The Superannuation "Transfer Balance Cap"
The $1.6M Transfer Balance Cap (TBC) announced in the 2016 Federal Budget placed a cap on the amount of money individuals could have in their tax free pension phase account from July 1, 2017. The transfer balance cap of $1.6M is not intended to be static and will move in line with the consumer price index (CPI), but in $100,000 increments. At current CPI rates the next stepped increase is likely to take effect in the 2020-2021 financial year.
Personal Balance Cap (Transfer Balance Account)
Each individual will have a personal transfer balance cap linked to the general transfer balance cap. However, while all super members who are in receipt of a pension on 1 July 2017 will have a personal balance cap of $1.6 million other fund members will have a cap based on when they first became entitled to a pension and the general balance applying in the relevant financial year.
The transfer balance account is intended to operate in the same fashion as a bank account - with assets transferred into the retirement phase counting towards the cap; and transfers out counting as debits. Where an individual starts to have a transfer balance account and does not use the full amount of their cap, their personal transfer balance cap will be subject to "proportional indexation."
Probably the best way to understand this approach is by reference to an example provided in an Explanatory Memorandum (EM) provided by the Government (Example 1.2):
Amy’s transfer balance account is credited by $800,000 in 2017-18. At that time, she has used 50 per cent of her $1.6 million personal transfer balance cap.
When the general transfer balance cap is indexed to $1.7 million in 2020-21, Amy’s personal transfer balance cap is increased proportionally to $1.65 million. That is, Amy’s personal transfer balance cap is increased by 50 per cent of the corresponding increase to the general transfer balance cap. As such, Amy can now contribute $850,000 without breaching her personal cap.
Breaching the Cap
Individuals who breach the transfer balance cap will have their superannuation income streams commuted (in full or in part) back to the accumulation phase and will pay an " excess transfer balance tax".
Again, probably the best way to understand how these breaches will be handled, is by reference to an example provided in an Explanatory Memorandum (EM) provided by the government (Example 1.14):
On 1 July 2017, Rebecca commences a superannuation income stream of $1 million from the superannuation fund her employer contributed to (Master Superannuation Fund). On 1 October 2017, Rebecca also commences a $1 million superannuation income stream in her SMSF, Bec’s Super Fund.
On 1 July 2017, Rebecca’s transfer balance account is $1 million. On 1 October 2017, Rebecca’s transfer balance is credited with a further $1 million bringing her transfer balance account to $2 million. This means that Rebecca has an excess transfer balance of $400,000.
On 15 October 2017, the Commissioner issues an excess transfer balance determination to Rebecca setting out a crystallised reduction amount of $401,414 (excess of $400,000 plus 14 days of notional earnings). Included with the determination is a default commutation authority which lets Rebecca know that if she does not make an election within 60 days of the determination date the Commissioner will issue a commutation authority to Bec’s Super Fund requiring the trustee to commute her $1million superannuation income stream by $401,414.
The "excess transfer balance tax" above is payable on the "notional earnings" of the excess amount so that no benefit accrues from having had the "excess capital" in a tax-free environment, rather than an accrual account where 15% tax is payable.
In terms of expatriates, we would just stress that the TBC applies on an individual basis; providing couples with twice the available headroom should they be transferring pension funds and assets into superannuation prior to return/retirement in Australia.