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Transfer balance cap

Transfer balance account - debits

Section: 9.4

Under section 294-80 sets out when debits arise in a transfer balance account, and the amount of the debit. A debit may arise in a member's transfer balance account from:

  • a commutation of a superannuation income stream in the retirement
  • structured settlement contributions
  • an event that results in their superannuation interest being reduced (fraud or dishonesty, bankruptcy)
  • a payment split (divorce or relationship breakdown)
  • a superannuation income stream failing to comply with the pension or annuity standards under which it is provided
  • a superannuation income stream provider failing to comply with a commutation authority in respect of a particular superannuation income stream
  • other circumstances as provided for by the regulations

Commutation

A commutation of a superannuation income stream occurs where the member consciously and validly exercises their right to exchange some or all of their entitlement to receive future superannuation income stream benefits for an entitlement to be paid a superannuation lump sum. A commutation also occurs where a superannuation income stream provider converts superannuation income stream entitlements to a superannuation lump sum in compliance with a commutation authority issued under subdivision 136-B of Schedule 1 of the TAA in respect of that superannuation income stream.

Where the superannuation income stream is commuted in full, the superannuation income stream ceases. Where the superannuation income stream is partially commuted the value of the superannuation interest supporting the superannuation income stream is reduced. The superannuation lump sum that arises from a commutation may be cashed out of the superannuation system or can be retained within the superannuation system subject to the cashing rules for superannuation death benefits.

When a superannuation income stream is fully or partially commuted, a debit arises in their transfer balance account at the time they receive the superannuation lump sum, not at the time that you instruct their superannuation income stream provider to commute a superannuation income stream. For instance, if a member instruct their superannuation income stream provider to commute a superannuation income stream on 1 July 2017 and due to processing times the superannuation income stream provider commutes the superannuation income stream to a superannuation lump sum on 7 July 207, the debit arises on7 July and not on 1 July 2017.

Structured settlements

Compensation or damages received for a personal injury a member suffered that is contributed to a complying superannuation plan may result in a debit to their transfer balance account. The contribution must arise from:

  1. the a settlement of a personal injury claim that is based on the commission of a wrong, or a right created by statute, effected by a written settlement agreement between the parties
  2. settlement of a personal injury claim arising under an Australian workers compensation law, or
  3. the order of a court made in respect of a claim that is based on the commission of a wrong, or a right created by statute (not including a court order approving or endorsing a settlement agreement as mentioned above).

In addition:

  1. for contributions made on or after 10 May 2006, the contribution must be covered by section 292-95, which includes requirements for the contribution to be made by a particular time and for the superannuation provider to be notified, or
  2. for contributions made before 10 May 2006, the contribution would have been covered by 292-95 if it had been in force at that time disregarding paragraphs 292-95 (1)(b) and (d), which are in respect of timing and notification requirements.

The transfer balance debit is equal to the amount of the contribution and arises at the later of when the contribution is made or when they first start to have a transfer balance account.

Example: Structured settlement

Alice is seriously injured in a car accident. She undertakes legal proceedings against the driver and is awarded a court ordered structured settlement of $4 million on 1 July 2016.

Alice contributes the $4 million into her superannuation fund, notifies her superannuation fund that this contribution is a structured settlement and commences a superannuation income stream with this amount.

Immediately before 1 July 2017 (end of 30 June 2017), the value of Alice's superannuation interest is now $3.5 million due to investment returns and superannuation income stream payments made to her. Alice's transfer balance account commences on 1 July 2017 and a transfer balance credit of $3.5 million arises on this day in respect of this superannuation income stream.

On 1 July 2017, a transfer balance debit of $4 million also arises in Alice's transfer balance account in respect of the structured settlement contribution. Therefore, Alice's transfer balance is negative $500,000 at the end of 1 July 2017. Alice is entitled to start another superannuation income stream with a value up to $2.1 million without exceeding her transfer balance cap ($1.6 million).

Alice's transfer balance is measured at the end of a day, Alice has never had an excess transfer balance (because the relevant credit and debit both arose on the same day, 1 July 2017) and is eligible to increase her transfer balance cap by indexation in future years.

Superannuation income streams that fail to comply with the standards

In certain circumstances a superannuation income stream may cease to be a superannuation income stream because it has failed to comply with the rules or standards under which it is provided.

One of these circumstances is when the superannuation income stream provider fails to pay the minimum amount of superannuation income stream benefits required under the regulatory rules.

Where this occurs, the superannuation income stream provider is taken not to have been paying a superannuation income stream during the income year and the income stream ceases to be a superannuation income stream. However, the credit that arose in the individual's transfer account remains due to the operation of the assumptions in section 294-50.

A debit arises in the member's transfer balance account at the time the superannuation income stream stops being a superannuation income stream in the retirement phase. The value of the debt is the value of the superannuation interest that supports the income stream just before the time the superannuation income stream stops being a superannuation income stream.

Example - Failure to make a minimum payment in income year

Neesh commenced an account-based pension on 1 July 2017.The superannuation interest supporting the superannuation income stream is valued at $1.1 million.

Neesh commences to have a transfer balance account on 1 July 2017 and receives a credit of $1.1 million to her transfer balance account on that day.

The fund fails to make the minimum payment amount for the superannuation income stream for the 2017-18 income year. The consequence of this is that Neesh is taken not to have commenced a superannuation income stream on 1 July 2017. However, the assumptions ensure that Neesh continues to have a transfer balance account and the credit of $1.1 million that arose on 1 July 2017 remains.

