Taxation of defined benefit income streams
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 prior to 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 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.
If you have any questions concerning the defined benefit income cap and if it affects you, please don’t hesitate to contact our office.