Total Superannuation Balance

7

What is Total Superannuation Balance?

Total superannuation balance is the method used to value an individual’s total superannuation interests for taxation purposes. Superannuation interests refers to a member’s interests in superannuation.  

Total superannuation balance is relevant to assessing if a member is eligible for a number of superannuation concessions. These include:  

  • The unused concessional contributions cap carry forward concession. In addition to other eligibility criteria, the member must have a total superannuation balance which is less than $500,000 on 30 June prior to the income year in which the concession is sought to be applied.    
  • The entitlement to make non concessional contributions. In addition to other eligibility criteria, the member must have a total superannuation balance which is less than the general transfer balance cap (currently $1.9m in the 2023-24 income year) on 30 June prior to the income year in which a contribution is sought to be made (and received by the relevant fund).    
  • The bring forward rule for non concessional contributions. In addition to other eligibility criteria, the entitlement to and the maximum cap that may be brought forward is limited by the member’s total superannuation balance on 30 June prior to the income year in which the rule is concession is sought to be applied. For example, if a taxpayer’s total superannuation balance is greater than $1.59m and less than $1.79m at 30 June prior to the income year in which the rule is sought to be applied, the maximum non concessional contribution is limited to $220,000. Alternatively, if the taxpayer’s total superannuation balance is $1.59m or less at 30 June prior to the income year in which the rule is sought to be applied, the maximum non concessional contribution is limited to $330,000.  
  • The government co contribution concession. In additional to other eligibility criteria, the member must have a total superannuation balance which is less than the general transfer balance cap (currently $1.9m in the 2023-24 income year) on 30 June prior to the income year in which a contribution is sought to be made (and received by the relevant fund).    
  • The tax offset for a contribution made on behalf of a spouse. In additional to other eligibility criteria, the spouse (receiving the contribution) must have a total superannuation balance which is less than the general transfer balance cap (currently $1.9m in the 2023-24 income year) on 30 June prior to the income year in which the contribution is made (and received by the relevant fund).  
  • The entitlement for a SMSF or a small APRA fund to utilise the segregated assets method in order to calculate exempt current pension income. In addition to other eligibility criteria, the member must have a total superannuation balance which is less than the general transfer balance cap (currently $1.9m in the 2023-24 income year) on 30 June prior to the income year in which the method is sought to be utilised. 

How is Total Superannuation Balance Calculated?

Section 307-230 ITAA 1997 outlines how to calculate total superannuation balance. Total superannuation balance is essentially the sum of 1 to 4, less 5.  

  1. The value of the member’s superannuation interests that are not being used to support a retirement phase superannuation income stream.  
  2. The member’s modified transfer balance if the member has a retirement phase superannuation income stream.  
  3. The amount of any roll over superannuation benefit not included in the above components.  
  4. The member’s share of the remaining balance of any limited recourse borrowing arrangement which commenced after 1 July 2018.  
  5. The amount of any structured settlement contribution.  

These five components are explored further below:

Value of superannuation interest not supporting a retirement income stream

Superannuation interests which are not in retirement phase and supporting a superannuation income stream to a retirement phase recipient will be in accumulation phase. Therefore, this component is essentially the value of superannuation interests in accumulation phase. 

The accumulation phase value corresponds to the total amount of superannuation benefits that would to payable to the member if they theoretically ceased to have superannuation interests in accumulation phase by withdrawing amounts held in accumulation phase.  

Modified transfer balance

When a member commences a retirement phase superannuation income stream, a transfer balance account commences.  

The transfer balance (i.e. the excess of credits over debits to that account) is used to calculate the capital held in retirement phase that is used to support a retirement phase superannuation income stream.  

For the purposes of calculating total superannuation balance, the calculation of the transfer balance must be modified to arrive at the modified transfer balance. This involves disregarding most debits and credits to the transfer balance account. For example, a credit from becoming a retirement phase recipient should be disregarded. Similarly, a debit flowing from the commutation of the retirement phase superannuation income stream should also be disregarded. However, a credit from excess transfer balance earnings or a debit from a non commutable excess amount should not be disregarded when calculating the modified transfer balance.  

The modified transfer balance should be increased by the value of superannuation interests in retirement phase. This should cause the modified transfer balance to correspond to the total amount of superannuation benefits that would to payable to the member if they theoretically ceased to have superannuation interests in retirement phase by withdrawing amounts held in retirement phase.  

Roll over superannuation benefits

The amount of any roll over superannuation benefits not included in the above components must be added to the total superannuation balance. This would typically involve a situation where there is roll over from one fund to another that occurs just prior to the end of the financial year where a transfer is in transit. For example, the roll over amount may have been transferred before 30 June but not yet received by the relevant fund as at 30 June and therefore not included in either the accumulation phase value (component 1) or the retirement phase value (component 2). Essentially, the amount in transit is relevant to the calculation of total superannuation balance.  

Share of limited recourse borrowing arrangement

A SMSF or small APRA fund is generally permitted to enter into a limited recourse borrowing arrangement with a financier (via an interposed trust) to finance the acquisition of assets. If an acquired asset is subject to such an arrangement entered into after 1 July 2018 (and that asset supports the member’s superannuation interests) the member’s total superannuation balance must be increased. The amount of increase is calculated as the member’s proportional share of the outstanding balance of the loan (at income year end e.g. 30 June) by reference to the member’s share of total superannuation interests in the SMSF that the relevant financed asset supports. This rule only applies to those limited recourse borrowing arrangements where the member has satisfied a condition of release with no cashing restriction or where the arrangement occurs with a related party. The intention here is to deter funds from utilising limited recourse borrowing arrangements to minimise total superannuation balance.  

