Confusing your super caps is a common mistake

Executive Manager, SMSF Technical & Private Wealth, SuperConcepts
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Since 1 July 2017, your super is controlled by two caps – your Transfer Balance Cap and your Total Super Balance.  Both caps have $1.6 million limits, which doesn’t make it any easier if you wish to work out which one applies.

To put it simply:

  • Your Transfer Balance Cap (TBC) controls how much you can transfer to retirement phase to commence income streams (pensions).
  • Your Total Super Balance (TSB) is calculated every 30 June and controls the amount of non-concessional contributions, other super concessions and ATO reporting requirements.

Let’s look at the two caps in more detail.

1. Transfer balance cap

Your TBC puts a limit on the amount you can transfer to retirement phase to commence an income stream(s) after you have met a full condition of release, such as retirement or, if earlier, when you reach 65.  It also applies to any death benefit income streams you receive on the death of someone else, usually your spouse.

The amount counted against your TBC includes:

  • the balance of any income stream in retirement phase or death benefit income stream as at 1 July 2017, and
  • the amount you used to commence an income stream or death benefit income stream on or after 1 July 2017,

The amount counted against your TBC is reduced if you transfer some or all your income stream to accumulation phase or amounts you have withdrawn from the income stream as lump sums. If your income stream balance increases by any investment income earned by your super fund or reduced by income stream payments, it has no effect on the amount counted against your TBC.

If the total of all amounts counted is greater than your TBC, any excess must be transferred to your accumulation account in the fund or withdrawn from the fund as a lump sum. In addition, an interest rate penalty will apply to any excess.

Most people have a TBC of $1.6 million, but there are some exceptions to have a higher cap if you are in receipt of a defined benefit income stream. A defined benefit income stream is usually paid from some public sector funds and a small number of corporate funds. If you have one of these income streams, your fund will usually tell you.

Here’s a case study

As an example of how the TBC works, let’s suppose Grant:

  • commenced the first account-based income stream on 1 July 2018 with a value of $1,300,000, and
  • commenced a second account-based income stream on 1 July 2019 with a value of $400,000.

Initially, the account based balance of $1,300,000 will be measured against Grant’s TBC of $1.6 million. As the balance is less than his TBC, there will be no excess.  However, if Grant commenced the second account based income stream with $400,000, he will exceed his TBC.  He will be required to transfer $100,000 plus the interest rate penalty to accumulation phase or withdraw it from super as a lump sum.  The interest rate penalty is included against amounts measured for TBC purposes.

The interest rate penalty is required to be included in Grant’s personal income tax return and will taxed at 15%.  If Grant exceeds his Transfer Balance Cap, a second or subsequent time the tax will be 30%.

Therefore, Grant should have been more careful in commencing the second account-based income stream so that he would not exceed his TBC of $1.6 million and avoid any penalties applying to the excess.

Total Superannuation Balance

Your TSB is used to control the amount of super contributions, gain access to some super concessions and when your SMSF reports to the ATO for TBC purposes. It is calculated on 30 June each year and includes the total of amounts you have in your accumulation account(s), income stream balances and any amounts that are being transferred between funds at that time.

When your TSB exceeds certain amounts, then limits are placed on the amount of your non-concessional (non-deductible) contributions. If you make non-concessional contributions and your TSB exceeds $1.6 million on 30 June in the previous financial year, you can have them refunded and will incur an interest rate penalty or you can leave them in the fund, and they will be taxed at 47%.

If you are under 65, it is possible to access the bring forward rule for non-concessional contributions depending on your TSB. If your TSB is between $1.5 and $1.6 million you are only able to make the standard non-concessional contribution of $100,000.  If your TSB is between $1.4 and $1.5 million you can bring forward one year’s non-concessional contribution in the first year your non-concessional contributions exceed $100,000.  This means you can make contributions of no more than $200,000 anytime over a two year fixed period.  If your TSB is no more than $1.4 million you can access the three year bring forward rule which allows access to contributions of no more than $300,000 anytime over a three year fixed period.

Case study (cont’d)

Let’s assume Grant is age 60 and makes a non-concessional contribution of $110,000 in the 2019/20 financial year. Grant’s non-concessional contribution exceeds the standard non-concessional contribution of $100,000 and because of that will allow him to access the bring forward rule.  The  amount of the non-concessional contribution that can be made will also depend on his TSB as at 30 June in the previous financial year, that is, on 30 June 2019.

The amount Grant had in his accumulation account on 30 June 2018 was $1,350,000 which was his TSB. As Grant’s TSB at that time was less than his TSB cap of $1.4 million for non-concessional contributions, he will be able to access the three year bring forward rule. This will allow him to make non-concessional contributions of up to $300,000 at any time over a fixed 3 year period commencing in the 2019/20 financial year.

However, once Grant’s TSB on the previous 30 June exceeds $1.6 million he cannot make non-concessional contributions in the next financial year without incurring an interest rate penalty.

Total Superannuation Balance – Other limits

The TSB has an impact on other super concessions. If your TSB is more than $1.6 million, you will not be eligible for the superannuation co-contribution or low income superannuation tax offset or your spouse will not be eligible for the spouse contribution tax offset.

A lower TSB threshold applies to access other superannuation concessions.  This includes the carry forward unused concessional contribution (subject to a maximum TSB of $500,000 to qualify) and the post retirement super contribution (subject to a maximum TSB of $400,000).  In addition, reporting of amounts for purposes of the TBC also depends on the TSB of fund members. It applies if one fund member has a TSB of at least $1 million and other conditions apply.

Don’t mix the caps

Don’t forget that your Transfer Balance Cap is all about the amounts you have transfer to commence pensions in retirement phase and your Total Super Balance is about qualifying to make contributions, some super tax concessions and when an SMSF reports TBC amounts to the ATO.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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