Clients with retirement phase income streams that exceeded the $1.6 million cap by up to $100,000 on 30 June 2017 have until 31 December 2017 to commute the excess or face potential penalties.

On 1 July 2017, the Government introduced a Transfer Balance Cap (TBC) of $1.6 million for clients with retirement phase income streams.

Any excess amount in retirement phase is required to be commuted, otherwise excess transfer balance tax will be payable. This provision applies to commutable income streams.

To support individuals in bringing their income streams below the TBC, transitional rules were introduced for breaches of up to $100,000 that occurred on 30 June 2017.

Such breaches are disregarded and do not give rise to notional earnings or an excess transfer balance tax liability if they are rectified by 31 December 2017.

With 31 December 2017 fast approaching, it's important that affected clients commute the excess amount before this deadline to avoid paying excess transfer balance tax from 1 July 2017.

The excess transfer balance amount that needs to be commuted is determined on the value immediately before 1 July 2017. Account based pensions are valued at exit value which may vary from the reported member balance shown in their annual statement.

A commutation must take place to create a debit against the client's Transfer Balance Account (TBA) to reduce the amount in retirement phase. Market movements and pension payments are not debits.

Commutations that have occurred since 1 July 2017 will create a debit against the client's TBA. However, any further commutations must occur by 31 December 2017 to meet the requirements of the transitional period.

Rick Maggi