The transfer balance cap – how does it work again?

In the 2016 Federal Budget, the Australian Government introduced the transfer balance cap as part of a broader superannuation reform package. The transfer balance cap imposes a lifetime limit on the amount of superannuation that can be transferred into a tax-free retirement pension account. While it may appear straightforward, understanding its nuances is essential for effective retirement planning.

What is the transfer balance cap?

 

The transfer balance cap restricts the amount of superannuation savings that can be transferred into one or more retirement pension phase accounts. It is essential to understand that this cap doesn’t specify the total amount a member can have in a pension account; rather, it limits the amount that can be transferred into it.

Currently, the general transfer balance cap is set at $1.9 million. This cap applies individually, which means that a couple can collectively transfer up to $3.8 million into the pension phase if they begin their pensions today. If a member’s superannuation exceeds their personal transfer balance cap before starting a pension, the excess amount may stay in the accumulation phase or be withdrawn from superannuation.

When an individual starts a retirement phase income stream for the first time, their personal transfer balance cap will equal the general transfer balance cap at that time. However, the personal transfer cap will change based on usage and indexation, which we’ll explain in further detail.

How does it work?

 

The transfer balance cap applies when a member wants to transfer their super money from their Accumulation Account and start a Pension Account by capping the amount that can be moved into the Pension Account.  Once the Pension Account has started, the balance of that account can still grow beyond the cap, and the earnings will remain tax-free. It is important to remember that a member cannot top up their pension balance once they have used their full personal transfer balance cap, even if the balance subsequently falls due to unrealised losses or pension payments.

The ATO maintains a record of all members’ personal transfer balance caps, accessible through MyGov. The record includes balances from different superannuation funds. Additionally, self-managed super fund (SMSF) members must report specific events like starting an account based pension to the ATO. This reporting must be done quarterly as part of the transfer balance account report.

Interestingly, the transfer balance cap is not indexed in line with Average Weekly Ordinary Time Earnings, like other superannuation caps such as contributions. Instead, the general transfer balance cap is annually adjusted based on the Consumer Price Index (CPI) in increments of $100,000. The cap was introduced at $1.6 million on 1 July 2017, and now, thanks to the recent surge in CPI, it’s $1.9 million.

Now, let’s dive into indexation.

Since its establishment in 2017, the general transfer balance cap has been indexed twice, first to $1.7 million and then to $1.9 million. If a member has only used a portion of their personal transfer balance cap, any indexation increase is determined by the unused cap percentage. Put simply, if a member initially used 80%, then they can only use 20% of any subsequent indexation increase. Members who have already used up their personal transfer balance at a particular point in time won’t be eligible to use any subsequent indexation increases in the cap. It is important to note that various factors can affect the remaining personal transfer balance cap like starting another pension or taking a lump sum withdrawal.

 

What happens if you exceed the cap?

 

The complexity of the cap makes it easy to see how a member could unintentionally go over the limit. If the ATO finds that a member has exceeded the cap, they will get a notice called an ‘excess transfer balance determination’. This notice will show the excess amount, the estimated earnings on that excess, the deadline to fix it, and which superannuation fund will get the commutation authority if it’s not rectified on time.

To resolve, the member must commute the excess into a lump sum withdrawal or back into an Accumulation Account.  Once corrected, the member will receive an ‘excess transfer balance tax assessment’, essentially a 15% tax on the estimated earnings to replicate what would have happened if the excess had stayed in the accumulation phase. If the member exceeds the cap again, the tax goes up to 30%.

Opportunities?

 

The transfer balance cap is staying at $1.9m for the 2023/24 and 2024/25 financial years.  If a member has not fully utilised their transfer balance cap they are eligible to transfer more funds from the accumulation phase to the tax-free pension phase.   For anyone looking to retire and start a pension towards the end of the 2024/2025 financial year it may be worth considering delaying the start of their pension until the new financial year when hopefully the Cap will be indexed again. 

With indexing of other superannuation contribution limits recently announced for 2024/25, it’s an ideal time to think about making additional contributions so you can more super into the tax-free pension phase. Contact us if you have any questions regarding the next phase of your life

 

Source: Bell Potter

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