With new rules come new words, especially when it comes to super. It doesn’t take long before you end up with more acronyms and jargon in your super vocabulary than the average teenager and their iphone. The new super rules that commenced on 1 July this year have provided a raft of new words and meanings which you need to know if super is close to your heart, or should I say, your retirement. In this article we provide you with some of the key terms you need to know to help you in understanding what’s going on with super.
Making Contributions – the importance of the TSB
Making personal after-tax non-concessional contributions to super, doesn’t just depend on your age and work status but also your super balance. Only members with a Total Superannuation Balance or “TSB”, below $1.6 million on 30 June of the prior financial year are able to make non-concessional contributions. If your member balance is close to the $1.6 million cap, it may be wise to wait until the 30 June audit is finalised and your final 30 June member balance is known precisely before making non-concessional contributions.
Drawing Pensions, the GTBC, PTBC & TBA
With all that jargon in the heading you wonder what’s next. These acronyms are necessary to understand if you are drawing a pension or are just about to withdraw a pension from the fund.
The General Transfer Balance Cap or “GTBC” is set at $1.6 million for the 2017/18 financial year for most people and relates to the value of pensions that can be transferred to retirement phase without incurring a penalty. The cap is indexed in line with changes in CPI in increments of $100,000. Indexation is available if you haven’t previously used up all of your “Personal Transfer Balance Cap”.
Your Personal Transfer Balance Cap or “PTBC” is equal to your General Transfer Balance Cap for the financial year you begin to have a Transfer Balance Account. That is, the financial year in which you commence a pension. Subsequently, your personal transfer balance cap is indexed proportionally in line with increases in the general transfer balance cap, provided you haven’t previously used up your transfer balance cap in full.
Example
On 1 July 2017 John commences an account based pension with a capital value of $1,200,000. On 1 July 2020 the General Transfer Balance Cap is indexed up by $100,000 to $1,700,000. On 1 July 2020 John’s Personal Transfer Balance Cap is $1,625,000. This is because on 1 July 2017 John used up 75% of his Personal Transfer Balance Cap, as a result he is only entitled to an additional 25% of the indexed amount.
The Transfer Balance Account or “TBA” is a running total against your Personal Transfer Balance Cap. The ATO administers your Transfer Balance Account and any debits and credits to your TBA need to be reported within the required timeframe. For example, lump sums taken from a pension account will be recorded as a debit and new pensions will be recorded as a credit on your Transfer Balance Account. Most software systems will have the ability to report the relevant transactions to the ATO. Make sure you discuss with your accountant how your fund can meet the reporting obligations.
Your First-Year Cap Space is the difference between the General Transfer Balance Cap and your Total Superannuation Balance. For example, if you have an accumulation account of $700,000 and the General Transfer Balance Cap during that year is $1,600,000, your First-Year Cap Space is $900,000.
Exceeding the Transfer Balance Cap
If you exceed your Personal Transfer Balance Cap, the excess amount is referred to as your ‘Excess Transfer Balance”. Any excess is subject to an interest penalty which is calculated over the period called your “Excess Transfer Balance Period” during which the amount you have in retirement phase exceeds your transfer balance cap. The interest penalty is called your “Excess Transfer Balance earnings” and is calculated as a notional earnings amount on the excess and counted as a credit to your transfer balance account. You are personally liable for ‘Excess Transfer Balance Tax” equal to 15% on the notional earnings for the first time an excess occurs and 30% for further breaches. The interest rate is currently in the vicinity of 9% p.a. which is calculated as the 90 day bank bill rate + 7%.
That should give you some idea of some of the new words that have been generated as part of the super changes commencing on 1 July 2017. If you remain within the caps you have nothing to worry about but if you end up with an excess you may need to understand those new terms to figure out what’s going on.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
