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Excess Transfer Balance - no relief for taxpayer who claimed he was misled by the ATO

28/10/2019

Since 1 July 2017 a limit has been placed on the amount of superannuation capital which can transfer to the retirement phase and thereby enjoy a zero rate of tax on superannuation investment earnings.  Currently the dollar value of this limit is $1.6m.

If you exceed the $1.6m limit, you will have an excess transfer balance and the ATO will require you to return the excess (plus an amount on account of earnings derived on the excess portion before the excess has been returned).  The tax advantage of exceeding the balance is negated as the ATO will impose an excess transfer balance charge.

However, an excess transfer balance will not occur if the pension account balance increases after the superannuation capital has transferred to the retirement phase.

As a transitional measure associated with the introduction of the $1.6m limit, individuals who had more than $1.6m but less than $1.7m in retirement phase immediately before 1 July 2017, were allowed 6 months in which to reduce their excess transfer balance to zero by cashing out or rolling back as necessary to reduce the balance to $1.6m or less.  If the necessary reduction was achieved within the 6 months, no charge would be imposed.

However, what would be the position if the necessary reduction was achieved in part by taking additional pension payments before the end of the 6 month grace period?  Unfortunately, that would not be effective to achieve the necessary reduction, as the taxpayer has found out in a recent AAT.

The taxpayer, Mr Lacey, had a transfer account balance of about $1,660,000 as at 1 July 2017.  Under the transitional rule Mr Lacey had six months in which to reduce the transfer account to $1.6m.  Mr Lacey attempted this reduction by rolling back about $30,000 to accumulation phase and by ensuring that his pension payments for the first 6 months of 2017/18 was about $40,000.  By these two means Mr Lacey attempted to reduce his transfer balance account to $1.6m or less as at the end of the 6 month grace period.

Unfortunately for Mr Lacey the first means was effective but the second means was not.

The transfer balance account is a record of movements of superannuation capital into and out of retirement phase.  A movement of superannuation capital into retirement phase produces a transfer balance credit while a movement of superannuation capital out of retirement phase produces a transfer balance debit.

If Mr Lacey’s transfer balance account was $1,660,000 as at 1 July 2017, he had to generate one or more transfer balance debits which in total equal $60,000.  Rolling back to accumulation phase generates a transfer balance debit.  However, pension payments (whether normal or extraordinary) do not.  Consequently Mr Lacey did generate a transfer balance debit of $30,000 (by rolling back that amount from retirement phase to accumulation phase) but the pension payments of about $40,000 generated no transfer account debit.

The position Mr Lacey was in as at 31 December 2017 was a transfer balance account of about $1,620,000.  Consequently at the end of the 6 month grace period, Mr Lacey had an excess transfer balance of about $20,000.  The ATO then assessed Mr Lacey for excess transfer balance tax.

Mr Lacey believed that the pension payments would also generate transfer balance debits and he claimed that this belief was in part based on publicly available (inadequate) information provided by the ATO by means of its website.  

In particular, Mr Lacey relied upon an example given by the ATO – the example being:

“If on 1 July 2017 you are over your $1.6m cap by $100,000 or less and you remove this excess by 31 December, then you will not have to pay excess transfer balance tax or account for notional earnings on the excess”’

Mr Lacey claimed that the use of the word “remove” (rather than commute or rollback, or rollover) permitted the construction that the reduction could be achieved by sufficient pension payments.

While Mr Lacey’s criticism of the text has merits, the pension payments (whether small or large, whether the minimum required or the maximum permitted) do not generate transfer balance debits.  Further, a misunderstanding of the correct taxation position – even one contributed to by the ATO - does not preclude the ATO from applying the correct position.

In the end, Mr Lacey had not generated sufficient transfer balance debits to reduce the excess transfer balance account by the required time and therefore was subject to the imposition of excess transfer balance tax which the ATO had correctly calculated and lawfully imposed.

This case clearly highlights the need to correctly understand what transactions to a pension in retirement phase (eg an account-based pension or, a transition to retirement pension in respect of which an unrestricted release condition has occurred) generate transfer balance debits: commutations of a pension do generate a transfer balance debit while pension payments do not.  In particular, one-off pension payments will not generate a transfer balance debit as a one-off pension payment is still a pension payment and not a commutation of a pension.

The case is reported as Lacey v Commissioner of Taxation [2019] AATA 4246.