Note that the ATO may consider certain arrangements designed to minimise total superannuation balance to be in breach of the general anti avoidance rules (Part IVA). This includes situations where a fund member is seen to be manipulating the allocation of assets subject to limited recourse borrowing arrangements against certain superannuation interests in order to achieve a tax benefit (e.g. access to a superannuation concession).  

Structured settlement amounts

The amount of a structured settlement contribution is disregarded for the purposes of calculating total superannuation balance.  

A structured settlement broadly refers to a personal injury settlement, workers’ compensation settlement, or court order for compensation or damages for personal injury that is contributed into superannuation.  

Example  

James has an SMSF and wants to know his total superannuation balance at 30 June 2023 for the purposes of assessing eligibility for a number of superannuation concessions in the 2023-24 financial year. The value of superannuation benefits payable to him if his superannuation interests in accumulation phase ceased would be $400,000. The transfer balance account has a credit balance of $600,000. The transfer balance account contains a credit of $1,000,000 as a result of commencing a superannuation income stream as a retirement phase recipient, a debit of $500,000 as a result of a partial commutation of an income stream and a credit of $100,000 resulting from excess transfer balance earnings. The value of superannuation benefits payable to him if his superannuation interest in retirement phase ceased would be $700,000. There is an asset subject to a limited recourse borrowing arrangement. The financier under the arrangement is an associate of the fund. The financed asset supports James’ superannuation interests. James’ share of the total superannuation interests supported by the asset is 100% and the outstanding balance on the loan is $200,000. James also previously received $200,000 into superannuation as compensation by court order for a personal injury claim. James also had two superannuation funds (the SMSF and another superannuation fund) and had instructed the non SMSF superannuation fund to transfer all superannuation interests to the SMSF. The roll over amount is $300,000. The transfer is made on 29 June 2023 (the 2022-2023 income year) but is not received by the SMSF until 1 July 2023 (the 2023-2024 income year). The roll over superannuation benefit is therefore not recognised in the retirement phase value or the accumulation phase value.  

Here, James’ total superannuation balance at 30 June 2023 is $1.4 million. This is calculated as follows:  

  1. Value of superannuation interest not supporting a retirement income stream = $400,000 (being the value of accumulation phase benefits payable); Add  
  2. Modified transfer balance = $800,000 ($700,000, being the value of retirement phase benefits payable + $100,000 which is a credit to the transfer balance account that is not disregarded when calculating the modified transfer balance); Add  
  3. Roll over superannuation benefits = $300,000 (being the superannuation benefits rolled over but not recognised in the SMSF accounts at 30 June 2023); Add  
  4. Share of limited recourse borrowing arrangement = $200,000 (being James’ relevant share under the limited recourse borrowing arrangement); Less  
  5. Structured settlement amounts = $300,000 (being the personal injury compensation contributed into superannuation and reflected in the accounts).  

Strategies to Manage Total Superannuation Balance

When it comes to employing strategies to manage total superannuation balance, please be reminded that the ATO holds powers to cancel tax benefits and impose penalties where a scheme is entered into for the dominant purpose of obtaining a tax benefit. This conceivably includes a scheme designed to reduce total superannuation balance in order to access a superannuation concession. Therefore, any strategies employed to manage total superannuation balance should have a genuine commercial basis.  

Possible strategies include the following:  

  • Deferring contributions to a later income year. Contributions into superannuation obviously increase total superannuation interests. Therefore, if a member is approaching the threshold for ineligibility to a particular concession, the taxpayer may consider deferring contributions if the benefit of access to the concession outweighs any disadvantage of deferral. Generally, the deferral strategy would be more suitable for concessional contributions where the fund member has a total superannuation balance is under $500,000. This is because previously unused concessional contribution cap space can be carried forward. The deferral strategy may be less suitable in respect of non concessional contributions. This is because previously unused non concessional contributions space may not be carried forward. The primary opportunity to increase non concessional contribution cap space is instead to bring forward unused cap space.   
  • Using contribution splitting with a spouse. Eligible taxpayers are permitted to split concessional contributions with their spouse. The member benefit is allotted to the contributing taxpayer’s spouse. That is, the contribution splitting benefit becomes a superannuation benefit of the receiving spouse instead of the contributing taxpayer. This enables the couple to maximise total superannuation interests whilst enabling the contributing taxpayer to limit further increases to their total superannuation balance which may otherwise cause them to exceed eligibility thresholds to various superannuation concessions. There are a number of restrictions and eligibility criteria to consider in respect of contribution splitting. For example, the maximum benefit that can be attained by the receiving spouse is the lower of 85% of the concessional contribution and the member’s concessional contribution cap for the income year. Further, the spouse receiving the contribution must not be 65 years or older.  
  • Withdrawing superannuation benefits. For example, cashing out superannuation benefits in order to reduce total superannuation balance. This is a simple measure to ensure total superannuation balance remains under the relevant threshold of concern.  

The ability to manage various caps can be very important, particularly in the SMSF context. For example, a SMSF may require the cash from a non concessional contribution in order to repay the outstanding balance of a loan under a limited recourse borrowing arrangement. If the member fails to ensure that their total superannuation balance is under the relevant threshold of eligibility to make non concessional contributions (currently $1.9m in 2023-2024), there may be difficulties sourcing the cash to repay the loan. In some cases, cash flow issues may require the liquidation of significant assets of the fund.  

Please note this article has not addressed the interplay between total superannuation balance and defined benefit interests. 

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.