For the purposes of working out Neesh's transfer balance, the application of the assumptions in section 294-50 mean that the superannuation income stream stops being a superannuation income stream at the end of 30 June 2018 and a debit arises in Neesh's transfer balance account on that date. The debit amount is the value of the superannuation interest that supported the superannuation income stream just before it ceased to be a superannuation income stream in the retirement phase.

The assumptions in section 294-50 only apply for the purposes of the transfer balance account. They do not apply for other purposes such as determining when a superannuation income stream ceases for the purposes of calculating a fund's exempt current pension income

Payment split

A member's superannuation income stream provider does not at times notify the ATO of payment splits and events that result in a reduction in the superannuation interest supporting the member's superannuation income stream1. As such a member or their spouse in respect to the payment splits, will need to notify the ATO in the approved form if a payment split or reduction in the superannuation interest supporting their superannuation income stream occurs for a debit to arise in their transfer balance account.2

A temporary beach of the transfer balance cap can occur due to the delay between the debit arises in the transfer balance account and when the member notifies the ATO of the debit. However, once the Commissioner is notified, the debit is applied retrospectively to remedy the breach.

Payment splits: divorce or relationship breakdown

After the event of a divorce or other relationship breakdown, superannuation interests may be split as part of the division of property. Payment splits may come about from a court order or a superannuation agreement between the parties

Different treatment arises for the purposes of a member's transfer balance account depending on whether, under the payment split, the non-member spouse is entitled to either a lump sum amount or a percentage of the member spouse's superannuation income stream benefits payable from the superannuation income stream.

If the payment split is achieved by the member spouse fully or partially commuting a superannuation income stream that is in the retirement phase to pay the non-member spouse a lump sum amount, a debit will arise in the member spouse's transfer balance account. If the non-member spouse chooses to use that lump sum amount to start a superannuation income stream, a transfer balance credit arises in their transfer balance account. These transfer balance credits and debits will be reported to the Commissioner by the superannuation provider.

Where the split is achieved by dividing the superannuation income stream benefits payable from the superannuation income steam, a credit to the full value of the superannuation interest that supports the superannuation income stream (at the time of the payment split) arises in the transfer balance account of the non-member spouse3. In these circumstances the transfer balance credit that originally arise in the member spouse's transfer balance account in respect of the superannuation income stream is not altered.

Item 4 in the table in subsection 294-80(1), each spouse will receive a debit equal to the other spouse's respective proportional entitlement to the superannuation income stream benefits payable from the superannuation income stream. The reason of these debits is to proportionally reduce the credits that arose as a result of both the member spouse and the non-member spouse being a retirement phase recipient of the superannuation income stream as a result of the payment split.

In this case, the payment split must apply to a superannuation interest that spports a superannuation income stream that is in the retirement phase and both spouses must be retirement phase recipients of that superannuation income stream as a result of the payment split, refer to section 294-90(2).

The time at which these debits arise in the member spouse's and non-member spouse's transfer balance account is the later of4:

  1. the operative time for the payment split,
  2. at the start of the day the member spouse or non-member spouse first starts to have a transfer balance account
Example - Payment splits

Justin has a superannuation income stream that is in the retirement phase that pays $4,000 per month. The superannuation interest that supports this income stream isvalued at $1.6 million just before 1 July 2017 (at the end of 30 June 2017). Therefore, on 1 July 2017, Justin commences to have a transfer balance account and his transfer balance is $1.6 million which is equal to his transfer balance cap.

On 18 November 2017, Justin's wife Lizzy leaves him. The court orders that 60% of the superannuation income stream benefit payable under Justin's superannuation income stream should go to Lizzy. The date specified in the court order is 1 April 2018. Prior to this date, Lizzy did not have a transfer balance account.

On 1 April 2018, Lizzy becomes the retirement phase recipient of a superannuation income stream and commences to have a transfer balance account. On this day, the superannuation interest supporting the income stream is valued at $1.61 million (this is not a breach of Justin's transfer balance cap as his transfer balance remains $1.6 million).

Justin notifies the Commissioner of the payment split in the approved form. A transfer balance debit arises in Justin's transfer balance account on 1 April 2018 equal to 60% of the value of the superannuation interest that supports the superannuation income stream on 1 April 2018 ($966,000).

A transfer balance credit of $1.61 million arises in Lizzy's transfer balance accounton 1 April 2018. A transfer balance debit also arises in Lizzy's transfer balance account on 1 April 2018 equal to 40% of the value of the superannuation interest that supports the superannuation income stream on 1 April 2018 ($644,000). Because her transfer balance is measured at the end of a day, Lizzy has never had an excess transfer balance and is eligible to increase her transfer balance cap by indexation in future years.

Justin, however, is not eligible to increase his transfer balance cap by indexation in future years as his transfer balance was equal to his transfer balance cap in the past.

Justin's transfer balance account
Date Description Debit Credit Balance
1 July 2017 Transfer balance account   $1.6 million $1.6 million
1 April 2018 Payment split $966,000   $634,000
Lizzy's transfer balance account
Date Description Debit Credit Balance
1 April 2018 Transfer balance account commences $644,000 $1.61 million $966,000

Source: 1.These events include reductions to the value of a superannuation interest that support a superannuation income stream as a result of a conviction of an offence of fraud or dishonestly, or as a result of bankruptcy.2. Paragraph 294-85(1)(b) 3. The credit arises under item 1 or 2 of the table in section 294-25 at the time you start to be a retirement phase recipient 4. Subsection 294-90(4)

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