If The Cap Fits: Who’s Affected By The Transfer Balance Limit

SMSF specialists will get a detailed explanation of which clients will be affected by the introduction of the transfer balance cap (TBC) and how to ensure those clients are compliant after July 1, 2017, at the SMSF Association Technical Day.

SMSF Association head of policy Jordan George will discuss how the TBC limits the amount of capital an individual can have in retirement phase after July 1 to $1.6 million, with the consequence of limiting a fund’s tax exempt earnings derived from assets supporting income streams. The cap applies only to retirement phase income streams and exempts transition-to-retirement income streams (TRIS) not in the retirement phase, the age pension, and overseas pensions.

An SMSF trustee’s personal TBC is managed through a transfer balance account (TBA) that reflects the net position of credits and debits.

Counting on the credit side of the ledger for a TBA are:

  • The value of retirement phase income streams as at June 30, 2017;

  • Commencement value of new retirement phase income streams (this includes death benefit income streams)

  • Value of reversionary income streams 12 months from the time the individual is to receive them or July 1, 2017

  • Notional earnings that accrue on excess

  • Repayments of new limited recourse borrowing arrangements after July 1, 2017, using accumulation benefits.

On the debit side are:

  • Full or partial commutation of capital value of a retirement phase income stream;

  • Failure to comply with either the SIS Regulation pension standards or a commutation authority;

  • Family law payment splits;

  • Structured settlement contributions;

  • Losses due to fraud on conviction of person responsible or bankruptcy.

George will detail how the TBA relates to pre-July 1, 2017, income streams, TRIS, and market-linked and flexi-pensions.

“With the former, the personal TBC is the general TBC of $1.6 million at 1 July 2017, with the retirement phase pensions triggering a ‘credit’ on 1 July.

“In relation to TRIS, an SMSF paying a TRIS post 1 July 2017 can treat it as a retirement phase income, stream provided the fund member has turned 65 or the member notifies the fund they have met a condition of release where a nil cashing restriction is met, such as ceasing an employment arrangement post age 60.

“In addition, SMSFs paying a TRIS may be eligible to claim CGT relief in their 2016-17 tax return.

“However, an SMSF paying a TRIS post 1 July 2017 does face new restrictions, including exempting earnings on assets supporting a TRIS not in retirement phase and accepting an election from a fund member to convert a pension payment to a lump sum.”

An SMSF paying a market-linked pension before July 1 can use a “special value” to calculate a TBC credit on July 1, while a fund starting a new market-linked pension from July1 will use an “account balance” to calculate the TBC on the starting date.

“Flexi-pensions, a scheme that ended on 30 June 2007, have been excluded for the definition of a capped defined benefit income stream, with trustees to use a ‘net present value’ to calculate a TBC ‘credit’ on 1 July 2017.”

Jordan George

Professional Planner

18 July 2017

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