Calculating the notional earnings in relation to the Transfer Balance Cap is important in determining the amount that will need to be removed from retirement/pension phase of superannuation as a result of exceeding the Transfer Balance Cap under the new superannuation rules from 1 July 2017.
The notional earnings will also be used to calculate the level of Excess Transfer Balance Tax payable.
Essentially, exceeding the Transfer Balance Cap will mean that an individual has benefited from having more in the tax-free retirement pension phase of superannuation than permitted.
Therefore, the earnings on this excess amount will need to be taxed in the manner that it would have otherwise been taxed had the Transfer Balance Cap not been exceeded.
An additional penalty tax may also be incurred for second and subsequent breaches of the cap.
Calculating Notional Earnings (Balance Transfer Cap)
As mentioned, the earnings received from the portion of assets that exceeded the Transfer Balance Cap will incur Excess Transfer Balance Tax. The earnings on which the Excess Transfer Balance Tax is calculated is the period between when the Transfer Balance Cap was breached until when the excess amount was removed from retirement pension phase.
In calculating the earnings during this period, the ‘actual’ earnings are not relevant. Instead, the Australian Tax Office (ATO) applies ‘notional’ earnings (or assumed earnings) received during this period in order to determine the earnings amount that Excess Transfer Balance Tax will be calculated.
The Notional Earnings for excess Transfer Balance Cap purposes are based on the general interest charge rate as regulated by the ATO.
What is the General Interest Charge (GIC) Rate?
The General Interest Rate Charge applies to a number of penalties imposed by the ATO. It allows them to apply an interest rate for each day that tax is overdue, or effectively overdue.
However, in the case of calculating the Notional Earnings in regards to Excess Transfer Balance Cap amounts, the GIC rate is used.
Each quarter, the annual and daily General Interest Charge rate changes. Here is an example of the GIC rate for the 2016/2017 financial year:
|Quarter||GIC Annual Rate||GIC Daily Rate|
The General Interest Charge rate is updated two weeks before the new quarter.
You can find a history of the GIC and the current GIC rate here.
Calculating Notional Earnings Example
For example, ignoring transitional provisions and using the April-June quarter GIC rate, if an individual exceeded the Transfer Balance Cap on 1 July 2017 by $200,000 and then removed this $200,000 from their retirement pension account on 1 November 2017, this excess amount of $200,000 would be assumed to have earned $5,917.48. over this period; calculated as:
$200,000 x 123 days x 0.02405479% = $5,917.48
Therefore, this amount, $5,917.48, plus the $200,000 will need to be removed from the pension income stream. The $5,917.48 will then incur Excess Transfer Balance Tax.