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Superannuation – Transfer Balance Cap

The superannuation reforms that commenced on 1 July 2017 introduced a new concept – the Transfer Balance Cap.

The Transfer Balance Cap is the maximum amount you can transfer from accumulation phase into retirement phase.  The cap is $1.6 million and will be indexed with CPI in $100,000 increments.

Retirement phase is when the earnings on assets that are supporting the pension are tax-free.  Whilst it is possible for a superannuation fund member to have more than the $1.6 million in superannuation, generally speaking the additional amount will now be held in accumulation phase and the earnings on assets relating to that portion of the members account will be subject to tax.

The transfer balance amount measures net transfers to retirement phase.  Therefore, as an example, the initial amount applied to start a pension will go towards the cap balance.  However, earnings, losses and pension payments do not impact the cap.

If the cap is exceeded, the amount of the excess (plus notional earnings) will be required to be commuted either back to accumulation phase or out of the superannuation environment.  In addition, excess transfer balance tax may apply.

From 1 July 2018, it is proposed that Self Managed Super Fund (SMSF) Trustees will be required to report events impacting an individual members transfer balance on an events basis.  The Australian Taxation Office has not yet advised how often such reporting will occur, but it is likely to be either within a month of a relevant event or at the end of the quarter in which the event occurs.

With the introduction of the Transfer Balance Cap and new event-based reporting requirements, it will be critical that SMSF trustees have appropriate accounting systems that are maintain accurately and on a timely basis.