An individual's total superannuation balance (TSB) determines many of their superannuation rights and entitlements, such as eligibility to contribute after-tax amounts into superannuation without an excess arising. Due to the importance of total superannuation balance TSB testing under the major superannuation reforms, there is a strong incentive for individuals to carefully monitor their TSB over time, particularly towards the end of a financial year (FY) when most TSB thresholds are tested. In many cases, actions taken to reduce an individual's TSB through appropriate planning in a prior FY will provide an individual with greater flexibility in relation to their superannuation.
For more detail about the various TSB thresholds, please refer to the DBA Lawyers article 'Total superannuation balance milestones'.
Background: Components of TSB
Before considering strategies to reduce an individual's TSB, it is useful to consider the key elements of the TSB definition.
An individual's TSB at a particular time is comprised of the following components:
- The accumulation phase values of their superannuation interests that are not in retirement phase,
- The amount of their transfer balance or modified transfer balance account - this generally captures the net realisable value of most types of pensions in retirement phase,
- Any roll-over superannuation benefit that has not already been included under steps one and two, and
- Reductions for any structured settlement contributions.
The above is a broad summary only. A detailed examination of the TSB methodology that is set out in s 307-230 of the Income Tax Assessment Act 1997
(Cth) is beyond the purpose and scope of this article.
Strategy #1: Make pension payments and/or lump sum payments to an individual
Payments of pensions and lump sum amounts are both outgoings that can reduce an individual's TSB. Generally, an individual must meet a relevant condition of release before they can receive a payment from their superannuation fund. For example, an individual must attain preservation age (which ranges from 55-60 years old depending on their date of birth) before they are eligible to commence a transition to retirement income stream (TRIS).
Furthermore, once an individual has met a relevant condition of release with a 'Nil' cashing restriction, e.g. reaching preservation age and retiring or attaining age 65, they can:
- Commence an account-based pension (ABP) and start receiving pension payments,
- Partially or fully commute any ABP they are receiving and cash the commuted amount outside of the superannuation system, and
- Pay a lump sum from their accumulation entitlements to the extent that their benefits comprise unrestricted non-preserved benefits.
Each of the above types of superannuation payments can help to moderate an individual's TSB, though naturally there are limitations on the potential impact of TRIS payments due to the 10% maximum payment limitation (and commutation restriction) where a full condition of release has not been met.