Transfer Balance Cap

Budget measure

  • Introducing a $1.6 million superannuation Transfer Balance Cap to restrict the total amount of superannuation an individual can transfer into retirement phase accounts. See Introducing a $1.6 million transfer balance cap on the Budget 2016–17 website fact sheet page.
  • A number of similar changes will apply to defined benefit superannuation arrangements. See Changes to defined benefit schemes on the Budget 2016–17 website fact sheet page.

Our understanding

The Transfer Balance Cap (TBC) is a new concept in superannuation. It is a limit that will apply to the total amount of superannuation that can be transferred into a superannuation income stream or pension product (a ‘retirement phase account’). The cap will apply to all members with a retirement phase account on or after 1 July 2017. These changes will apply to all CSS pensions, although some modifications will be applied for reversionary and invalidity pensions. These will be discussed in a future update once the specifics of these modifications are known.

The effect of the TBC is to restrict the amount of superannuation that can be transferred into the retirement phase. It will not restrict how much money can be held in superannuation in general. This measure will have no impact on the payment of superannuation lump sum benefits, or balances in the accumulation phase.

The TBC applies collectively to all retirement phase accounts a member holds. For account based pensions, the equity used to purchase the pension (or the value of the retirement phase account on 1 July 2017 for existing pensioners) will be reported against the cap. However, CSS pensions are classed as defined benefit pensions. These are unallocated, so a valuation needs to be performed. Our current understanding is that the valuation will be determined as;

  • For new pensioners after 1 July 2017, the first full fortnightly payment (less any backdated arrears) annualised and multiplied by a factor of 16
  • For existing pensioners on 1 July 2017, the gross annual pension as at 30 June 2017 multiplied by a factor of 16

Where a member exceeds the TBC, they will be required to move the excess amount back into the accumulation phase, or withdraw the amount as a lump sum. As a CSS pension cannot be commuted, restrictions will instead be placed on tax offsets to replicate the effect of the $1.6 million cap.

From 1 July 2017, defined benefit pensions over $100,000 per annum will be subject to additional tax. Our current understanding is that these changes will only affect recipients who are over age 60, or recipients of reversionary pensions that have over-60 tax treatment applied.

50% of any amount of a taxed pension (your taxable taxed and tax-free elements) over $100,000 per annum will be included in the recipient’s assessable income. Any amount of an untaxed pension over $100,000 per annum will be taxed at full marginal tax rates (with no 10% offset). For hybrid taxed/untaxed pensions over $100,000, the untaxed component will be stacked on top of the taxed component.

Below are two examples based on our current understanding:

Example 1 – Member aged 60, Taxable Untaxed Component exceeds $100,000 cap
ComponentValue (yearly)Value (fortnightly)
^ calculated based on fortnightly PAYG rates for 16/17 FY
Tax Free Component (TF) $30,000 $1,153.85
Taxable Taxed Component (TT) $60,000 $2,307.69
Taxable Untaxed Component (TU) $90,000 $3,461.54
Total Pension $180,000 $6,923.08
Assessable $90,000 (TU) $3,461.54
Marginal Tax Rate ^ $22,776.00 $876.00
Offset $1,000 ($10K TU below cap x 10%) $38.00 (rounded)
Tax to be withheld $21,776.00 $838.00

Both the Tax Free ($30,000) and Taxable Taxed ($60,000) components will remain tax free as they are under the $100,000 threshold. The remaining $10,000 of the threshold will be made up of the Taxable Untaxed component. This means the remaining $80,000 of the Taxable Untaxed component will be taxed at full marginal rates and will not be eligible for the 10% offset.

Example 2 – Member aged 60,Taxable Taxed and Untaxed Components exceeds $100,000 cap
ComponentValue (yearly)Value (fortnightly)
^ calculated based on fortnightly PAYG rates for 16/17 FY
Tax Free Component (TF) $40,000 $1,538.46
Taxable Taxed Component (TT) $70,000 $2,692.31
Taxable Untaxed Component (TU) $100,000 $3,846.15
Total Pension $210,000 $8,076.92
Assessable $105,000 (TU + 50% of TT excess) $4,038.46
Marginal Tax Rate ^ $28,652 $1,102.00
Offset Nil Nil
Tax to be withheld $28,964 $1,102.00

The Tax Free ($40,000) component will remain tax free as it is under the $100,000 threshold. The remaining $60,000 of the threshold will be made up of the Taxable Taxed component, meaning 50% of the remaining $10,000 of the Taxable Taxed component will be included in the member’s assessable income and taxed at full marginal rates. As there is no unused cap space left, the Taxable Untaxed component will be taxed at full marginal rates and will not be eligible for the 10% offset.

Given the complexities of these new measures, a fact sheet will be uploaded to the CSS website in the near future to help better understand these changes.