ATO finalises guidance on transfer balance cap

ATO finalises guidance on transfer balance cap

The ATO has released a final version of its law companion guideline on the transfer balance cap, which provides positive clarifications for the SMSF sector.

Late last week, the ATO issued the finalised LCG 2016/9 Superannuation reform: transfer balance cap.

You can access the full guide here.

Mostly, the finalised guidelines are a confirmation of what was already issued in the draft guidelines in November last year.

“It is positive from the point of view of ratifying what we already knew, it’s nice to have that confirmation,” said Perpetual’s Colin Lewis, who is generally pleased with the comprehensiveness of the LCGs issued by the ATO.

The final version of the guidelines appears to take a more cautious approach to the transitional rule, which applies to individuals who are over their transfer balance cap by less than $100,000 as at 1 July 2017 and remove the excess by 31 December 2017, explained SuperConcepts’ Peter Burgess.

“The draft guidelines said individuals with pension balances approaching $1.7 million should carefully monitor their pension balance and ensure it doesn’t exceed $1.7 million as at 1 July 2017. The final guidelines refer to $1.6 million as the relevant threshold,” Mr Burgess said.

“Essentially, what the final guidelines are saying is that whilst you will not be liable to pay excess transfer balance tax if you exceed the transfer balance cap by an amount equal to or less than $100,000, and you remove that excess by 31 December 2017, there may be other implication as a result of you exceeding the $1.6 million transfer balance cap,” he added.

“For example, you will not be eligible for any proportional indexation should you ever commence a second pension after 1 July 2017 and if you don’t remove the excess by 31 December 2017, you will be liable to pay excess transfer balance tax.

“So individuals should be cautious, ‘lower their eyes’ and focus on the $1.6 million as being the relevant cap rather than automatically factoring in the transitional $100,000 amount.”

Mr Burgess pointed to a positive development in the explanatory memorandum, which says any breaches of the transfer balance cap committed prior to 1 July 2018 do not count as a ‘first strike’ when assessing the 30 per cent tax rate to apply to any subsequent transfer balance cap breaches.

“Under the legislation, a tax rate of 30 per cent applies to additional excess transfer balance tax assessments the individuals receive, as opposed to 15 per cent for the initial breach. However, an assessment that applies to an excess transfer balance period beginning before 1 July 2018 does not count as an earlier assessment for the purposes of assessing subsequent breaches at the 30 per cent rate,” he said.

“So whilst an individual, who is eligible for the $100,000 transitional measure, may not be entitled to any future indexation of the cap, at least their excess pension balance won’t count for the purposes of determining the 30 tax rate to apply to any subsequent transfer balance cap breaches.”

The final guidelines also provide more details about how the transfer balance cap will be applied in the event of divorce and provide further confirmation that a reversionary pension must automatically revert in order to be eligible for the 12-month grace period.

“In other words, if the trustees have any discretion over how the death benefit can be paid, and they ultimately decide to pay the benefit as a death benefit pension, a credit will appear in the recipient’s transfer balance account on the day the pension commences and the credit value will be the value of the pension at that time. If the pension automatically reverts, the credit only appears in the recipient’s transfer balance account 12 months after the date of death and the value of the credit is based on the value of the pension as at the date of death,” Mr Burgess said.

ATO finalises guidance on transfer balance cap
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