Transfer balance cap
Transfer balance account - Credits
Section 294-25 sets out when a member whilst in the retirement phase is the recipient of superannuation income stream this gives rise to a credit into their transfer balance account. The following events will trigger a credit:
- superannuation income streams commenced prior to 1 July 2017 and the member continues to receive the income after this date - this includes both reversionary and non-reversionary death benefit income streams
- superannuation income streams commenced after 1 July 2017 - this includes both reversionary and non-revisionary death benefit income streams.
- when a transition to retirement stream starts to be in retirement phase
- limited recourse borrowing arrangements - repayments
- excess transfer balance earnings
Keep in mind, whilst the credits increases the transfer balance account this will eventually reduce the available personal cap space.
Reversionary beneficiary and death benefits
A reversionary beneficiary is the nominated dependant beneficiary of a superannuation income stream that automatically reverts to the nominated beneficiary on the death of the superannuation income stream recipient (member). In these cases, the superannuation income stream does not cease, as the reversionary beneficiary is immediately entitled to receive it.
At any time the superannuation provider has any discretion about which beneficiary becomes entitled to the superannuation income stream then it is not reversionary, and the beneficiary is not a reversionary beneficiary1.
The 'starting day' (for the purposes of the transfer balance account) for reversionary beneficiaries is the date of death of the original superannuation member as this is the time the reversionary superannuation income stream becomes payable to the beneficiary.
The credit that arises in the reversionary beneficiary's transfer balance account, however, is delayed to provide the beneficiary with time to arrange their affairs. For a reversionary beneficiary, the credit arises:
- if the reversionary beneficiary is a retirement phase recipient of the superannuation income stream just before 1 July 2017 - on the later of 1 July 2017 or 12 months from when the superannuation income stream first became payable. The credit is equal to the value of the superannuation interest supporting that superannuation income stream just before 1 July 2017, or
- if the reversionary beneficiary starts to be a retirement phase recipient on or after 1 July - 12 months form the starting day. The credit is equal to the value of the superannuation interest supporting that superannuation income stream on the starting day.
|Example - Reversionary beneficiary
David has a reversionary pension worth $1 million at the time of this death on 1 August 2017. Mary is David's wife and is the reversionary beneficiary of this pension.
As Mary is a reversionary beneficiary, the starting day for the purpose of section 294-95 is the date of David's death, 1 August 2017.
A credit arises in Mary's transfer balance account on 1 August 2018 (12 months from the starting date). The credit amount is $1 million, which is equal to the value of the superannuation interest on the starting day being 1 August 2017.
Limited recourse borrowing arrangements
A credit will arise in transfer balance account in relation to a payment made by a superannuation provider under a limited recourse borrowing arrangement (LRBA) that was entered into on or after 1 July 2017 where:
- the payment results in an increase in the value of a member superannuation interest that supports their superannuation income stream that is in the retirement phase
- a member's superannuation interest is in a self-managed superannuation fund (or another complying superannuation n fund with less than 5 members).
Where an LRBA that is covered by subsection o67A(1) of the superannuation Industry (supervision) Act 1993 was entered into before 1 July 2017 and is refinance on or after 1 July 2017, the refinance LRBA is treated as being entered into before 1 July 2017 for the purpose of working out whether they have a credit if:
- the refinanced LRBA is secured by the same asset/s as the original LRBA; and
- the amount borrowed under the refinanced LRBA at the time it is entered into is equal to or less than the outstanding balance of the borrowing under the original LRBA.
An increase in the value of the member's interest supporting their superannuation income stream in the retirement phase will occur where a payment in respect of the LRBA is made fully, or partially, from assets that are supporting superannuation interests that are not in the retirement phase. For instance, this may occur where the assets of the superannuation fund are allocated to specific superannuation interests that are supporting superannuation income streams.
The credit arises at the time of the payment and is equal to the amount of the increase in the value of their superannuation interest supporting their superannuation income stream. For the purposes of calculating the amount of the credit, they are not required to separately determine the market value of their superannuation interest as the increase in value is determined by reference to the repayment amount.
