By Marjon Muizer
With new rules come new words, especially when it comes to superannuation. It doesn’t take long before you end up with more jargon in your super vocabulary than the average teenager and their iPhone.
The 1 July 2017 super reforms – representing the biggest set of SMSF changes in over a decade – have launched a raft of new terms you need to know, no matter whether you’re an SMSF trustee or a practitioner in the field.
Making personal after-tax non-concessional contributions to super doesn’t just depend on your age and work status but also your super balance. Only members with a total superannuation balance (TSB) below $1.6 million on 30 June of the prior financial year are able to make non-concessional contributions.
If your balance is close to $1.6m, it may be wise to hold off making contributions until the EOFY process is complete and your 30 June balance is finalised.
Yep, that’s a lot of jargon, yet it’s important you understand these acronyms particularly if you’re drawing a pension from an SMSF or are considering doing so.
The general transfer balance cap (GTBC) relates to the value of pensions that can be transferred to retirement phase without incurring a penalty. For FY 2017/18 the general transfer balance cap for most people is $1.6 million. The cap is indexed in line with changes in CPI in increments of $100,000. Indexation is available if you haven’t previously used up all of your personal transfer balance cap (PTBC).
Your personal transfer balance cap is equal to your general transfer balance cap for the financial year you begin to have a transfer balance account (i.e. the financial year in which you commence a pension).
Subsequently, your personal transfer balance cap is indexed proportionally in line with increases in the general transfer balance cap, provided you haven’t previously used up your personal transfer balance cap in full.
Example: Personal transfer balance cap
John commences an account based pension on 1 July 2017 with a capital value of $1,200,000.
On 1 July 2020, because of CPI indexation, the general transfer balance cap increases by $100,000, from $1.6m to $1.7m.
However, as a result of the CPI increase John’s personal transfer balance cap is lifted to only $1,625,000. This is because on 1 July 2017 John used up 75% of his personal transfer balance cap, and as a result he is only entitled to an additional 25% of the indexed amount.
The transfer balance account (TBA) is a running total against your personal transfer balance cap. The ATO administers your transfer balance account and any debits and credits to it need to be reported within the required timeframe. For example, lump sums taken from a pension account will be recorded as a debit and new pensions will be recorded as a credit.
A good SMSF software system should have the ability to report the relevant transactions to the ATO, enabling them to monitor your transfer balance account. If you’re a trustee, make sure you discuss with your accountant how your fund can meet the reporting obligations.
Your first year cap space is the difference between the general transfer balance cap and your total superannuation balance. For example, if you have an accumulation account of $700,000 and the general transfer balance cap during that year is $1,600,000, your first year cap space is $900,000.
If you exceed your personal transfer balance cap, the excess amount is referred to as your excess transfer balance.
Any excess is subject to an interest penalty which is calculated over the period called your excess transfer balance period, during which the amount you have in retirement phase exceeds your transfer balance cap.
The interest penalty, called your excess transfer balance earnings, is calculated as a notional earnings amount on the excess and counted as a credit to your transfer balance account.
You are personally liable for excess transfer balance tax equal to 15% on the notional earnings for the first time an excess occurs and 30% for further breaches. The interest rate is currently in the vicinity of 9% p.a. which is calculated as the 90-day bank bill rate plus 7%.
So, fairly heavy reading, but it gives meaning to some of the important new terms emanating from the super reforms. SMSF members who remain within the caps have little to worry about. For those skating close to or over the caps, then an understanding of the new terminology is vital.