Income Stream transfer balance cap
AvSuper summarises the new transfer balance cap and its potential impact for members in and nearing retirement.
A Government imposed maximum balance (known as a transfer balance cap) for Australian Income Streams was introduced on 1 July 2017. Previously, there had not been a limit on how much money could be in an Income Stream. For 2020-21, the cap is $1.6 million but this amount will be indexed in line with CPI in $100,000 increments for future years.
There are various implications from this new law and 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 $1.6 million in an income stream.
- Transition to Retirement income streams are not subject to this cap, but will be subject to earnings tax from 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, 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?
The transfer balance cap is a Government imposed maximum amount you can put into Australian income streams.
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.
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 $1.6 million, it won’t matter if your balance later grows to more than $1.6 million due to investment earnings.
If you exceed the cap (ie have an excess transfer balance), you will have to reduce the balance to the cap and 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.
Note that 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 specified time in your assessment, the Commissioner will direct your super fund to make a withdrawal for you.
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.
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!
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