Understanding the Transfer Balance Cap (TBC)
The TBC is a $1.6m cap on the overall capital a retiree can allocate to Retirement Phase for tax-free status. It commenced 1/7/17. This will not affect the majority of funds, but might be relevant to your future planning.
What is the TBC
At the outset it's very important to note this TBC;
1. is your personal lifetime cap, which may fluctuate based on a running Transfer Balance Account
2. this Account records all commutations into/from retirement phase, and is recorded in a Transfer Balance Account (TBA)
3. it is not your actual Retirement Phase balance, which may in future rise or fall above/below the $1.6m TBC cap
4. once your TBC has been reached, there are no top-ups available unless the TBA reduces eg via lump sump payouts
What is the TBA
The ATO loves acronyms, and another is the Transfer Balance Account (TBA)
1. this is a running balance throughout the year which cannot exceed the TBC
2. the TBA is not affected by subsequent earnings, gains, losses or pensions paid
4. your TBA may also reduce with lump sum commutations or transfers back to Accumulation Account
5. the TBA may increase with some other settlements, deceased spouse reversionary pensions, or LRBA loan payouts
How do TBC changes work
Future changes to the TBC Cap may not mean you can then transfer more to your TBA
1. your usage of the TBC is stated as a percentage by the ATO, which doesn't change even if the $cap increases over time
2. the TBC is indexed and will rise in 100k increments in future, but your % usage of the new cap will remain the same
If my existing TBC exceeded the cap
For existing members with over $1.6m in retirement phase
1. your retirement phase balance must be at or below $1.6m at commencement, ie 1/7/17
2. hence a transfer of excess assets from Retirement to Accumulation Account phase is needed, attracting 15% tax on future earnings.
3. where your TSB (see below) remains above $1.6m and you are in retirement phase, from 1/7/17 your fund can no longer use the segregated accounts method
If TBC under the cap, but my TSB exceeds the cap
A new rule also applies for those who meet the TBC, but have a Total Super Balance (TSB) over $1.6m
1. the TSB is the sum of both your personal Accumulation Account and Retirement Account interests, and held anywhere
2. from 1/7/17 your fund can no longer use the segregated accounts method to calculate exempt pension income (ECPI)
3. this means the proportionate method and an actuarial certificate is needed to determine your ECPI in future
4. a person's TSB is calculated annually each 30 June, whereas the TBC is a running balance that cannot be exceeded during a year
What is the segregated or proportionate method
This refers to the accounting and tax treatment of investments and their earnings.
1. A fund may opt to keep investments segregated for the respective Accumulation Account or Retirement Accounts
2. Otherwise a proportionate method is needed, utilising an actuarial certificate to determine separate exempt or taxable income
3. In some cases this is unavoidable due to the nature of large indivisible assets or mix of types of members
What is the CGT temporary relief
This is a transitional measure only, for those transferring assets from Retirement to Accumulation Account to meet the new TBC cap.
1. Temporary CGT Relief is available to retain the unrealised exempt gain of a transferred asset
2. this means the CGT cost base of an investment will be reset to its market value as at transfer date
3. this is essentially treated the same as a disposal and re-acquisition at market value in the smsf 2017 return
4. a capital gain or loss arises in the return, and then an irrevocable election to entirely disregard it is allowed
5. then upon sale in the future, the taxable gain will be based on the updated market value at transfer time, not its original cost
6. however be aware that the CGT Discount holding period of 12 months refreshes to zero as at the date of transfer
How is a Transition to Retirement (TTR or TRIS) affected
1. a TTR automatically becomes a transfer to retirement phase when a member turns 65 or has met a condition of release
2. otherwise it continues much the same as Accumulation phase (and earnings are now taxed the same also)
3. a TTR fund may also choose CGT temporary relief in it's 2017 return where asset transfers have been required to meet new rules
What if my TBC is exceeded by uncontrolled factors
1. The subsequent capital growth or earnings of your Retirement Account does not affect the TBC or TBA
2. When a deceased spouse's pension reverts to you, these are transfers at their market value which impact the TBC, but you will be provided 12 months to transfer out or pay a lump sum to meet the cap
What Penalties & Reporting apply
New compliance penalties & quarterly reporting has been introduced;
1. The ATO warns that a new Excess Transfer Balance Tax will accrue on a daily basis once the TBC cap is exceeded
2. The ATO is introducing quarterly reporting so that related TBC transfer amounts are reported from 1/7/18
3. They call this event-based reporting, where a transfer balance account report (TBAR) is required upon any TBA changes
4. This includes - commencement of, or commutations to/from a Retirement Account, or LRBA payouts affecting it, but not pensions paid or earnings etc
TBAR Due dates
If applicable to your SMSF, it must either;
1. lodge a TBAR annually with its tax return - if no fund member has a TSB balance over $1m
2. otherwise quarterly - within 28 days after the quarter in which the event occurred
3. note this refers to TSB, so an smsf trustee may need to be aware of other super balances held by members elsewhere
4. Fail to lodge on time penalties can apply. See an ATO manual
TBAR form here
general comment
Most tax agents or ATO staff don't understand these new rules, let alone retirees, but hopefully the above will provide a basic understanding if and when needed. Kindly note that we do not provide investment nor financial planning advice, and our services are limited to purely SMSF accounting, taxation, compliance & audit.
Kind Regards
BCA Team
Last updated: 30/06/2018
