The new $1.6 million pension transfer balance cap (PTBC) makes things complicated enough all on its own for advisers whose clients have account-based pensions that will exceed the limit at June 30 this year. But things get even more complicated when those clients also receive a lifetime annuity or pension.

The pension legislation includes provisions for two categories of defined benefit income streams:

  • lifetime pensions and annuities regardless of when they started
  • lifetime expectancy and market-linked pension annuities where the income stream existed on June 30, 2017.

Where a client receives only a defined benefit income stream, and does not have any other superannuation pension balances, the excess of their defined benefit income above $100,000 is taxed differently to the amounts received under $100,000 a year.

Where the income stream is paid from a taxed source, half of the excess above $100,000 is added to the taxable income of the member. Where the income stream is paid from an untaxed source, all of the excess above $100,000 is added to the taxable income of the member.

The complication for advisers arises where clients have an account-based pension and also receive a defined benefit income stream. In this situation, a value is placed on the defined benefit income stream to arrive at the total of a person’s superannuation pension assets.

The value placed on a defined benefit income stream is 16 times the annual entitlement. This means when advisers are assessing whether clients will have an excess PTBC problem – and those clients also receive a defined benefit income stream – they will need to multiply the annual annuity or pension by 16 and add this to the total estimated value of the account-based pension.

For example, if a client has an account-based pension with an estimated value at June 30, 2017, of $1.7 million, and is receiving a defined benefit income stream of $30,000 a year, the combined total of their superannuation pension accounts will be $2.18 million. Made up of a value for the income stream of $480,000 ($30,000 x 16) and the $1.7 million in the account-based pension.

As lifetime pensions cannot be commuted, I believe clients will be required to either payout or rollover any excess they have above the PTBC from their self-managed superannuation fund account-based pension. This will need to be done before July 1, 2017, so that the SMSF can get the benefit of the capital gains tax relief and avoid having to pay excess transfer balance tax and roll out the notional earnings on the excess.

Where the excess over the PTBC is $100,000 or more at June 30, 2017, excess transfer balance tax is payable on the notional earnings on the excess. The excess transfer balance tax will be levied at 15 per cent on the notional earnings for periods in the 2017-18 financial year. From July 1, 2018, the tax will be 15 per cent for the first breach and then 30 per cent for each subsequent breach.

The notional earnings are calculated only on the amount that exceeds the PTBC on a daily basis for the period from when the excess occurred until the date when the Australian Taxation Office issues a determination notice advising the member of the excess.

Notional earnings are calculated at the general interest charge. This is a penalty interest that the ATO has used since July 1, 1999. It is based on the 90-day Bank Accepted Bill rate, with an uplift factor of 7 per cent.

The difficulty for advisers who do not have an intimate knowledge of the total taxation situation of their clients will be to identify those who could have a problem with regard to lifetime annuities or pensions.

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