On 7 Dec 2016, the ATO issued Draft Law Companion Guideline LCG 2016/D10 headed: Superannuation Reform: defined benefit income streams – non-commutable, lifetime pensions and lifetime annuities’ ).
This relates to $1.6m ‘transfer balance account cap’ introduced by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (which received Royal Assent on 29 November 2016).
This Act introduced a system of debits and credits to that account and the taxation implications of exceeding that cap. This draft Law Companion Guide deals with the treatment of ‘non-commutable’ life time pensions and life time annuities.
The draft guideline seeks to clarify how the defined benefit income cap applies to superannuation income stream benefits that are paid from a non-commutable, lifetime pension or lifetime annuity.
‘Non-commutable’ benefits can’t result in a breach of the transfer balance cap, because the main way of doing this is to commute the benefit. Rather, there is a modification of rules for these benefits.
1. The first is that a credit arises in ‘transfer balance account’ equal to the “special value” of the income stream, which in turn is (broadly) the annual amount of that income stream by sixteen (16). So, for instance, if the annual benefit were $100,000, the ‘special value’ would be $1.6m.
2 The second modification is the creation of a ‘defined benefit income cap’ above which, the income stream becomes assessable (rather than being non-assessable). Usually this cap will be $100,000 with 50% of the excess will be included in the recipient’s assessable income and taxed at the recipient’s marginal rates. This cap is actually the ‘transfer balance account cap’ divided by 16 (and this cap is not always $1.6m).
[FJM] [ATO website – LCG 2016/D10] [LTN 237, 7/12/16]
Extract from LCG/D10
5. As with other types of superannuation income streams, the value of capped defined benefit income streams count towards an individual’s transfer balance cap. The transfer balance cap regime is designed to limit the amount of an individual’s superannuation that can be moved into the retirement phase, where it benefits from the fund earnings tax exemption.
6. Capped defined benefit income streams cannot, of themselves, result in an excess transfer balance for an individual. Instead, modifications to the general transfer balance cap rules apply.
7. Instead of excess capped defined benefit income streams causing a breach of the transfer balance cap that needs to be remedied by removing the excess, modifications result in certain amounts being included in assessable income and adjustments to the availability of tax offsets. The reason for the different treatment arises because capped defined benefit income streams generally cannot be commuted and cashed as a lump sum.
8. The following modifications to the general transfer balance cap rules apply for capped defined benefit income streams:
- (a) the application of a statutory formula to work out the value of an individual’s superannuation interest that supports a capped defined benefit income stream. This value is called the ‘special value’ and gives rise to a credit in an individual’s transfer balance account.
- (b) the defined benefit income cap, which affects the defined benefit income that is assessable income for an individual. It also limits the tax offset available in respect of the untaxed element of certain benefits that are defined benefit income.