Super Reforms: The Transfer Balance Cap and Death Benefit Pensions

From 1 July 2017 all pensions balances and any accumulation amounts which become pensions will need to consider the new transfer balance cap measures.

The transfer balance cap has been introduced from 1 July 2017 and is there to track pension balances up to the $1.6m cap to determine how much of an individual’s superannuation balance becomes taxable.

The transfer balance cap is also impacted where death benefit pensions are transferred to existing members. LCR 2017/3 deals with the application of transferring of a members superannuation balance on death and the impact this has on the dependants transfer balance cap.

Are you a dependent beneficiary?

Where a member dies, there superannuation must be cashed out by the trustee as soon as practicable. The cashing of the superannuation balance on death is called a superannuation death benefit.

If you are a dependant beneficiary of the member who has died, then there are a few options available to you in respect of the superannuation death benefit. You can elect the following:

– the superannuation death benefit can be paid as a lump sum and cashed outside of the superannuation system.

– the superannuation death benefit can be paid as death benefit income stream and retained within the superannuation system. From 1 July 2017, a death benefit income stream must be paid when in retirement phase.

– a combination of any of the above.

Where you are not a dependent beneficiary (known as an ‘other beneficiary’), the superannuation death benefit must be paid as a lump sum and cashed outside of the superannuation system.

So who qualifies as a dependent beneficiary.

A dependent beneficiary is a dependent of the deceased member who is:

– a spouse

– a child under 18 years of age

– a financially dependent child under the age of 25

– a child who is disabled irrespective of age

– a person who has an interdependency relationship with the deceased (Section 10A of the SISA and section 20A of the Retirement Savings Accounts Act 1997 (RSAA) give the meaning of interdependency relationship).

Only superannuation death benefits which are paid to dependent beneficiaries as death benefit income streams result in a credit to the transfer balance cap. All other superannuation death benefits which are cashed as lump sums and paid outside of superannuation do not impact the transfer balance cap.

For the dependent’s receiving death benefit income streams, the amount and timing of credit to the transfer balance cap depends on whether the recipient is a reversionary or non-reversionary beneficiary.

Reversionary and non-reversionary pensions

The Draft Guideline states that a reversionary death benefit income stream is an income stream that reverts to the reversionary beneficiary automatically upon the super fund member’s death. That is, the income stream continues, but the entitlement to it passes from one person (the deceased member) to another (the dependant beneficiary) under the rules of the fund.

On the other hand, a non-reversionary death benefit income stream is a new superannuation income stream created and paid to a dependant beneficiary where the trustee exercises a power or discretion to determine an amount in the beneficiary’s favour.

Transfer balance credit: reversionary pension

For a reversionary death benefit income stream, a credit will arise in the recipient’s transfer balance account 12 months after the original super fund member’s death. If the reversionary income stream began before 1 July 2017, the credit will arise on the later of 1 July 2017 or 12 months after the death of the original member.

The credit that will arise in the reversionary beneficiary’s transfer balance account is equal to the value of the superannuation interest on the day it first became payable to the reversionary beneficiary (ie at the date of the death); or just before 1 July 2017 if the income stream commenced before that time.

There is a benefit in having a reversionary beneficiary in place for existing pensions as it provides a 12 month period for the reversionary beneficiary to manage their potential excess balance cap and avoid any penalties and interest charges which may apply on their excess balance.

Transfer balance credit: non-reversionary pension

For a non-reversionary income stream, a credit will arise in the recipient’s transfer balance account on the later of 1 July 2017 or when the person becomes entitled to be paid the income stream. The credit is the value of the superannuation interest at the time it begins, or just before 1 July 2017 if it began before that date. The ATO notes that the value for non-reversionary pensions may include any investment earnings that accrued to the deceased member’s interest between the date of their death and the time the death benefit income stream begins.

Included in the non-reversionary pension category is where members have in place a binding death benefit nomination but no reversionary beneficiary nominated on their existing pensions. A binding death benefit nomination on its own does not make a pension reversionary. The reversionary beneficiary will need to be nominated on existing pensions in order to receive the 12 month extension on when a superannuation death benefit is credited to the transfer balance cap.

Example

Nathaniel commences a pension worth $1.4 million on 1 October 2017. The rules of the pension do not provide that it may revert to another person on Nathaniel’s death. Nathaniel dies on 1 January 2018. The value of the superannuation interest supporting the pension at the time of Nathaniel’s death, 1 January 2018, is $1.3 million. Nathaniel had no other superannuation interests.

Malena is Nathaniel’s spouse and only beneficiary. On 15 June 2018, she is advised she is entitled to all of Nathaniel’s remaining superannuation interest. During the period between Nathaniel’s death and the death benefit income stream payment to Malena commencing, $1,000 of investment earnings accrued to the interest, bringing its total value to $1,301,000. The value of the superannuation interest supporting the death benefit income stream when it commences on 15 June 2018 is $1,301,000.

A transfer balance credit arises in Malena’s transfer balance account on 15 June 2018. That transfer balance credit is equal to the value of the superannuation interest supporting the death benefit income stream on 15 June 2018 (ie $1,301,000).

Reducing a transfer balance

Commutation is the process of converting a super income stream into a super lump sum.

To reduce an excess transfer balance so it does not exceed the general transfer balance cap ($1.6 million for 2017–2018), an individual can choose to commute either (fully or partially):

• the death benefit income stream; or
• a superannuation income stream that the individual already has in retirement phase.

If an individual chooses to commute their own existing superannuation income stream, the commuted amount can remain within the superannuation system as an accumulation interest. However, if the individual chooses to commute the death benefit income stream, the commuted amount cannot be retained as an accumulation phase interest and the commuted amount must be cashed out as a lump sum death benefit.

For further information of assistance with the latest superannuation reforms please contact our accountants in North Sydney