The Transfer Balance Cap (TBC)
An Introduction
The introduction of the $1.6M "transfer balance cap" in the 2016 Federal Budget fundamentally involved placing a cap on the amount of money individuals could have within a tax free pension phase account from July 1, 2017.
There was previously no limit on how much superannuation could be held within an accumulation superannuation fund which was subject to a preferential tax rate of 15%. However, in February 2023 the Government announced that from 2025‑26, the concessional tax rate applicable to future earnings for balances above $3 million would be 30% and that this amount would not be indexed.
The TBC is not static and was structured to increase over time in line with the consumer price index (CPI) in $100,000 increments, and therefore slightly lag inflation. This is why the TBC for individuals commencing retirement incomes streams on or after July 1, 2021 increased to $1.7M, in line with proportionate increases in concessional and non concessional payment caps. Based on inflation movements the TBC increased to $1.9M from July 1, 2023.
Personal Balance Cap (Transfer Balance Account)
Account Based Pensions
Each individual has a "personal" transfer balance cap linked to the general transfer balance cap described above. While all fund members in receipt of a pension on 1 July 2017 had a personal balance cap of $1.6M other fund members have a cap which is dependent on when they first became entitled to a pension - based on the general transfer balance cap applying in the relevant financial year.
The transfer balance account operates in much the same fashion as a bank account - with transfers of assets into the retirement phase counting towards the cap; and transfers out counting as debits. Where an individual starts to have a transfer balance account and does not use the full amount of their cap, their remaining personal transfer balance cap is subject to "proportional indexation." Note that only the remaining cap space is subject to indexation. Probably the best way to understand this concept is by reference to an example provided in the original Explanatory Memorandum (EM) provided by the government (Example 1.2):
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Amy’s transfer balance account is credited by $800,000 in 2017-18. At that time, she has used 50 per cent of her $1.6 million personal transfer balance cap. When the general transfer balance cap is indexed to $1.7 million on July 1, 2021, Amy’s personal transfer balance cap is increased proportionally to $1.65 million. That is, Amy’s personal transfer balance cap is increased by 50% of the corresponding increase to the general transfer balance cap. As such, Amy can now contribute $850,000 without breaching her personal cap. |
This calculation becomes complicated given movements of the TBC over time and the super industry has lobbied for a simpler mechanism - but in the interim it is best just to refer to MyGov to determine how much "headroom" you still have available.
Conversely, note that if the balance in your pension accounts grows organically over time through investment earnings and exceeds your TBC, you won’t be considered to have exceeded the cap. Nor would any growth affect the cap space available - as this is determined at the time you commence the pension income stream.
Treatment of Defined Benefit Pensions
Different tax rules will apply if you receive certain defined benefit or income streams, principally because it is difficult or sometimes impossible to commute (convert to a lump sum) defined benefit pensions, the Government has sought to impose additional taxation on income streams that exceed a certain amount per annum, initially more than $100,000 per annum but this will increase with indexation.
As mentioned in Explanatory Memorandum (EM):
| The value of lifetime pensions and other defined benefit income streams is counted towards an individual’s transfer balance cap. Excess transfer balance tax is not imposed for a breach of the transfer balance cap that is attributable to certain defined benefit income streams. Excess defined benefit income instead is subject to additional income tax rules.” |
The tax payable on any excess income over $100,000 per annum depends upon whether the payments are coming from a taxed or untaxed superannuation fund.
Taxed Defined Benefit Pensions: Pensions are tax-free from age 60, up to an income cap - $118,750 per annum for the 2023/24 tax year. The cap is 1/16th of the general transfer balance cap for the financial year. If a recipient exceeds the income cap, 50% of the pension over the cap is counted towards the DB pensioner's assessable income and taxed at their marginal tax rate.
Untaxed Defined Benefit Pensions: These are typically pensions paid from government super funds, comprising unfunded defined benefit schemes and "constitutionally protected funds", and will continue to be taxed at full marginal rates, but a 10% tax offset is available, but has been capped at $10,000 since 1 July 2017.
Mixed Account Based and Defined Benefit pensions
It will be common for individuals who been employed in both the private and public sectors to have both account based and defined benefit pensions. In that situation, the defined benefit pension is multiplied by a factor of 16 to arrive at a valuation for transfer cap purposes. Therefore, add both the value of your account based pension(s) + your defined benefit annual pension multiplied by 16 together to arrive at your transfer balance account total.
If the cumulative balance exceeds your transfer balance cap, then you will be required to withdraw the excess from the super system, or transfer the excess to the accumulation phase, as explained below; using the account-based pension.
Transition to Retirement Income Streams
Note that Transition to Retirement (TRIP) income streams do not count towards the transfer balance cap, because from July 1, 2017 superannuation funds no longer received a tax exemption in relation to investment earnings on the assets supporting these income streams.
Breaching the Cap
Individuals that breach the transfer balance cap will have their superannuation income streams commuted (in full or in part) back to the accumulation phase and will be subject to excess transfer balance tax.
Again, probably the best way to understand how these breaches will be managed, is by reference to an example provided in an Explanatory Memorandum (EM) provided by the government (Example 1.14):
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On 1 July 2017, Rebecca commences a superannuation income stream of $1 million from the superannuation fund her employer contributed to (Master Superannuation Fund). On 1 October 2017, Rebecca also commences a $1 million superannuation income stream in her SMSF, Bec’s Super Fund. On 1 July 2017, Rebecca’s transfer balance account is $1 million. On 1 October 2017, Rebecca’s transfer balance is credited with a further $1 million bringing her transfer balance account to $2 million. This means that Rebecca has an excess transfer balance of $400,000. On 15 October 2017, the Commissioner issues an excess transfer balance determination to Rebecca 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 Rebecca know that if she does not make an election within 60 days of the determination date the Commissioner will issue a commutation authority to Bec’s Super Fund requiring the trustee to commute her $1 million superannuation income stream by $401,414. |
The "excess transfer balance tax" mentioned above is payable on the notional earnings of the excess amount in order to neutralise any benefit that might have been received by having the "excess capital" in a tax-free environment, rather than one where 15% tax is payable. The excess transfer balance tax is 15% on notional earnings for the first breach and 30% for second and following breaches.
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