In this guide
- The transfer balance cap (TBC) and how it changes
- How do the transfer balance cap rules work?
- Does this mean I can’t have more than my TBC amount in super?
- What is a transfer balance account?
- What counts towards the transfer balance cap?
- What happens if I breach the TBC?
- What happens when the cap is indexed?
- Death and the transfer balance cap
One of the most significant changes to super – the introduction of the transfer balance cap (TBC) – came into effect on 1 July 2017. The cap rose for only the second time on 1 July 2023, so it’s worth understanding how it is applied and how to take advantage of new opportunities when it’s increased.
As the name suggests, the TBC limits how much super retirees can transfer into a super pension account.
Anybody who retires has the choice of accessing their super either as a lump sum, an income stream or a combination of both. If they access any of their super as an income stream, the income earned on the capital supporting that income stream is tax free.
The introduction of the TBC was designed to reinforce the role of super to provide retirement income, not as a store of intergenerational wealth or means of avoiding tax.
The transfer balance cap (TBC) and how it changes
On 1 July 2017, a cap on the amount that can be used to commence a pension in retirement phase was introduced. The cap was initially set at $1.6 million.
The cap is indexed periodically in $100,000 increments, in line with inflation. Indexation first occurred on 1 July 2021, when the cap increased to $1.7 million, and a spike in inflation caused a jump to $1.9 million on 1 July 2023.
How do the transfer balance cap rules work?
The transfer balance cap limits the amount you can transfer into a retirement income stream, but any change in the value of the income stream after it has started is not taken into account.
For example, if you transferred $1.7 million to an income stream in July 2022 you used the whole available cap at that time. If the balance of your account later rose above the cap due to investment returns, the limit would not be breached. Only transferring more money into an income stream can cause you to exceed the cap.
If you exceed the cap, you are liable to pay tax on the excess transfer balance earnings (excess transfer balance tax). You also need to transfer any excess to a super accumulation account or withdraw it as a lump sum. This is called a commutation.
Does this mean I can’t have more than my TBC amount in super?
No. You can have more than your cap in super, but you can only use the amount up to your cap to commence a retirement income stream.
If you have more than your transfer balance cap amount after retirement you can leave the remainder in your accumulation account. The fund pays 15% tax on earnings in the accumulation phase rather than 0% if it was in retirement phase. You can also remove it from the super system but, if the amount is then invested in your name, any income will be taxed at your personal tax rate.
What is a transfer balance account?
If you receive your super as an income stream, you will have a transfer balance account in your name with the ATO. That account will start on either the date you first received a retirement income stream after 1 July 2017, or on that date if you were already receiving a retirement phase income stream on 30 June 2017.
A transfer balance account is a record of all the events that count towards your transfer balance cap and is kept by the ATO. If you have more than one super pension account, the amounts you used to commence each one (or the ‘special value’ of the income stream if it is a capped defined benefit) will all be recorded and added together in your transfer balance account report (TBAR) with the ATO. This account remains active until your death, and you can access your TBAR at the ATO via your myGov account.
If you already had a retirement income stream before 1 July 2017, your super fund was required to report the value as at 30 June 2017. If you commenced an income stream after 1 July 2017, your fund will have reported the commencement value of that super income stream. You can always talk to your super fund if you disagree with the amount reported on your TBAR.
If you take a lump sum from your income stream, or transfer some or all of it back into the accumulation phase, a debit is recorded in your transfer balance account. This creates ‘space’ in your account to be used when you later start another income stream.
The transfer balance cap is exceeded when the balance in your TBAR is higher than your personal cap.
A transfer balance account report will include both credits and debits as shown in this example:
| Date | Transaction | Debit | Credit | Transfer balance |
|---|---|---|---|---|
| 1 Jan 2018 | Superannuation Income stream purchase | $0 | $1,600,000 | $1,600,000 |
| 1 Jun 2018 | Partial commutation of the income stream to a lump sum | $200,000 | $0 | $1,400,000 |
What counts towards the transfer balance cap?
Any super transferred into retirement phase from an accumulation account to support an income stream counts as a credit towards the cap.
Death benefit income streams count as credits towards your cap. A death benefit income stream is an income stream started with the proceeds of a deceased person’s super, most commonly a spouse. Read more about consequences of receiving a death benefit income stream in the last section of this article.
Providing they meet certain criteria, as defined by law in the box below, structured settlement contributions do not count towards the cap in that a credit and a debit for the structured settlement amount will appear in your TBAR on the same day. A structured settlement is a payment for a personal injury you have suffered that is contributed to a complying super fund.
