Probably the most confusing of the changes to superannuation this year is the new “transfer balance cap” that comes into effect 1 July 2017. Let’s clarify it for you.

The cap is a new limit on the total amount of superannuation savings you can transfer from an accumulation account to a tax-free retirement account. The lifetime cap of $1.6m applies per person, regardless of the number of superannuation accounts you have. It will increase in line with the CPI in $100,000 steps.

So how will this affect you?

If you already have more than $1.6 million in a tax-free pension you will need to remove the amount in excess of $1.6 million from your retirement account prior to 1 July 2017. There are different options available depending on each individual. Ask us about the most appropriate option for you.

If you don’t withdraw the excess or transfer more than the cap into a retirement account you will be liable to pay tax on the notional earnings on the excess amount. The tax rate is 15% for the first breach, and 30% on subsequent breaches. 

If your retirement account value is less than $1.7 million on 1 July 2017, you will have six months to withdraw the excess without penalty.

The cap only applies to the amount transferred into the retirement phase account. It does not apply to subsequent earnings or capital growth.

You can make more than one transfer into the retirement account provided the available cap has not been exceeded.  However, if you establish your retirement account with $1.6 million, you will have used 100% of your cap and will not be allowed to contribute additional amounts, even if your account balance subsequently falls below $1.6m.

TTR income streams will not count towards the cap because from 1 July 2017 these income streams will lose the tax exemption on earnings. However, once a condition of release has been met, the transfer balance caps will apply to the TTR pension as it will become a standard account based or  allocated pension.  

Our video will help your client understand these changes and prompt them to contact you. Own your own copy here.

Sources:

The $1.6 million transfer balance cap explained: https://www.class.com.au/1-6-million-transfer-balance-cap-explained/

www.ato.gov.au Transfer balance cap - Capped defined benefit income stream modifications

Introducing a $1.6 million transfer balance cap available at http://www.treasury.gov.au/superreforms#transfer