To ensure fairness and sustainability within the superannuation system, the Australian Taxation Office (ATO) has implemented transfer balance account rules. These rules limit the amount of money that can be transferred to the tax-free retirement phase account, known as the transfer balance cap. Currently, the cap stands at $1.9 million as of 1 July 2023.
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Understanding Transfer Balance Account Rules
As of 1 July 2023, the transfer balance cap rules for retirement phase pensions have undergone two important changes. These changes have implications for individuals who have already commenced receiving a retirement phase pension and those who will start receiving it on or after 1 July 2023.
The first change involves the indexation of the general transfer balance cap to $1.9 million. This indexation occurred due to sufficient recent increases in the Consumer Price Index (CPI). It is the second time this indexation has taken place. The increased general transfer balance cap of $1.9 million will be applicable differently to individuals based on when they started receiving their retirement phase pension.
The second change focuses on updating the event-based reporting rules for Self-Managed Superannuation Funds (SMSFs) from 1 July 2023. This update requires all SMSFs to report events affecting retirement phase pensions within 28 days after the end of the quarter in which the event occurs. This change primarily affects SMSFs that were previously eligible to report such events on an annual basis.
How is it calculated?
The transfer balance cap is calculated based on the balance of a member’s transfer balance account at any given time. The transfer balance account is the sum of credits minus the sum of debits. If the balance of a member’s transfer balance account exceeds their transfer balance cap, they are considered to have an ‘excess transfer balance’ amount.
When a member exceeds their transfer balance cap, excess transfer balance earnings start to accrue immediately on the excess amount. These earnings are calculated based on an earnings rate tied to the general interest charge (GIC). The amount of excess transfer balance earnings accrued for each day is credited to the member’s transfer balance account.
To rectify the situation of exceeding the transfer balance cap, the member is required to remove the excess transfer balance amount. This can be done by partially commuting the pension back to accumulation phase or completely withdrawing the amount from the superannuation system, if permitted. If the member does not take any action within 60 days of receiving an excess transfer balance tax determination from the ATO, a commutation authority will be issued to the fund, requiring them to commute the specified amount within 60 days.
2 ways to start Pension
When your pension account balance exceeds the transfer balance cap, you may be concerned about your options for starting a pension. Fortunately, there are two methods available that enable you to commence a pension without the need for special counsel. Let’s explore these methods and understand the benefits they offer:
Method 1: Pension Transfer as Retirement Fund
Under ordinary circumstances, when a pension account balance exceeds the transfer balance cap, the transfer balance account rules come into play, and the cap becomes relevant. However, if you wish to start a transition to retirement pension, there is a way to bypass these rules.
A transition to retirement pension does not receive the earnings tax exemption, making the transfer balance account rules irrelevant in this case. This means that even if your account balance exceeds $1.9 million, you can still commence a transition to retirement pension.
One of the primary advantages of this method is that you can access your preserved pension account while still working. If you have attained the age of 60 by the time the pension commences, you can withdraw between $100,000 to $250,000 in tax-free pension payments. These amounts are based on the minimum drawdown rates that a transition to retirement pension must satisfy.
It is important to note that once you reach the age of 65, the transition to retirement pension will be entitled to the earnings tax exemption, providing further tax benefits. However, keep in mind that starting a transition to retirement pension with an account balance exceeding $1.9 million may result in an excess transfer amount. In such cases, the pension will need to be partially rolled back or cashed out to remove the excess amount. This ensures compliance with the transfer balance account rules.
Method 2: Negative Transfer Balance Account Before Pension Commencement
Another way to start a pension when your account balance exceeds the cap is by having a negative transfer balance account before the pension commences. This scenario arises when you have previously begun a retirement phase pension that has exhausted the transfer balance cap, and then the pension is rolled over.
For instance, let’s consider a situation where you initially started an account-based pension when you turned 65, with a balance of $1.9 million. Since this is your first pension, the ATO creates a transfer balance account for you, equivalent to $1.9 million, which exhausts your transfer balance cap space. Over the course of three years, your pension account grows to $2.3 million.
In this scenario, if you decide to roll over your existing pension and commence a new pension, you will have a negative transfer balance account. This means that the excess amount above $1.9 million is no longer counted towards your transfer balance cap. As a result, you can start a new pension with the remaining balance without exceeding the cap.
By leveraging a negative transfer balance account, you can effectively navigate the limitations posed by the transfer balance cap and still initiate a pension with a balance that exceeds $1.9 million. This allows you to maintain control over your retirement savings and maximize the benefits of tax-efficient pension payments.
About Us
At MintSuper, we understand the intricacies of the superannuation landscape and are here to guide you through the process. Our experienced team is well-versed in navigating the transfer balance account rules and can provide expert advice tailored to your unique situation.
If you find yourself in a position where your pension account exceeds the transfer balance cap, don't panic. There are options available to you that allow you to commence a pension without requiring special counsel. Whether it be through the utilization of a retirement pension or a negative transfer balance account, our team can help you make well-informed decisions and optimize your retirement strategy.
To learn more about how MintSuper can assist you in managing your SMSF and ensuring compliance with superannuation regulations, please visit our website at www.mintsuper.com.au. We are dedicated to providing top-tier SMSF auditing services and supporting your financial freedom in retirement.
Take control of your superannuation journey with MintSuper. Contact us today to explore your options and secure a prosperous future.
Frequently Asked Questions (FAQ)
Q: How do the transfer balance cap rules apply to retirement phase pensions?
A: The transfer balance cap rules are applied to retirement phase pensions by measuring the balance of a member’s transfer balance account against their transfer balance cap. If the balance exceeds the cap, the member has an ‘excess transfer balance’ amount. Excess transfer balance earnings will accrue on the excess amount and the member will be required to remove the excess transfer balance from the retirement phase.
Q: What happens if the transfer balance cap is exceeded?
A: If the transfer balance cap is exceeded, excess transfer balance earnings start to accrue on the excess amount. The member will be required to rectify the situation by partially commuting the pension back to accumulation phase or completely withdrawing the excess amount from the superannuation system, if permitted. Failure to take action within 60 days of receiving an excess transfer balance tax determination from the ATO may result in a commutation authority being issued to the fund, requiring them to commute the specified amount within 60 days.
Q: Can I start a pension if my account balance exceeds the transfer balance cap?
A: Yes, there are ways to start a pension even if your account balance exceeds the transfer balance cap. One option is to start a retirement pension, as these pensions do not receive the earnings tax exemption and, therefore, the transfer balance cap does not apply. Another option is to have a negative transfer balance account before the pension commences, which can occur if you had previously commenced a retirement phase pension that fully utilized the transfer balance cap and then rolled it over.
Q: What is the benefit of starting a retirement pension?
A: The primary benefit of starting a retirement pension is that it allows you to access your preserved pension account. If you have reached the age of 60 when the pension commences, you can enjoy tax-free pension payments ranging from $100,000 to $250,000, based on the minimum drawdown rates required for a transition to retirement pension. This provides a tax advantage while still keeping your pension account intact. However, it’s important to note that once you turn 65, the transition to retirement pension will be entitled to the earnings tax exemption.
