Federal Budget / Pensions / SMSF Compliance

Understanding your retirement debits and credits

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The super reforms from 1 July 2017 will introduce a range of new concepts for post-retirement, along with an obligation to report amounts being transferred into retirement phase so that it is assessed against each member’s $1.6 million transfer balance cap.  This cap is designed to limit the amount of capital that can be transferred into retirement phase to support the payment of an income stream and be entitled to tax exemption of fund earnings from assets supporting the pension.

A Transfer Balance Account (‘TB Account’) will include:

  • the value of superannuation interests that support any income streams at 30 June 2017; and
  • the commencement value of any new superannuation income stream that commences from 1 July 2017

There are a range of additional credits and debits that will ultimately impact an individual’s TB Account, which I’ve outlined below:

Credits to an individual’s transfer balance account

The following amounts will count as a credit that must be reported and applied to an individual’s Transfer Balance Account:

  • The value of all superannuation interests that support superannuation income streams in retirement phase on 30 June 2017;
  • The commencement value of new superannuation income streams (including new death benefit income streams) in the retirement phase that start from 1 July 2017;
  • The value of reversionary superannuation income streams at the time the individual becomes entitled to them; and
  • Notional earnings that accrue on excess transfer balance amounts

Importantly, changes to the value of a superannuation interest that supports a superannuation income stream after the initial valuation that credits the individual’s transfer balance account are not taken into consideration (i.e. any increase or decrease in the member’s account balance subsequent to commencement of the income stream).

Debits to an individual’s transfer balance account

The following amounts will count as a debit that must be reported and applied to an individual’s Transfer Balance Account:

  • An individual that commutes* (in part or in full) a superannuation income stream is generally entitled to a debit for the value of the lump sum from their transfer balance account
  • An individual receives a structured settlement payment that is received and then contributed towards an individual’s superannuation interest (e.g. personal injury payment); and
  • A range of limited event (replenishment debits) may result in an individual losing some or all of the value of their superannuation interest. A debit may be granted by the Commissioner upon notification for items including fraud, bankruptcy and void transactions, along with Family Law payment splits.

Note: pension payments from a superannuation income stream will not count as a debit.  Furthermore, the reforms will repeal Regulation 995.1.03 of the ITAR 1997 that will disallow a partial commutation to apply towards a member’s minimum pension for an income year.

Subject to the market value of a member’s superannuation interest at the time a debit may occur, it could result in the individual’s transfer balance account to go into a negative balance.  Importantly, this will allow for any subsequent credit back to the individual’s TB account to be appropriately measured against their transfer balance cap (e.g. where a member commutes the income stream and completes a rollover between super funds).

Understanding how these debits and credits will impact an individual’s transfer balance account over their lifetime will become central to the post-retirement landscape from 1 July 2017.  You can find out more about these debits and credits in my recent webinar, or register for the upcoming SMSF Day events I will be holding around Australia between 8-15 November 2016.

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