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Transfer balance cap to penalise some couples

The method by which the transfer balance cap is applied to couples in certain financial situations is unfair, according to a superannuation and estate planning legal expert.

The situation Townsends Business and Corporate Lawyers superannuation and estate planning special counsel Brian Hor was specifically referring to at last week’s Super Central Bacon, Super and Eggs seminar was where one spouse worked and one did not in a married couple.

Hor explained, as the rules work, in this scenario if the person in the couple who is working had a superannuation balance of $3 million come 1 July 2017, they would have to commute $1.4 million of it when starting a pension to avoid paying tax on it.

He pointed out this would be the case even if the partner did not work and had no retirement savings assets to their name.

The rules as they stand are potentially unfair because a couple where both individuals work and both had, for example, accumulated a superannuation balance of $1.5 million each would be able to enjoy $3 million worth of tax-free assets in their retirement, Hor noted.

“I think this one is definitely unfair,” he said.

A further transfer balance cap application he identified as possibly unfair is the inclusion of investment returns in the measurement of the $1.6 million.

“The transfer balance cap doesn’t take out earning, so earnings aren’t credited to your account. But because it’s taking into account balances that accumulated to 1 July 2017, it also includes earnings up to that date,” he noted.

“So you might have someone who only put in $1 million, but due to very clever investing, [their balance has grown] to $1.6 million.

“Once 1 July swings around, if they’ve used up their transfer balance cap, then they lose the ability to add extra contributions.

“I guess some people think that might not be fair.”

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