Under the transfer balance cap measure market linked pensions (MLPs) are lumped with other defined benefit pensions. Defined pensions are treated differently to account based pensions given the inability to commute such pensions.
The 2 things to consider with MLPs are:
- Does the pension exceed the transfer balance cap?
- Does the income from the pension exceed the defined benefit income stream cap?
Transfer balance cap for MLPs
Unlike account based pensions, where a MLP (or other defined benefit pension) causes an individual to exceed their transfer balance cap, there is no requirement to commute the excess amount (as MLPs cannot be commuted).
Therefore, the transfer balance cap calculation is only relevant for working out whether a member can commence an account based pension (or must commute an existing account based pension).
The calculation is made every year as follows:
- Calculate the pension entitlement for the year
- Multiply the pension entitlement by the remaining term
- Count that figure against the transfer balance cap (initially $1.6 million).
- Say a member has an MLP entitlement of $110K for a year
- Say that member has a remaining term of 18 years – multiply $110K by 18
- Which equals $1,980,000
As this amount is greater than the transfer balance cap (of $1.6 million), no further pensions could be held by the member.
This calculation is made each year.
Defined benefit income stream cap for MLPs
This is the taxing measure for defined benefit pensions. Given that MLPs cannot be commuted, and that therefore the assets will stay in pension phase, the measure instead subjects the member to taxation on their pension benefits. Broadly, the measure works by including half of the pension payments above the cap in the assessable income of the member.
At the self managed superannuation fund (SMSF) level, the full value of the MLP stays in pension phase.
The measures work differently depending on whether the pension is in a taxable fund or a tax free fund. SMSFs are taxable funds (tax free funds are certain Government/civil servant funds). This update will therefore only refer to the taxable fund measures.
More specifically the measure works as follows:
- Work out the defined benefit income stream cap - being the transfer balance cap divided by 16 - for 2017/18 it will be $100K (ie $1.6 million divided by 16)
- Work out the pension entitlement for the year
- Any excess pension income over the cap is taxed by adding 50% of the excess to the member’s assessable income where it is taxed at marginal tax rates:
There are no rebates payable on these amounts and they apply on both the taxable and tax free component.
So to continue the above example, the tax treatment for 2017/18 would be:
- The defined benefit income stream cap for 2017/18 is $100K
- The pension entitlements for the year payments equal $110K
- The excess pension income over the cap is $10K
- 50% of that excess (ie $5K) is included in the member’s assessable income and taxed at their marginal tax rate - assuming a marginal tax rate of 47% the tax payable is $1,175
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