Based on new superannuation rules and changes from 1 July 2017, the maximum amount that can be used to commence a superannuation retirement income stream, or be held in existing pension accounts, is $1.6 Million (indexed in line with CPI in increments of $100,000).
The reason for the newly imposed limit is to reduce the tax benefits associated with the ‘pension phase’ of superannuation.
There are two phases within superannuation – accumulation phase and pension phase.
All earnings received from assets within accumulation phase are taxed at up to 15%; whereas all earnings received from assets within pension phase are received completely tax free. Herein lays the benefit of having more wealth held in the pension phase of superannuation.
However, the new Transfer Balance Cap limits this benefit to earnings on $1.6 Million.
So, what happens if the Transfer Balance Cap is exceeded and how are the earnings taxed?
Excess Transfer Balance Tax
Any amount held in pension phase that exceeds the Transfer Balance Cap is required to be rolled back into accumulation phase. However, as there is a period of time where this excess amount is in pension phase and effectively receiving tax free earnings, an Excess Transfer Balance Tax is imposed with the intention of neutralising any tax benefit received on this excess amount.
Excess Transfer Balance Tax is disregarded under transitional provisions caused by breaches of the Transfer Balance Cap for existing income streams if the breach is less than $100,000 and is rectified within 6 months.
Excess Transfer Balance Tax also doesn’t apply to individuals whose total retirement income stream benefits are received from defined benefit pensions and other non-capital based income streams.
Click here to read more about the assessment of defined benefit pensions, annuities and life expectancy pensions AND click here to read more about capped defined benefit pension income modifications, including the taxation of income is excess of the Transfer Balance Cap and how it is calculated.
Also, the Transfer Balance Cap (and potential Excess Transfer Balance Tax) does not apply to transition to retirement (TTR) pensions and income streams – click here to read more.
Excess Transfer Balance Tax Rate
Excess Transfer Balance Tax is initially intended to simply negate any tax benefit received from having excess funds in tax free pension phase. As such, in the 2017/2018 financial year the rate of Excess Transfer Balance Tax is 15%.
From 1 July 2018, the Excess Transfer Balance Tax is also 15% for a first breach; however second and subsequent breaches incur Excess Transfer Balance Tax of 30% – effectively turning Excess Transfer Balance Tax from a ‘restorative tax’ to a ‘punitive (penalty) tax’.
Excess Transfer Balance Tax Earnings
Excess Transfer Balance Tax is payable on the earnings during the period between when the breach first occurred and when the breach was rectified. However, the tax is not imposed on the ‘actual’ earnings during this period, but rather the ‘notional‘ earnings based on a notional earnings formula. Notional earnings are calculated based on a daily rate of earnings; specifically, the General Interest Charge (GIC) rate.
Excess Transfer Balance Tax Payment
The Commissioner of Taxation will issue a tax assessment in relation to the breach after it is rectified of the amount of Excess Transfer Balance Tax to be paid. This tax will be due 21 days after the assessment is issued.