Since 01/07/2017 there has been a limit on the total amount of superannuation assets that can be transferred into retirement phase – the transfer balance cap. Until indexed, this cap is $1.6 million. A transfer balance account is maintained by the ATO to record events that count towards an individual’s transfer balance cap. A transfer into retirement phase is a credit and certain transfers out (such as commutations) are debits.
If one had retirement phase assets of more than $1.6 million at 01/07/2017, the excess would normally be rolled back into an accumulation account or withdrawn. However, things are more complex with legacy defined benefit pensions that can’t be commuted except to start new equivalent income streams. These “capped defined benefit income streams” have additional tax liabilities instead of retirement phase asset removal. For example, a lifetime income stream over $100,000 p.a. has 50% of the annual income stream over $100,000 taxed at the person’s marginal tax rate. PAYG withholding and summary obligations apply to the fund trustees.
For reasons that are hard to understand, a pre-existing market-linked pension (TAP) at 01/07/2017 was classified as a capped defined benefit income stream. Its’ TBC debit is the annual next pension amount multiplied by the remaining term of the pension in whole years. This debit is more than the account balance. Any market linked pension started after 1 July is not a capped defined benefit income stream and has a TBC credit based on the purchase price. However, the legislation was deficient resulting in a double count for TBC purposes on a market linked pension rollover. As a stop gap measure via CRT Alert 066/2018 the ATO announced they would not take compliance action if the fund does not report the transfer balance account events of the commutation or the commencement of the new market linked pension. The permanent fix will be via legislation and it will have a retrospective 01/07/2017 effective date.
Based on lapsed draft legislation before the Federal election, the following is how the new legislation is likely to operate. The transfer balance account debit will be the debit value of the superannuation interest that supported the superannuation income stream just before the commutation takes place. This is:
- The original transfer credit; less
- The amount of any transfer balance debits that have arisen in respect of the pension; less
- The total amount of superannuation income stream benefits the person was entitled to receive before the start of the financial year in which the commutation takes place; less
- The greater of the superannuation income received in the financial year in which the commutation takes place or the minimum amount required to be paid to them under the regulations.
For a partial commutation, the transfer account debit is the lesser of the full commutation debit value or the amount of the superannuation lump sum that results from the partial commutation.
Caution is still needed as it may not be possible to commence a new market linked pension without causing an excess transfer balance which can’t be removed due to the non-commutable nature of market linked pensions.
As we did last year with actuarial exempt pension income percentage and adequacy end of year certificates, we will keep an eye open for situations where a better client outcome exists. NetActuary is keen to be the legacy pension specialist.
Brian Bendzulla