The transfer balance cap (TBC) is a limit on the amount of superannuation savings an individual can transfer into a retirement phase income stream, where earnings are tax-free. This cap was introduced on 1 July 2017 to restrict tax concessions for those with large super balances.
This guide explains how the TBC works, how it is indexed, and what happens if you exceed your personal cap.
What is the Transfer Balance Cap?
The TBC limits the total amount that can be transferred into a retirement phase pension. Earnings on these assets remain tax-free. However, amounts in accumulation phase continue to be taxed at up to 15%.
- Current Transfer Balance Cap: From 1 July 2023, the general TBC increased to $1.9 million due to indexation.
Personal Transfer Balance Cap (PTBC)
Each individual has a personal transfer balance cap, which may differ from the general cap based on their highest-ever transfer balance. This means that some people may have a cap between $1.6 million and $1.9 million.
How the Transfer Balance Account Works
The transfer balance account (TBA) records amounts transferred into and out of the retirement phase. It operates on a system of credits (increases) and debits (reductions).
- Credits: Include amounts transferred into a pension or reversionary pensions received.
- Debits: Include pension commutations (lump sum withdrawals) and structured settlement contributions.
Indexation of the Cap
If you haven’t fully used your transfer balance cap, you may be eligible for proportional indexation. This means your cap increases based on the unused portion when indexation occurs. However, once your cap is fully used, it does not increase further.
Breaching the Transfer Balance Cap
If your transfer balance account exceeds your cap, you must commute (reduce) the excess amount or face penalties.
- Excess Transfer Balance Tax: If you exceed your cap, you will pay excess transfer balance tax on the notional earnings.
Capped Defined Benefit Income Streams (CDBIS)
Certain defined benefit pensions have special rules. The defined benefit income cap is $118,750 per year (2023/24). Excess income above this cap is subject to additional taxation.
Final Thoughts
Understanding your transfer balance cap is crucial for managing retirement income and avoiding tax penalties. Consulting a financial adviser can help ensure that your pension strategy remains compliant and tax-effective.