How does the pension transfer balance cap actually affect me?

By Julie Hartley, Townsends Business & Corporate Lawyers

November 22 2016
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What does the pension transfer balance cap mean for new and current account-based pensions and transition to retirement pensions?

What happens to new pensions?

If a pension commences on or after 1 July 2017, the super fund paying the pension will notify the ATO that the pension has commenced and the initial balance of the pension. The ATO will create a transfer balance account for the taxpayer and credit the initial balance of the pension to the account. If the credit amount exceeds the transfer balance cap, the ATO will advise the fund of the excess portion and the fund will have to commute the excess portion and either transfer the commuted portion into accumulation phase or pay out the excess portion as a lump sum benefit (provided the member has met a condition of release). The ATO will also issue an assessment for excess transfer balance tax (taxed at 15 per cent).

If the taxpayer commences a second pension, the second pension initial account balance will be notified to the ATO and the same process will be repeated.

What happens to current pensions?

In relation to a current pension (i.e. a pension which commenced before 1 July 2017 and remains on foot after 30 June 2017), the paying fund will have to notify the ATO of the pension account balance at 30 June 2017, and the ATO will open a transfer balance account for the taxpayer and credit the 30 June 2017 balance to the transfer account.

The ATO will then determine the extent, if any, the pension is excessive and, if so, notify the fund paying the pension. The excessive portion must be commuted and transferred to either accumulation phase or paid as a superannuation lump sum. Excess transfer balance tax will then be imposed to claw back the earnings tax exemption which has applied since 1 July 2017 on the excessive portion.

What about transition to retirement pensions?

From 1 July 2017, these pensions will no longer be entitled to the earnings tax exemption. Consequently, while these pensions remain in the ‘transition’ phase the pension transfer cap is not relevant.

However, as soon as the transition phase ceases (because the taxpayer has attained age 65 or has retired), the pension is now an ordinary account-based pension and the trustee paying the pension will have to report to the ATO the date the transition phase ceased and the pension account balance at that date. From that point, the earnings tax exemption will apply.

In summary:

• Transition to retirement pension commenced before 1 July 2017 then:
• If the transition phase ceases before 1 July 2017, the pension will be an ordinary account-based pension at 1 July 2017 and the account balance at 30 June 2017 must be reported to the ATO; and
• If the transition phase ceases on or after 1 July 2017 – say for example on 30 September 2017 when the taxpayer attains age 60 – the pension will be an ordinary account-based pension on 30 September 2017 and the pension balance account at 30 September 2017 must be reported to the ATO.

• Transition to retirement pension commenced after 30 June 2017 then:
• At the time the transition to retirement pension commences, as the pension is not entitled to the earnings tax exemption, it is not required to be reported; and
• At the time the transition to retirement pension ceases – say on the retirement of the taxpayer on 31 December 2017 – then the pension will be an ordinary account-based pension on 31 December 2017 and the pension balance at 31 December 2017 must be reported to the ATO.

Julie Hartley, solicitor, Townsends Business & Corporate Lawyers

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Retirement