Proposed draft laws for the introduction of the $1.6 million super pension cap

The Government has released the second round of draft rules for the implementation of the superannuation reform package announced in the 2016-2017 budget. This tranche includes the draft legislation for the proposed $1.6 million super pension cap (known as the “transfer balance cap”), which essentially limits the amount that a member can hold in a pension account to $1.6 million from 1 July 2017. 

The draft legislation provides that:

• the cap will be $1.6 million indexed in line with CPI (meaning that the cap it is likely to increase by $100,000 per year);
• where a member currently exceeds the cap, the member will have to bring their pension phase balance under $1.6 million before 1 July 2017 by commuting any excess to the member’s accumulation account;
• where a member does not use their entire cap in the first year, their remaining cap will be measured by a percentage of that first year cap so that for future increases in the cap they can only use that remaining percentage (for example, if $1.4 million of the cap is used in the 2017 year, the member can then only use 12.5% of the relevant increased cap in the following year);
• The cap will move up and down through the concepts of credits and debits;
• Amounts that will be credited towards the cap (i.e. decreasing the amount left in the cap) include:
  • Income streams (pensions);
  • Reversionary pensions and death benefit pensions;
  • Notional earnings on excess transfer balance amounts;
• Lump sum withdrawals (excluding pension payments) will be debited towards the cap (i.e. increasing the amount left in the cap);
• Where the cap is exceeded: 
  • the excess plus the notional earnings on that excess must either be transferred to the member’s accumulation account or withdrawn as a lump sum;
  • if the amount is not transferred or withdrawn, the whole pension will not receive the pension phase exemption;
  • the notional earnings will be taxed in the member’s name at 30%;
• Once a member has reached their transfer balance cap, the fund will no longer be able to use the segregated pension method;
• Partial commutations toward minimum pension payments will no longer be allowed;
• If members receive reversionary pensions that cause them to exceed their cap, they have 60 days to commute the excess;
• Where there are death benefit pensions paid to minor children special rules apply;
• Transitional capital gains tax (CGT) relief applies for pensions in place prior to 1 July 2017.

The draft legislation is very complex and we anticipate that it will be subject to significant consultation from industry bodies. 

If you would like more information please contact:

Melanie Twomey
Senior Associate
T 03 5225 5238
E mtwomey@ha.legal

or

Nicole Stornebrink
Associate
T 03 5225 5209
E nstornebrink@ha.legal