Contributed by Allan Coe, Senior Content Specialist, Wolters Kluwer
As of 1 July 2017, the transfer balance regime is operating. If you had retirement phase interests that exceeded $1.6m on 1 July 2017 you are over your cap and may be subject to the 15% excess transfer balance tax. This tax will continue to accrue until the excess is commuted.
You can refer to our latest Superannuation Guide and Legislation books for more in-depth information and insights.
You have the choice of either proactively commuting the excess or waiting for the ATO to issue a determination advising of the excess that needs to be commuted. This article highlights the benefit of proactively commuting the excess to bring your account balance within the cap.
Excess transfer balance tax is calculated at 15% of your excess transfer balance earnings, and the tax continues to accrue from the date of excess up to the date your excess is commuted.
Your excess transfer balance earnings are calculated daily as the amount of excess multiplied by the general interest charge. This is regardless of the actual earnings (or losses) experienced by your fund and your superannuation account. The general interest charge for the current quarter is 8.73% per annum, or a daily rate of 0.02391781%. Excess transfer balance earnings are added back to your transfer balance account each day as a transfer balance credit, thus increasing your excess and creating a compounding effect.
If you have an excess, the ATO can issue you with a determination which will advise you of the amount of excess and amount that needs to be commuted. However, the ATO will not know you have an excess until all of your superannuation funds have reported to them. The ATO states in its ‘frequently asked questions’ that superannuation funds may not report to them until the end of the 2017/18 financial year, and as such the ATO determination may be over twelve months after the excess first arose. In the meantime your excess and tax continue to increase.
The following examples highlight the difference between proactive commutation and waiting for an ATO determination.
Transfer balance account over $1.6m but not more than $1.7 m
If you were over $1.6m but not over $1.7m on 1 July 2017 you may not have to pay any tax on the excess. Under transitional arrangements, you have until 31 December 2017 to commute the excess and bring yourself under the cap. If you do this, excess transfer balance earnings are not added to your transfer balance account and no tax is payable. However, to take advantage of this transitional relief you must not commence a further superannuation income stream and you must rectify this minor breach before 31 December 2017. This due date of 31 December 2017 for rectification may be before you have received an ATO determination.
If you commute before 31 December 2017 the amount you need to commute is the amount you were over the cap on 1 July 2017. This is because excess transfer balance earnings are not added to your account under the transitional arrangements. However, if you commute after 31 December 2017 excess transfer balance earnings (and tax) accrue from 1 July 2017, and a larger amount needs to be commuted.
Transfer balance account over $1.7m
If you had a transfer balance account over $1.7m on 1 July 2017 you are over the $1.6m cap and do not have the benefit of the transitional relief. The tax is calculated at 15% of your excess transfer balance earnings, and the tax continues to accrue until your excess is commuted.
Over $1.7m and ATO has not issued a determination
You can commute the excess over $1.6m prior to the ATO issuing you with a determination. An earlier commutation will reduce the amount you need to commute and lower your tax bill.
For example, if you had a transfer balance of $2m (and hence an excess of $400,000) on 1 July 2017, this would accumulate excess transfer balance earnings of $95.67 ($400,000 x 0.02391781%) at the end of that first day and you would have a transfer balance account of $2,000,095.67 on 2 July 2017.
If you commuted your excess one month later on 1 August 2017 your transfer balance account would have grown to $402,976.50 due to the addition of excess transfer balance earnings of $2,976.50 (($400,000 x 1.000239178131) – $400,000). When you commute your excess to bring it back within your cap you need to commute both the original excess and the excess transfer balance earnings. As such, you need to commute $402,976.50 on 1 August 2017.
An excess transfer balance tax of 15% is applied to the notional earnings of $2,976.50 resulting in a tax bill of $446.47.
Over $1.7m and ATO has issued a determination
If you have an excess over the $1.6m cap the ATO can issue you with a determination which will advise you of the amount of excess that needs to be commuted. The size of your excess will crystalise upon the issuing of the determination from the ATO. This makes it easier as there is certainty around the dollar amount to be commuted. However, the tax will continue to accrue (and compound) beyond the date of the determination and up to the date the excess is commuted.
If you receive a determination advising of an excess to be commuted, you have the options of doing nothing and allowing the ATO to direct a fund to commute after sixty days, advising the ATO of a different income stream to commute, or proactively directing your fund to commute and advising the ATO of the commutation.
Taking the earlier example, if a commutation notice issued on 1 August 2017 for $402,976.50, further tax of $873.60 would accrue in the 60 days after 1 August 2017 resulting in a total tax bill of $1,320.07. This compares to a tax bill of $446.47 if you commuted when you received the determination on 1 August 2017. While the amount you need to commute remains the same, proactive commutation by yourself rather than waiting sixty days for the ATO to direct a commutation will result in a lower tax bill.
Other relevant information
There are a few other points to consider:
- you cannot claim a tax deduction for the excess transfer balance tax
- the date of commutation is not when you instruct the fund to commute, but rather when the fund actually makes the commutation. The responsiveness of your fund needs to be taken into account when calculating the excess that you need to commute.
- if you have received a determination from the ATO and decide to proactively commute, you must notify the ATO in the approved form of your commutation (at the time of writing the ATO has not released this approved form). Otherwise you run the risk that the ATO does not have full information and still acts on his determination and directs a second commutation, and
- if you were previously subject to excess transfer balance tax, then the rate of tax increases from 15% to 30% in future financial years.
Excess transfer balance tax continues to accrue until the excess is commuted. Even when the ATO has issued a determination, proactively commuting to bring your transfer balance account within your cap could reduce the amount of excess transfer balance tax.
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