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With all the changes coming into place around CGT relief, the Transfer Balance Cap (TBC) of $1.6 million and TBAR Reporting, understanding all your clients pension details is imperative.

As outlined in our previous blog ‘Ins & Outs of A Reversionary Pension’, a reversionary pension is designed to revert to a dependant beneficiary after the death of the member who is in receipt of an account based pension or transition to retirement pension. This can be anyone whom is considered a SIS dependant.  Click this link for information on SIS dependants.

ALL members with a superannuation interest in retirement phase will have a personal transfer balance cap.  It is a specific cap assigned per member.  They are not shared with any other members.  As a method of monitoring a member’s position with respect to their $1.6m cap, a Transfer Balance Account is maintained and operates in a similar way to a bank account.  Amounts transferred to the retirement phase are recorded as increases (credits) to that individuals account, and certain transfers out of the retirement phase for an individual are recorded as decreases (debit) to the account. Ongoingly, the individuals TBA cannot exceed $1.6 million.  Where an excess occurs, that excess must be commuted back to accumulation phase for that member. Table 1 below summarises transactions that effect the ongoing balance of a members personal transfer balance cap.

Table 1:

Example:

The transfer balance cap will reflect the proportional increase of an individual’s personal transfer balance cap. On 1 July 2017, an ABP value is $1.1m, the transfer balance cap is $1.6m therefore the $1.1m represents 69% of the members personal transfer balance cap used and 31% remaining / available in their personal transfer balance cap. Now lets assume on 1 July 2021, an additional ABP commenced of $510,000. The general transfer balance cap is indexed by $100,000 and is proportioned against the remaining cap of 31%. Therefore, the individual is entitled to an additional balance of $31,250 (100,000 indexed amount at 31%) towards their personal transfer balance cap. Table 2 below summarises the movements in the members transfer balance account.

Table 2:

Member balances exceeding the $1.6m transfer balance cap

Any amount over the $1.6 million can be rolled back to accumulation phase or withdrawn before 30 June 2017. On 1 July 2017, the first $100,000 over the transfer balance cap will have up to 31 December 2017 to either roll back the excess to accumulation phase or withdraw the amount.

If there is a breach due to an excess transfer balance cap, tax penalties will apply until the breach is rectified. The ATO will provide a transfer balance determination which will be based on the notional earnings on a 90 day bank bill rate + 7%. From there, the individual makes an election within 60 days to commute the pension. The Tax penalty rate is subject to 15% penalty tax on the notional earnings and consequent breaches will be 30% and thus planning in advance is essential to avoid having to deal with penalties such as these.

Reversionary Pensions & Transfer Balance Caps

With the TBA cap of $1.6 million in mind, what will happen where a member of a fund passes away and their pension reverts to another member whom has either utilised all or part of their personal transfer balance cap?

Well, where an income stream is considered an Automatically Reverting Pension (ARP) that has reverted because of a member’s death, the beneficiary’s TBA will not be credited until 12 months after the member has passed. It is expected within this time frame that all affairs of the deceased have been considered and finalised.

Example:

Glenn has $1.5 million in his reversionary pension account, on 21 September 2017 Glenn passes away.

Lisa, Glenn’s wife is the beneficiary of the pension account, continues to receive payments into her bank account to ensure the minimum pension is met.

Lisa currently holds a pension and her TBA sits at $600,000, and in October 2017 becomes aware she is the recipient of Glenn’s pension account when he passed.

Lisa’s total pension is now $2.1 million, therefore exceeding the $1.6 million transfer cap.

What are Lisa’s options now that she is exceeding the cap?

1. Fully commute one of the pensions back to accumulation to ensure her total pension phase balances do not exceed the capOR

2. Partially commute her own pension to reduce the total amount in pension phase to less than $1.6 million

Lisa decides to commute $500,000 from her pension back to accumulation on 1 January 2018. In her Personal TBA, there is a debit of $500,000 made on 1 January 2018, reducing her transfer balance to $100,000 ($600,000 – $500,000).

Exactly one year after Glenn’s passing, 21 September 2018, $1.5 million is credited through Lisa’s TBA because of the reversionary pension. Due to the commutation, Lisa does not exceed the $1.6 million cap.

Where this is likely to affect your clients, it would be wise to seek advice on which option will benefit the client most.