits and debits in respect of all of their capped defined benefit income streams.

Example: Excess transfer balance, capped defined benefit income streams and no other income streams held

At 30 June 2017, Alice was receiving a lifetime pension (capped defined benefit income stream) with a special value of $1,700,000. She did not have any other income streams.

As Alice held a capped defined benefit income stream, the amount of excess transfer balance was calculated as the lesser of her:

  • transfer balance account - personal transfer balance cap, or
  • transfer balance account - capped defined benefit balance.

Therefore, the amount of her excess was the lesser of:

  • $1,700,000 - $1,600,000 = $100,000
  • $1,700,000 - $1,700,000 = $0

Although Alice's transfer balance account exceeded her $1.6 million transfer balance cap by $100,000 on 1 July 2017, she does not have an excess transfer balance as the excess is entirely attributable to a capped defined benefit income stream.

Example: Excess transfer balance, capped defined benefit income streams and other income streams

Continuing on from the previous example, if Alice commenced a $200,000 account based pension on 1 June 2019, her transfer balance account would be:

  • Lifetime pension $1,700,000
  • Account based pension $200,000
  • Total $1,900,000

As Alice holds a capped defined benefit income stream, the amount of excess transfer balance is calculated as the lesser of:

  • transfer balance account - personal transfer balance cap, or
  • transfer balance account - capped defined benefit balance.

Therefore, the amount of excess is the lesser of:

  • $1,900,000 - $1,600,000 = $300,000
  • $1,900,000 - $1,700,000 = $200,000.

Alice has an excess transfer balance of $200,000, attributable to her account based pension. Alice needs to commute the $200,000 plus any notional earnings, and may be subject to excess transfer balance tax.

What if the balance of the other income streams is less than the excess?

Where a member has both capped defined benefit income streams and other income streams, and they have an excess transfer balance, they will be required to commute the excess amount from their non-capped defined benefit income streams.

However, where the value of their non-capped defined benefit income streams is less than the amount of excess (eg due to paying income stream payments or investment losses), and they only have superannuation remaining in capped defined benefit income streams, the ATO will issue a notice creating a debit equal to the amount of the excess in the member's transfer balance account. The result is that the member will cease to have an excess.

Example: Excess transfer balance when other income streams are nil

Following on from the previous example, if the balance of Alice's account based pension was insufficient to transfer the full $200,000 plus notional earnings back to accumulation, her account based pension provider would act upon the commutation authority by commuting her pension in full and notifying the ATO.

Let's say that after the commutation of the account based pension, Alice had a remaining excess transfer balance of $2,000. In this case, the ATO would debit $2,000 from Alice's transfer balance account, effectively writing off the remainder of the excess.

Last modified: Thursday, July 25, 2019