The ‘defined benefit income cap’ limits the tax-free income one can receive from a capped defined benefit income stream and will be introduced as of 1 July 2017.
The defined benefit income cap will be one- sixteenth of the $1.6 million general transfer balance cap ($100,000) for 2017-18. The following are instances of capped defined benefit income streams:
- specific lifetime annuities existing prior to 1 July 2017
- specific lifetime pensions irrelevant of when they began
- specific market-linked pensions and annuities, life expectancy pensions and annuities all existing before 1 July 2017
From 1 July 2017, you may be subject to additional tax liabilities if you are over the age of 60 or are a death benefit dependent of someone over the age of 60 when they are deceased and have a capped defined benefit income exceeding the defined benefit income cap. These include:
- 10 per cent tax offset does not apply to untaxed-sourced benefits exceeding the $100,000 cap if you are the recipient of an unfunded component of your income stream
- 50 per cent of annual income stream amount over $100,000 taxed at marginal rate for members of a funded defined benefit scheme.
There are also certain circumstances where the defined benefit income cap for an income year will be reduced below $100,000, such as:
- receiving reversionary defined benefit income stream with concessional tax treatment throughout the year
- receiving capped defined benefit income stream and turning 60 mid-way through the year, consequently receiving concessional tax treatment for that income
- starting a capped defined benefit income stream with concessional tax treatment for the first time mid-way through the year
To prepare for these changes before 1 July 2017, you should calculate the defined benefit income receivable (if you are already receiving a capped defined benefit income stream, or may commence receiving one in 2017-18). This amount will determine whether you are affected by the introduction of the defined benefit income cap.