Transfer Balance Cap for Income Streams
A Government imposed maximum balance (known as a transfer balance cap) for Australian Income Streams was introduced on 1 July 2017. The cap is $1.7 million and indexed in line with CPI in $100,000 increments after 1 July 2021.
There are various implications to this law. It can be complex to decide the best approach, so please consider contacting our Member Advice Consultants for assistance in understanding the impact for your super and your retirement.
Summary of the key points
- You can have additional retirement savings in a tax-effective accumulation account at the same time as having up to $1.7 million in an income stream.
- Transition to Retirement income streams are not subject to this cap, but are subject to earnings tax (since 1 July 2017). Other Income Streams are not subject to earnings tax.
- The cap applies to the total balance of all income stream accounts you may have in any Australian super fund— you can’t have two accounts of $1.5 million each, for example.
- Lifetime index pensions such as CSS and PSS will also count towards the cap using a statutory formula.
- Once you have a transfer balance cap, it cannot be reduced by regular drawdowns.
What is the transfer balance cap for income streams?
The transfer balance cap is a Government imposed maximum amount you can put into Australian income streams over your lifetime.
The cap covers any and all income streams you may have, excluding any Transition to Retirement (TTR) income streams. Note that AvSuper may not know of other income streams you hold so it is your responsibility to ensure the combined balance remains under the cap.
If you reach the transfer balance cap, you will not be able to contribute any more to an income stream at any time. Also, your cap won’t increase with any subsequent increments.
Fluctuations in account balances due to earnings will not impact the cap. So if earnings put you over the cap, it will not be counted as a breach.
What happens if I exceed the transfer balance cap?
As long as you commence a new income account with less than $1.7 million, it won’t matter if your balance later grows to more than $1.7 million due to investment earnings.
If you exceed the cap (ie have an excess transfer balance), you must reduce the balance to the cap. You’ll also be liable for a tax on the notional earnings of the excess amount. You can reduce your income stream balance by transferring the money into an accumulation account (where there is no maximum balance rule) or by withdrawing the excess as a lump sum. Note that tax implications may apply in either scenario.
Tax will apply to each day you have an excess transfer balance so you may want to reduce your balance before the Tax Commissioner issues an assessment to you as that could take months. If you don’t withdraw sufficient money to go under the cap within a time specified in your assessment, the Commissioner will direct your super fund to make a withdrawal for you.
Impact for AvSuper members
Once you exceed the cap, you will not be able to increase the cap in the future (ie indexation will not apply to your account).
If you don’t reduce your balance, the ATO will direct us to withdraw the excess from your income stream and put it into an accumulation account on your behalf.
How does this work for AvSuper Defined Benefit members?
Since your AvSuper defined benefit will be crystallised into an accumulation account before being transferred into any income stream, the transfer balance cap works in exactly the same way as it does for other members.
Remember: An AvSuper income stream has the same benefits as our accumulation accounts, such as investment choice without switching fees, access to personalised financial advice and a long history of strong investment returns, and with lower fees!