“The contribution must arise from:
(a) The settlement of a personal injury claim that is based on the commission of a wrong, or a right created by statute, effected by a written settlement agreement between the parties
(b) Settlement of a personal injury claim arising under an Australian workers compensation law, or
(c) The order of a court made in respect of a claim that is based on the commission of a wrong, or a right created by statute (not including a court order approving or endorsing a settlement agreement as mentioned above).”
What happens if I breach the TBC?
If you breach the cap you may receive an excess transfer balance determination from the ATO. Regardless of whether you receive a determination you are required to pay tax on the excess transfer balance earnings for every day your account is in excess. Those earnings are calculated by a daily pre-determined formula, which is part of the law, and is worked out as follows:
90-day bank accepted bill yield + 7 percentage points ÷ number of days in the calendar year
The tax rate is 15% for your initial excess transfer balance amount, increasing to 30% for your next excess transfer balance amount, if you exceed the cap again.
The earnings compound daily and are credited to your transfer balance account and included in the next day’s earnings calculations. That only stops when the ATO issues an excess transfer balance determination (to crystallise the amount) or you commute the excess transfer balance by cashing it as a lump sum or transferring it back into an accumulation account; whichever is earliest.
If you don’t commute the amount by the required date on the determination, the ATO will send a commutation authority to your super fund to commute the amount even if the remaining amount is small.
What happens when the cap is indexed?
When indexation occurs, anyone who has not already commenced a retirement income stream has access to the new higher limit.
Individuals who have previously started an income stream have a personal transfer balance cap that is adjusted for indexation based on the proportion of the cap they have already used in the past.
If your transfer balance account has ever been equal to or higher than your cap, you will not receive any indexation.
Indexation is calculated by dividing the highest ever balance of your transfer balance account by your transfer balance cap on the earliest day you had that balance. That number is then expressed as a percentage, rounded down to the nearest whole number, and subtracted from 100. The resulting percentage of the indexation increment is then added to your prior cap.
Confused? Luckily, you will not need to calculate this for yourself. The ATO keeps your personal cap up to date with indexation in their online service you can access via myGov. If you’re keen to understand it, here’s how it works.
It’s important to remember that if there are transfer balance events that reduce the amount supporting your pension – for example the pension was partially commuted – your indexation will depend on the highest ever balance of your TBA.
Death and the transfer balance cap
When you inherit a death benefit income stream its value is added to your transfer balance account. The timing of the addition depends on whether it is reversionary or non-reversionary.
When a person who held an income stream and had nominated a reversionary beneficiary dies, the ownership of the income stream automatically passes to the reversionary beneficiary and a reversionary death benefit income stream starts.
In this case, the value on the day of death is calculated and a credit of that amount is made to the transfer balance account of the recipient 12 months after the death. This delay provides time for the beneficiary to make adjustments if necessary to avoid exceeding the cap.
A non-reversionary death benefit income stream is an income stream commenced with super death benefits when there was no reversionary nomination. The account may have been in accumulation phase or in a retirement income stream without a reversionary nomination.
In this case, a credit to the recipient’s transfer balance account of the value of the death benefit income stream occurs on the day it commences.
If you inherit a super death benefit as a lump sum, there are no consequences for your transfer balance cap.
When a child receives a death benefit income stream their transfer balance cap is not the general cap. Instead, they have a ‘modified personal transfer balance cap’.
The modification of the transfer balance cap depends on the deceased parent’s super interests – that is, whether they were in accumulation or retirement mode – and the child dependent’s share of the super interests. These modification calculations are called cap increments.
A child recipient of a death benefit income stream must cash it when they reach age 25 unless they are disabled. At the time benefits are cashed, the modified transfer balance cap arrangements end. The rule for child recipients are complex and described in detail on the ATO website.
If you move your pension back into accumulation and then later covert back to a pension is that money counted twice ?
When money is transferred back into accumulation phase, this is called a commutation. The commutation is deducted from your transfer balance account, reducing its balance.
Then, when you transfer money back into a pension (retirement phase), the amount transferred is added to your transfer balance account.
This avoids any double counting.
The process is explained under the heading ‘What is a transfer balance account?’ in this article.
A word of warning – don’t expect any help from your super fund in dealing with the nuances of Transfer Balances. My experience with HostPlus and Aust Super was that their support people have been told to freeze at the mention of “transfer balance” and start repeating “ATO, ATO, ATO” until you hang up. So not only did I find myself grappling with the verbose and confusing info from the ATO, but no assistance from the Super Funds who appear to be paralysed by the new transfer balance system. My independent financial advisor at least was helpful.