Proceeds from a member’s pension account are paid tax free to a member. Where the member’s fund balance exceeds the cap and they are able to meet the criteria for release, the member can either withdraw this balance as a lump sum or retain this excess balance within accumulation mode in the fund. As income earned in accumulation mode is taxed at 15%, this may be considered to be more favorable to some taxpayers than taking the excess amount as a lump sum and subsequently paying tax on associated earnings at their marginal tax rate.
It should be noted that the relevant cap applies per fund member, meaning that when combined, a couple would have a combined maximum cap $3.2 million dollars (assuming each had an individual cap of $1.6 million).
A member’s transfer balance cap however essentially ceases upon that member’s death, and accordingly where a member’s death benefits are left to their spouse, it will be taken into account in the surviving spouse’s transfer balance cap. That is an individual’s cap includes not only their own pension, but also both reversionary and death benefit pensions that may be commenced upon the death of another person.
A credit is required to be applied to a member transfer balance account when either a reversionary or death benefit pension is commenced, the timing of this credit is summarized below:
| Pension type | Credit to be applied to TBC |
|---|---|
| Reversionary pension | 12 months after a member deaths death (s.194- 25(1) ITAA 1997) |
| Death benefit pension | The date of entitlement to the income stream |
As can be seen from the above, a 12 month period of grace is provided to beneficiaries of a reversionary pension to manage any transfer balance cap issues without breaching their respective cap. This is because the beneficiary would ordinarily become entitled to a reversionary pension at the date of death of the deceased and accordingly without this grace period, would have no time in which to organize their own affairs.
In such cases a beneficiary could undertake the following actions to comply with their transfer balance cap:
- Commute some or all of their own initial pension account back into accumulation mode
- Withdraw some of their own pension account as a lump sum
- Continue the reversionary pension up to the $1.6m transfer balance cap and withdraw the excess death benefits as a lump sum payment
Helpful tips: It should be noted, that due to the ‘compulsory cashing rules’ of death benefit proceeds, it would not be possible to revert any death benefits back into accumulation on phase.
Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.
This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning. Neither BNR Partners Pty Ltd, our employees or agents are responsible for any errors or omissions or any actions taken or not taken on the basis of this publication.