On Thursday 24.11.2016, the ATO released Draft Law Companion Guideline LCG 2016/D9 dealing with Superannuation reform: transfer balance cap.

The Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (which received Royal Assent as Act No. 81on 29 Nov 2016) imposes a transfer balance cap of $1.6m on the amount of capital individuals can transfer to the (tax free) retirement phase to support superannuation income streams. The result is that the amount of superannuation fund earnings that are exempt from tax is limited to the earnings of this capped amount.

The Draft Guideline provides guidance on how the transfer balance cap (set at $1.6 million for the 2017-2018 financial year) operates for account based superannuation income stream products. It provides specific guidance on some new concepts.

[LCG 2016/D9] [LTN 229, 25/11/16]

Table of Contents

Paragraph

What this draft Guideline is about 1
Transfer balance account and transfer balance cap 8
Transfer balance account 11
General transfer balance cap and personal transfer balance cap 16
Amounts credited and debited to your transfer balance account 19
Fund uses the segregated method 19
When debits and credits do not arise in your transfer balance account 24
Example 1 – Transfer balance account credits and debits 26
Credits that arise in your transfer balance account 31
Credit amounts for reversionary beneficiary and death benefits 32
Example 2 – Reversionary beneficiary 35
Debits that arise in your transfer balance account 40
Commutation 41
Structured settlements 44
Example 3 – Structured settlement 47
Superannuation income streams that fail to comply with the standards 52
A non-commutable excess transfer balance 56
Debits that you must notify us about in the approved form 57
Payment splits: divorce or relationship breakdown 59
Example 4 – Payment splits 65
Excess transfer balance 70
Excess transfer balance tax 78
Excess transfer balance determinations 83
Default commutation notice 92
Valid election 96
Non valid election 103
Commutation authorities 104
Your comments 108

What this Guideline is about

  1. This draft Guideline provides guidance on how the transfer balance cap (set at $1.6 million for the 2017-2018 financial year) operates for account based superannuation income stream products.
  2. It provides specific guidance on some new concepts:
  • a transfer balance account, including the general transfer balance cap, and your personal transfer balance cap
  • credits (increases) and debits (decreases) to your transfer balance account
  • the consequences of your transfer balance account exceeding your transfer balance cap, resulting in an ‘excess transfer balance’ including:
    • the excess transfer balance tax and how this is calculated
    • when the Commissioner will issue determinations, and
    • the effect of transfers and/or commutations on your transfer balance account.
  1. Special rules apply to capped defined benefit income streams. Further guidance is being prepared on these rules.

Transfer balance account and transfer balance cap

  1. The Bill introduces the concepts of a transfer balance account;1][ the general transfer balance cap[2] and your transfer balance cap.[3]
  2. The purpose of your transfer balance account is to track the net amounts you have transferred to retirement phase. Your transfer balance account allows you to determine whether or not you have exceeded your transfer balance cap on any given day.
  3. The ATO is able to provide individuals with information (including information reported to the ATO by superannuation funds and life insurance companies) that it holds at a time about their transfer balance account, which may include their personal transfer balance cap and their transfer balance at a particular time.

Transfer balance account

  1. You commence to have a transfer balance account from the first time you are the retirement phase recipient of a superannuation income stream.[4] However, if that time is before 1 July 2017, then your transfer balance account commences on 1 July 2017.[5]
  2. You continue to have a transfer balance account even if you subsequently cease to be a retirement phase recipient of a superannuation income steam. You only cease to have a transfer balance account when you die.[6]
  3. You are a retirement phase recipient of a superannuation income stream at a time if:

(a)     the superannuation income stream is in the retirement phase at that time[7], and

(b)     a superannuation income stream benefit from the superannuation income stream is payable to you at that time[8] or, if the income stream is a deferred superannuation income stream, the benefit will become payable to you after that time.[9]

  1. A superannuation income stream is in the retirement phase when a superannuation income stream is currently payable.[10] If it is a deferred superannuation income stream[11], that income stream is in retirement phase when a person has met a relevant condition of release (retirement, terminal medical condition, permanent incapacity or attaining age 65).[12]
  2. Transition to retirement income streams (TRIS) are not included in an individual’s transfer balance account as they are not in the retirement phase.[13] From 1 July 2017, superannuation funds and life insurance companies will be taxed on earnings made from assets supporting a TRIS.[14]

General transfer balance cap and personal transfer balance cap

  1. Your transfer balance cap will initially be equal to the general transfer balance cap for the financial year that you begin to have a transfer balance account.[15] The general transfer balance cap is $1.6 million for the 2017-18 financial year and will be subject to indexation.
  2. Your transfer balance cap is subject to proportional indexation[16] in line with increases in the general transfer balance cap if your transfer balance has never equalled or exceeded your transfer balance cap.[17]
  3. Exceeding your transfer balance cap causes you to permanently lose your entitlement to increase your transfer balance cap by indexation in future years.[18]

Amounts credited and debited to your transfer balance account

  1. Broadly, amounts transferred into the retirement phase are credited (an increase) to your transfer balance account and amounts commuted out of the retirement phase are debited (a decrease) to the account.
  2. Your transfer balance at a time is the sum of your transfer balance account credits less the sum of your transfer balance account debits at that time.[19] Your transfer balance can be less than zero.
  3. If your transfer balance exceeds your transfer balance cap on a particular day, you have an excess transfer balance.[20] The consequences of having an excess transfer balance are explained further in paragraph 78 of this draft Guideline.
  4. If you are receiving a superannuation income stream immediately before 1 July 2017, your transfer balance account commences on 1 July 2017. Your transfer balance account is credited by the value of that superannuation interest just before 1 July 2017.[21] This value will be reported to you by your superannuation fund or life insurance company. Where you have more than one superannuation fund just before 1 July 2017, your transfer balance account will be the sum of the value of all of your superannuation interests just before 1 July 2017. You will need to add up the values reported to you by each fund to determine your transfer balance as at 1 July 2017.
  5. Credits to your transfer balance account (other than excess transfer balance earnings) will be reported to the ATO by your super funds and life insurance companies, whereas some debits to your transfer balance account will require you to notify the Commissioner in the approved form in order for a debit to arise. Debits to your transfer balance account that require notification are discussed further in paragraph 57 of this draft Guideline.

When debits and credits do not arise in your transfer balance account

  1. Investment earnings and losses on your superannuation interest and amounts paid to you to comply with the minimum drawdown requirements are not debit or credit events and therefore do not affect the balance of your transfer balance account.
  2. Consequently, making a pension drawdown does not reduce your transfer balance and would not bring you under your transfer balance cap. You must commute an amount of your pension in order to reduce the balance of your transfer balance account so that you no longer exceed your cap. Commutations are discussed further below in paragraph 41 of this draft Guideline.