I have just received a “Superannuation Excess Transfer Balance Determination” from the ATO advising that my Allocated Pension exceeded the Transfer Balance Cap at 30 June 2017.  Can you please explain what this means and what I can do? By my records, my Allocated Pension was less than $1.6 million at the 30 June 2017 deadline.

A: From 1 July 2017, the Government introduced a Transfer Balance Cap (TBC) of $1.6 million for clients with retirement phase income streams such as Allocated Pensions.

Any amount in a retirement income stream in excess of the $1.6 million Pension Cap at 30 June 2017 was required to be commuted from the fund.  This commutation could have taken the form of a rollover to a Superannuation accumulation account or as a lump sum withdrawal from the Pension Account.

The purpose of the ATO determination is to notify you of your excess transfer balance, advise you of the amount that you need to remove from your retirement phase income stream(s) and the specified due date.

The amount you will need to remove is the amount you exceeded the cap by at 30 June 2017 plus an amount referred to as the “Excess transfer Balance Earnings.”

Excess Transfer Balance Earnings (calculated by the ATO) are notional earnings derived by the funds in excess of the cap. The rate is calculated on the same basis as the ATO General Interest Charge (GIC) – currently around 8.72% p.a.

It is important to note that market movements and pension payments do not result in a debit to an individual’s transfer balance account, and therefore do not count to ‘correct’ an excess.

To voluntarily commute the funds, you need to notify your Pension provider where the excess funds are to be transferred to. On transfer, the Super Fund will notify the ATO. If you do not commute the funds by the specified due date, the ATO will issue a default commutation notice to your Super fund enforcing removal of the excess funds.

The tax penalty you pay for exceeding the $1.6 million cap is referred to as the Excess Transfer Balance (ETB) Tax. The tax is levied against your excess transfer balance earnings for the period from when you start to have an excess transfer balance, to when your transfer balance account is no longer in excess.

As you can remove the excess balance from your pension fund at any time, the sooner you do this the sooner you will reduce your tax penalties. This is because the excess transfer balance earnings that attract ETB Tax continue to accrue until you remove the excess.

If you are liable for ETB Tax, the ATO will issue you with an ETB Tax assessment. ETB Tax is due and payable 21 days after the assessment is issued to you, and general interest charge will accrue if any amount remains unpaid after the due date. ETB Tax cannot be paid by your super fund.

The tax rate is set at 15% for an excess transfer balance in 2017–18 however from 1 July 2018 onwards, the tax rate increases to 30% if you have an excess transfer balance for a second or subsequent time otherwise if this is the first occurrence the rate will be 15%.

If you disagree with the ATO’s determination, in the first instance you should contact the Super fund to confirm what they have reported to the ATO.  If there has been an error, request that the Super Fund notify the ATO to rectify the misreporting.  Also check the reported figure against your Transfer Balance Cap that you can view on the ATO Tax Portal.   If either of these steps does not identify the error, contact the ATO directly seeking an explanation.  Failing a satisfactory response, you still retain the right to lodge an objection.