Transfer Balance Cap – what you need to know

The rules around accessing super can be complex, and the transfer balance cap is an important piece of the super puzzle. Understanding how it works is set to become a little more complicated from 1 July 2021 when the cap increases for the first time.

If you’re approaching retirement, you should understand how the transfer balance cap applies to your situation.

This article explores the transfer balance cap in more detail – what it is, how the increase might impact you and what happens if you exceed your cap.

What is the transfer balance cap?

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 out of super altogether, is because earnings on an account-based pension are tax free. So, keeping your retirement money in the super environment as long as possible is a more tax effective option.

On 1 July 2017, the Government introduced for the first time a limit on how much money an individual can transfer into the tax-free ‘retirement phase’ of super. This limit is known as the ‘transfer balance cap’ and was set at $1.6 million.

There continues to be no limit on how much super can be held in accumulation phase, which is subject to tax.

How does it work?

Once you commence a retirement income stream, the pension value is reported to the ATO. The ATO then creates a transfer balance account for you. Essentially, this is a ledger that keeps track of the movement of money in and out of the tax-free retirement phase.

For example, if you become eligible to access your super, and you transferred $1.2 million into a pension account, the value of your transfer balance account would be $1.2 million.

This balance may then go up or down based on certain credits or debits.

Rollovers to retirement income streams such as account-based pensions, lifetime annuities and deferred super income streams are recorded as credits (or increases) to this account while lump sum withdrawals or rollovers from these income streams are recorded as debits (or decreases). Pension payments made from the income stream and investment returns are not recorded and do not affect your transfer balance account. This means that the value of your transfer balance account will not necessarily remain the same as your pension balance.

What’s changing?

The $1.6 million cap introduced in 2017 was never designed to be static. It was always intended that the cap would increase over time in line with the consumer price index but in $100,000 increments.

The ATO announced recently that the general transfer balance cap will increase from $1.6 million to $1.7 million on 1 July 2021. This is the first time the transfer balance cap has been increased since it was introduced in 2017. And with that, comes additional complexity…

From 1 July 2021 there won’t be a single cap that applies to everyone. Each individual will have their own personal transfer balance cap of between $1.6 million and $1.7 million, depending on their circumstances. Your personal cap will be based on:

• The transfer balance cap at the time you first commence a pension
• Any indexation that is applied to the transfer balance cap, and
• The total amounts that you have transferred to retirement phase.

It’s important that you’re absolutely clear on your personal transfer balance cap, because if you transfer more money into retirement phase than your cap allows, penalties may apply.

If you’ve not yet started a transfer balance account

If you start a retirement phase income stream for the first time on or after 1 July 2021, you will have a personal transfer balance cap of $1.7 million.

If you’ve used 100% of your cap to date

If you started a pension (or pensions) and your transfer balance account reached $1.6 million in the last three years you’ve used 100% of your personal transfer balance cap. You will not benefit from the increase to the general transfer balance cap.

Can’t I just commute my pension and start a new one using the $1.7 million cap?

No, you can’t. The personal transfer balance cap is a lifetime cap. If you’ve accessed 100% of your personal cap up to 30 June 2021, your $1.6 million cap will remain in place always, and will never increase as a result of indexation.

If you’ve not used your full cap amount to date

If you started a transfer balance account and have not used the full amount of your cap, your remaining personal transfer balance cap will be subject to “proportional indexation.” This means that only the remaining cap space is subject to indexation. The best way to understand how this works is through an example.

Amy’s transfer balance is credited $800,000 on 18 November 2017. As Amy has not made any other transfers to her retirement phase account, her highest transfer balance is $800,000. This equates to 50% of the $1.6 million cap at that time.

In 2020–21, the transfer balance cap is indexed to $1.7 million, equating to an increase of $100,000. Amy’s personal transfer balance cap is increased proportionally to $1.65 million, which is an increase of $50,000 (50% × $100,000).

What happens if I breach the cap?

If you breach your personal transfer balance cap, you become liable to pay excess transfer balance tax.

This would apply only to the amount by which you are exceeding the cap. Currently, the excess transfer balance tax rate is 15% the first time you go over the cap, and 30% on subsequent occasions.

In addition, if you meet or exceed the transfer balance cap, you would permanently lose your entitlement to increase your transfer balance cap by indexation in future years.

If you exceed the cap, the ATO says you must commute (or stop) a portion of your super income stream in order to reduce the value of your transfer balance account.

The following example explains.

Tom is a member of both an industry fund, and his own SMSF. On 1 July 2019, Tom commences a super income stream of $1 million from his industry fund. On 1 October 2019, Tom also commences a $1 million super income stream in his SMSF.

On 1 July 2019, Tom’s transfer balance account is $1 million. On 1 October 2019, Tom’s transfer balance is credited with a further $1 million bringing his transfer balance account to $2 million. This means that Tom has an excess transfer balance of $400,000.

On 15 October 2019, the ATO issues an excess transfer balance determination to Tom 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 Tom know that if he does not make an election within 60 days of the determination date the Commissioner will issue a commutation authority to Tom’s SMSF requiring the trustee to commute his $1 million superannuation income stream by $401,414.

Need further help?

If you feel this is all a little complicated, you’re right – it is. If you’re thinking of starting a retirement income stream, talk to your super fund or your adviser first. Ensure you understand how the transfer balance cap applies to you, so you don’t inadvertently exceed your cap.

General disclaimer

This content is intended only to provide a summary and general overview of the subject matter covered. It is not intended to be comprehensive nor does it constitute advice. We attempt to ensure that the content is accurate and current but we do not warrant the content nor its currency. You should seek professional advice before acting or relying on any of the content.