If there is only one member in a superannuation fund, the increase in value of the superannuation interest is the repayment amount and thus the credit that arises is equal to the repayment amount. Where the increase in the value affects more than one member's interest in the retirement phase, it is necessary to apportion the credit across the different member's interests on a fair and reasonable basis. Whether the apportionment methodology is on fair and reasonable basis will depend on the facts and circumstances of each case. One example of a methodology that the Commissioner considers fair and reasonable is where the proportions are based on the value of the member's superannuation interests that are in the retirement phase as at 30 June of the immediate prior financial year provided that have been significant changes in value between that date and determining the amount of applicable credit.
|Example - LRBA - apportionment of credit
Ian and Sean are the only members of an SMSF which has allocated specific assets to support the superannuation income streams payable by the SMSF. They both have account-based pensions and accumulation interests
On 30 June 2018, Ian's retirement phase interest is valued at $400,000 and Sean's retirement phase interest is valued at $600,000. The SMSF entered into an LRBA on 1 August 2018 to acquire an asset that solely supports the account-based pensions of both Ian and Sean. The fund makes a monthly repayment of $10,000 from accumulation interests of both Ian and Sean towards the borrowing under the LRBA on 1 September 2018. There have been no significant changes in value of the superannuation interest in the retirement phase prior to the repayment.
The transfer balance credits that arise in Ian and Sean's transfer balance account on 1 September 2018, is apportioned in a fair and reasonable manner in accordance with the proportion of their retirement phase interests in the SMSF. This is calculated as follows:
Ian's transfer balance credit:
Sean's transfer balance credit:
On 1 April 2019 Ian commutes $200,000 of his retirement phase income stream out of superannuation. The SMSF makes a monthly repayment on 1 April 2019 of $10,000 from accumulation interests of both Ian and Sean, towards the borrowing under the LRBA.
The commutation that Ian made on 1 April 2019 of $200,000 mans that the value of his interest in the retirement phase is significantly different to the value of his interest in the retirement phase as at 30 June 2018. For the purposes of the apportionment methodology, it would be reasonable to adjust the 30 June 2018 value of Ian's superannuation interest in the retirement phase ($400,000) by $200,000.
The transfer balance credit that arises in Ian and Sean's transfer balance accounts are calculated as follows:
Ian's transfer balance credit:
Sean's transfer balance credit:
The apportionment of the credit has been made in a fair and reasonable manner in accordance with the proportion of retirement phase interests Ian and Sean hold in the SMSF.
Transitional to retirement income stream (TRIS)
A TRIS is not in the retirement phase unless a superannuation income stream benefit is currently payable from it and the member:
- is 65 years old or older, or
- has met a relevant condition of release with a nil cashing restriction (retirement, terminal medical condition, permanent incapacity) and they have notified the superannuation provider for the TRIS of that fact, or
- is in receipt of the TRIS as a reversionary beneficiary
From 1 July 2017, superannuation income stream providers will be taxed on earnings made from assets supporting a TRIS that is not in the retirement phase. The age pension (or other types of government assistance payments) and a pension received from a foreign superannuation fund are also not included in their transfer balance account because these pensions are not superannuation income streams.
|Example - TRIS in the retirement phase on 1 July 2017
Robert commenced a TRIS in 2008 when he was 58. On 1 July 2017 Robert still receives superannuation income stream benefits from the TRIS and the value of the superannuation interest supporting the TRIS just before 1 July 2017 is $900,000. Robert has no other superannuation interests.
As Robert was over 65 on 1 July 2017, the TRIS is in the retirement phase and Robert is a retirement phase recipient. Robert commences to have a transfer balance account on 1 July 2017 and a credit of $900,000 arises in the transfer balance account on 1 July 2017.
|Example - TRIS in the retirement phase after 1 July 2017
Bob commences a TRIS on 1 July 2018 at age 57 with $1.2 million. The TRIS is not in the retirement phase at that time as Bob does not meet a relevant condition of release with a nil cashing restriction. As Bob has no superannuation income streams in the retirement phase he is not a retirement phase recipient and does not have a transfer balance account.
Bob retires on 30 June 2019, meeting a relevant condition of release, and notifies the superannuation provider that pays the TRIS of his retirement on 15 July 2019. The TRIS is in the retirement phase on 15 July 2019 (the time of notifying the superannuation provider of his retirement) and Bob commences to have a transfer balance account on 15 July 2019. The credit that arises in his transfer balance account is equal to the value of the superannuation interest supporting the TRIS on 15 July 2019.
Source: 1. This is consistent with Taxation Ruling TR 2013/5 Income tax: when a superannuation stream commences and ceases
LCR 2016/9 Superannuation reform: transfer balance cap
This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.
Last modified: Thursday, September 24, 2020