The super 'transfer balance cap' explained

21 Mar 2019

By Shadforth Financial Group

When reaching retirement, one way to access your super is through a retirement income stream, such as an account-based pension which provides a regular income in retirement. One of the reasons it’s a popular choice, compared to taking a lump sum, is because earnings on an account-based pension are tax-free.

Since 1 July 2017, the Government has placed a cap on how much super you can hold in a tax-free retirement income stream.

What is the cap?

You can now have up to $1.6 million1 in a retirement income stream. This restriction is called the ‘transfer balance cap’ and does not affect the amount you can
hold in your super accumulation account (pre-retirement account) where earnings are generally taxed at 15%.

How does it work?

Once you commence a retirement income stream, the transfer amount or pension value is reported to the Australian Taxation Office (ATO). The ATO then creates a transfer balance account for you. This is a ledger that keeps track of the movement of money in and out of the retirement phase, that is, in the tax-free environment. Rollovers to retirement income streams such as accountbased pensions, lifetime annuities and deferred super income streams are recorded as credits to this account while lump sum withdrawals or rollovers from these income streams are recorded as debits. Pension payments made from the income stream and investment returns are not recorded in your transfer balance account.

Case study

Sam, age 65, commences an account-based pension with his super fund with a value of $1 million on 1 July 2019. Consequently, his transfer balance account is created by the ATO with an initial credit of $1 million on 1 July 2019.

To comply with pension rules, he must withdraw minimum payments on a yearly basis. In his case, he needs to withdraw a minimum of $50,000 per year (5% of $1 million). The ATO does not record a debit against the transfer balance account for the pension payments.

However, if by 1 August 2019 Sam needs to withdraw an extra $100,000 more than his minimum pension amount, for example to meet his living expenses or to give his children a gift, he will have the choice of taking this extra $100,000 as an additional pension payment or as a lump sum. The important difference is that pension payments are not recorded as a debit on his transfer balance account, whereas if he chooses to take out a lump sum then a debit will be recorded against his transfer balance account.

So, if Sam opts to withdraw a lump sum then a debit of $100,000 will be recorded on his transfer balance account, with his resulting balance now $900,000 ($1 million minus $100,000). This means that Sam will have unused cap space in his transfer balance account of $700,000 ($1.6 million minus $900,000). He can use this space later to commence another income stream up to the unused amount in his transfer balance account. If Sam takes the additional amount as a pension payment, his transfer balance account will stay at $1 million.

DateCreditDebitBalance Un-used cap amount
1 July 2019 $1,000,000 - $1,000,000 $600,000
1 August 2019   -$100,000 $900,000 $700,000

Excess transfer balance tax

If the total value of credits less the total value of debits, at any particular time, is above your transfer balance cap then you will be considered as having an excess transfer balance amount. If this happens, the ATO will write to you and request that you remove the excess amount plus a calculated earnings amount by either withdrawing it as a lump sum or rolling it back in to accumulation phase. A 15% excess transfer balance tax on earnings will also apply. If you exceed the cap a second time, the tax amount could rise to 30%.

What if you’re a beneficiary of an income stream?

If you receive a death benefit pension as a beneficiary, you need to be careful that you do not exceed your individual transfer balance cap. This is because any death benefit pension you receive is added towards your transfer balance account.
Case study

On 1 August 2019, Mary commences a $1 million account-based pension and has a transfer balance of $1 million.

Unfortunately, Mary’s spouse, David, dies on 1 July 2020, leaving super of $700,000. Mary decides to commence a death benefit pension with David’s super on 31 July 2020 with the same amount, so Mary’s transfer balance account shows:

DateCreditDebitBalance Un-used cap amount
1 August 2019 $1,000,000 - $1,000,000 $600,000
31 July 2020 $700,00 - $1,700,000 -$100,000

As Mary’s transfer balance account now has a balance of $1,700,000, it exceeds the transfer balance cap of $1,600,000 , and she may be liable to pay tax.

With some planning, to avoid this excess from occurring, Mary could have reduced her transfer balance account before receiving the death benefit pension or commenced a death benefit pension with only part of the death benefit (up to the cap) and receive the remaining death benefit as a lump sum.

If you are considering commencing a retirement income stream or are a beneficiary to an income stream, please contact us and we can help you to avoid exceeding the transfer balance cap and the penalties that may apply.

We can also help you make the most of the cap and the associated tax benefits.

1 The transfer balance cap for the 2018–19 financial year is $1.6 million. This article assumes the cap will remain at $1.6 million for the 2019–20 financial year.

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