Transfer balance is the net amount of capital an individual has transferred to their superannuation retirement phase. We use transfer balance account to track this transfer balance. The principal here is that we are working with the capital amount, so investment earnings and pension payments do not affect the transfer balance account.
Transfer balance cap
Transfer balance should ideally be kept under $1.6m for 2017-18 year. The term general transfer balance cap is used to refer to the $1.6m.
Each individual also has a personal transfer balance cap. A member’s transfer balance could be $800k in 2017-18. When the general transfer balance is indexed up by $100k in 2019-2020, this member’s personal transfer balance cap is increased by 50% (50%= unused$800k/$1.6m) of the $100k, and his personal transfer balance cap is $1.65m.
Personal transfer balance cap moves up in proportion with indexation, suppose the member never reached his personal transfer balance cap.
Transfer balance account
In general, transfer balance account starts when a member commences a pension for the first time. If a pension is already in existence on 30 June 2017, then the transfer balance account starts on 1 July 2017.
Transfer balance account is increased and decreased by credit and debit events. Broadly, amounts transferred to start a pension are credited and amounts commuted out of the pension are debited. Once a transfer balance account comes into existence, it can be debited or credited but it will never cease.
A common scenario is Alice starts an ABP on 1 Sep 2017 with pension commencement value at $650,000. She has a transfer balance account from 1 Sep 2017 and her transfer balance is $650,000 in credit.
Communication is a debit event and will reduce the transfer balance. Partial commutation can’t be counted towards the minimum annual pension payment anymore.
Transfer balance can be negative. For example, on 1 July 2017, Taylor purchases a pension worth $1.6m. On 1 June 2018, the value of the pension is $1.7m because of investment earnings. Taylor fully commutes the pension on 1 June 2018. Taylor’s transfer balance is $100,000 in debit. Taylor is entitled to start a new pension worth up to $1.7m without breaching his transfer balance cap.
The value of capped defined benefit income streams is counted toward an individual’s transfer balance cap. However, it doesn’t give rise to an excess transfer balance. This is because these defined benefit income streams are subject to commutation restrictions. It is therefore impractical to reduce their capital amount. (However draft regulation was introduced to allow some of these income streams to be commuted). The pension payments from these income streams are subject to additional tax.
Capped defined benefit income stream alone will not create excess transfer balance. For example, on 1 Aug 2017 Jane has a $3m lifetime pension. Jane does not have an excess transfer balance, because the excess is entirely attributable to her capped defined benefit income stream. If on 1 Jan 2018, Jane purchase an ABP for $200k, Jane will have an excess transfer balance of $200k.
Other credit events are listed as below:
- Reversionary income streams
- Excess transfer balance earnings
- Death benefit income streams
Other debit events are listed as below:
- Structured settlement contributions
- Loses due to fraud and void transactions under Bankruptcy
- Family law payment splits
- Superannuation income stream that cease to be in the retirement phase
- Superannuation income stream that fail to comply with the standards
- Write-off of excess transfer balance where excess can’t be reduced
- Capped defined benefit income streams
Excess transfer balance is disregarded if it is less than $100,000, is caused by existing pensions on 30 June 2017 and individual rectifies the breach within 6 months.