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Transfer balance cap

Modifications for capped defined benefit income streams

Section: 19.17

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 only to capped defined benefit income streams.

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

The value of a client's excess transfer balance is calculated as the lesser of:

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

This ensures a client 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 commutable income streams.

To ensure equitable tax treatment of capped defined income streams with other types of retirement phase income streams, capped defined benefit income streams providing income may be subject to additional taxation on income payments exceeding $100,000 pa, depending on the tax components of the income stream and the age of the pensioner.

Excess transfer balance transitional rules

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

Where, at 1 July 2017, a client had 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 arose (and therefore no excess transfer balance tax was payable) provided no further transfer balance account credits arose, and the excess amount was removed from the retirement phase, by 31 December 2017.

It is important to note that access to the transitional rules was based on a client's existing transfer balance credits rather than their excess transfer balance. This means that where a client had a capped defined benefit income stream (commenced prior 1 July 2017) with a special value greater than $1.6 million, the full special value was taken into account when determining whether the client could access the transitional rules.

While a client wouldn't have had an excess transfer balance relating to their capped defined benefit income stream, it may have impacted their ability to use the transitional rules in respect of other income streams.

Example

At 30 June 2017, Greg had 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 were $2,080,000, he was unable to use the transitional rules, even though his excess transfer balance was only $80,000.

Last modified: Friday, November 16, 2018