Superannuation death proceeds and transfer balance caps

As the reader would be aware, from 1 July 2017, a transfer balance cap of $1.6M was enacted in Australia, which essentially places a maximum life me cap of $1.6M on a member’s superannuation on proceeds that can be converted into a pension account to fund their retirement. This balance cap threshold is subject to CPI increments of $100,000 for those who are yet to commence pension phase.

Current at 1 November 2021

Superannuation death proceeds and transfer balance caps

As the reader would be aware, from 1 July 2017, a transfer balance cap of $1.6M was enacted in Australia, which essentially places a maximum life me cap of $1.6M on a member’s superannuation on proceeds that can be converted into a pension account to fund their retirement. This balance cap threshold is subject to CPI increments of $100,000 for those who are yet to commence pension phase.

Current at 1 November 2021

Proceeds from a member’s pension account are paid tax free to a member. Where the member’s fund balance exceeds this amount 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 more favorable to some taxpayers than taking the excess amount as a lump sum and subsequently paying tax on associated earnings at their respective personal marginal tax rates.

It should be noted that the $1.6 million-dollar cap applies per fund member, meaning that when combined, a couple would have a combined maximum cap of $3.2 million dollars.

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 necessary for the surviving spouse to access their personal transfer balance cap of $1.6 million dollars, as this 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 ming of this credit is summarized below:

Pension typeCredit to be applied to TBC
Reversionary pension12 months a2er a member deaths death (s.194- 25(1) ITAA 1997)
Death Benefit pensionThe date of entitlement to the income stream

 

As can be seen from the above, a grace period of 12 months has been provided to beneficiaries of a reversionary pension to manage any transfer balance cap issues without breeching their respective cap. This is as primarily, 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 me in which to organize their own respective affairs.

In such cases a beneficiary could undertake the following ac ons to comply with their respective transfer balance cap:

  1. Commute some or all of their own initial pension account back into accumulation mode
  2. Withdraw some of their own initial pension account as a lump sum
  3. 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.