Transfer balance cap – capped defined benefit income streams

Modified transfer balance cap rules

A capped defined benefit income stream, such as a lifetime pension, counts towards your transfer balance.

However, the transfer balance cap rules apply differently to capped defined benefit income streams as any excess transfer balance is generally unable to be commuted from these income streams.

If you have a capped defined benefit income stream:

• it will be included in your transfer balance account and
  • count towards your personal transfer balance cap
  • taken into account when we calculate if you're entitled to indexation of your personal transfer balance cap
• your super fund will calculate the 'special value' your capped defined benefit income stream according to a legal formula and report it to us, with the amount then recorded as a credit in your transfer balance account
• you may need to include income from these income streams in your assessable income and have a reduced entitlement to the super income stream tax offset if both
  • your income from your capped defined benefit income streams exceeds the defined benefit income cap
  • you're 60 years old or older – or under 60 years old (and receiving a death benefit income stream from a person who died at 60 years old or older).

If you exceed your personal transfer balance cap due to a combination of capped defined benefit income streams and account-based income streams:

• tax consequences may apply to the income from your capped defined benefit income streams
• you may need to commute your account-based pension and be liable for excess transfer balance tax.

What are capped defined benefit income streams?

Capped defined benefit income streams include:

• lifetime pensions, regardless of when they start
• lifetime annuities that existed before 1 July 2017
• life expectancy pensions and annuities that existed before 1 July 2017
• market-linked pensions and annuities that existed before 1 July 2017.

If you're receiving an income stream, ask your super fund if it's a capped defined benefit income stream.

Calculating the 'special value'

Your super fund will calculate the 'special value' of your capped defined benefit income stream and report it to us. You will receive a credit in your transfer balance account for this amount.

The following steps shows how they will calculate it.

Step 1 – Annualise your entitlement

Annualise the first payment you are entitled to receive from the income stream after the income stream started (or after 1 July 2017 if income stream existed before 1 July 2017).

This can be expressed in the following formula:

First payment divided by the number of days in the period, multiplied by 365.

Step 2 – Calculate your special value

• For lifetime pension or annuity, your special value is your annual entitlement multiplied by 16.
• For non-commutable life expectancy or market-linked products, your special value is your annual entitlement multiplied by the number of years (rounded up to the nearest whole number) remaining in that product.

If your special value exceeds your personal transfer balance cap

If you only have credits in your transfer balance account from capped defined benefit income streams, you will not have an excess transfer balance.

However, you may need to include part of the excess amount in your assessable income if both:

• you have credits in your transfer balance account from both a capped defined benefit income stream and an account-based income stream
• the annual income you receive from your capped defined benefit income streams exceeds your defined benefit income cap.

Your entitlement to the tax offset may also be affected.

For more information, see Capped defined benefit and account-based income streams.

Assessable income from your capped defined benefit income streams

If you are 60 years old or over (or a death benefit dependant and the deceased died at 60 years old or over) and your capped defined benefit income exceeds your defined benefit income cap, you may have additional tax liabilities.

This depends on which of the following components are paid to you as part of your total annual capped defined benefit income stream:

• taxable and tax-free components
• untaxed element
• multiple components.

Taxable and tax-free components

If you receive a taxable component only, or both taxable and tax-free components, 50% of your annual income stream amount over your defined benefit income cap will be taxed at your current marginal rate. The taxable component may consist of a taxed element or an untaxed element depending on whether the benefit is paid from a taxed or untaxed source.

Untaxed element

If you receive an unfunded (untaxed) element of your income stream, the super income stream tax offset will not apply to untaxed-sourced benefits over your defined benefit income cap.

Multiple components

Both of the above treatments will apply if the capped defined benefit income stream you received includes an untaxed element as well as a taxed element, a tax-free component, or both.

Note that any taxed source income is counted first (‘stacked’) before including your untaxed-source income in making these calculations.

If you have an untaxed element in your income stream, your fund may not pre-populate your payment summary with your entitlement to the tax offset as they don't know if you have income from other capped defined benefit income streams that will affect your entitlement to the offset. You will need to determine your entitlement to the offset in preparing your income tax return.

Capped defined benefit and account-based income streams

If you receive both a capped defined benefit income stream and an account-based income stream, you will need to compare the balance of your transfer balance account (taking into account credits and debits from all your income streams) to both your:

• personal transfer balance cap
• capped defined benefit balance.

Your capped defined benefit balance is the net sum of all the transfer balance credits and debits in your transfer balance account from capped defined benefit income streams.

If the balance of your transfer balance account exceeds your transfer balance cap, and also exceeds your capped defined benefit balance, you will have an excess transfer balance. Your excess transfer balance amount will include notional excess transfer balance earnings.

You will need to commute your account-based income streams to resolve the excess amount. You will also be liable for excess transfer balance tax.

Income tax consequences may also apply to the income you received from your capped defined benefit income streams.