Transfer balance cap
What to do if an excess transfer balance determination is issued
Where a member receives an excess transfer balance determination from the ATO, tax will be minimised by taking action as soon as possible.
How long does a client have to respond to an excess transfer balance determination?
A member has 60 days from the issue date shown on the excess transfer balance determination to take any action. This 60 day period is known as the 'determination period'.
What happens if the client does nothing in the determination period?
If no action is taken by the client, the ATO will issue a compulsory commutation authority to the income stream provider(s) at the end of the 60 day determination period, requiring the excess amount and notional earnings to be commuted within a further 60 days. This delay in commuting the required amount will mean notional earnings will accrue for up to an extra 120 days. This means the member will pay more excess transfer balance tax than if they had voluntarily commuted the amount as soon as possible.
Recommended action to take upon receiving an excess transfer balance determination
The following actions are recommended to minimise excess transfer balance tax:
Voluntarily commute the amount indicated in the determination as soon as possible
Within 60 days of the issue date of the excess transfer balance determination, the member may instruct one or more of their retirement phase income stream providers to commute the amount indicated in the determination. The commutation may be received as a lump sum or rolled back to the accumulation phase (if not a death benefit income stream) and must be processed within the 60 day determination period.
The voluntary commutation may be made from one or more of any of the client's retirement phase income streams and does not have to be the income stream specified in the default commutation notice included with the excess transfer balance determination.
Pension payments do not reduce a client's excess transfer balance account
Remember that a reduction in the member's transfer balance account arises at the time a superannuation lump sum is received by a client (either as a lump sum or credited to their superannuation accumulation account) and not at the time a member instructs the superannuation income stream provider to commute a superannuation income stream. Members will need to account for any processing time required to receive the commutation within the 60 day period.
In the case of an account based pension, prior to a full or partial commutation, either a pro-rated minimum income payment must have already been paid during the financial year or the remaining account balance must be sufficient to ensure that at least the minimum annual payment could be paid.
Notify the ATO, in the approved form, of voluntary commutations made in the 60 day determination period
If a voluntary commutation is made within the 60 day determination period, in response to an excess transfer balance determination, the income stream provider's reporting of that event may not be submitted to the ATO within the 60 day determination period. This could lead to the ATO issuing an irrevocable commutation authority to the fund for an amount that has already been commuted.
To eliminate the possibility of this scenario, members should notify the ATO, in the approved form, of transfer balance debits made during the 60 day determination period.
Alternative courses of action
Elect to have the amount commuted from an alternative retirement phase income stream(s)
An excess transfer balance determination will include a default commutation notice. If a member has more than one retirement phase income stream, and does not want commutations made from the income stream specified in a default commutation notice, the member may elect which of their other retirement phase income streams is to be fully or partially commuted. This election is a 'section 136-20 election'.
However, by simply making a voluntary commutation directly with the preferred retirement phase income stream provider (rather than submitting a section 136-20 election), the member can minimise the time taken to commute the required amount, which will minimize accrued notional earnings and minimise excess transfer balance tax.
Objecting to an excess transfer balance determination
Where it is apparent that the ATO did not know about, or did not take into account, certain debits that arose prior to the ATO issuing an excess transfer balance determination, or made an error in making the determination, a member may wish to lodge an objection.
Member have 60 days from the date the determination was served on them to lodge an objection against the determination. See the ATO Objection form for taxpayers for further details.
Keep in mind that excess transfer balance tax may continue to accrue in the time it takes to process an objection. If the member's objection fails, there will be more excess transfer balance tax to pay.
Members are required to report certain transfer balance account events to the ATO themselves. Consult with the member to identify any missing transfer balance debits. Use the ATO form Transfer balance event notification form to report any of the events below directly to the ATO:
- structured settlement contributions made before 1 July 2007
- any of the following events that occurred on or after 1 July 2017:
- family law payment split
- the value of the client's retirement phase income stream reduced because of an act of fraud or dishonesty where the offender has been convicted
- the value of the client's retirement phase income stream reduced because some or all of the assets supporting the retirement phase income stream have been made available to the client's trustee in bankruptcy.
Last modified: Thursday, July 25, 2019