Among them will be a requirement for
fund members to establish a transfer
balance account for each retirement
phase recipient. In other words,
individuals receiving superannuation
income stream benefits will be required
to have a transfer balance account. Those
following the Government’s proposal
might have seen it referred to as the
$1.6 m cap. 

The use of “accounts” for tax law
purposes is not new. The best example,
and a useful analogy, is the franking
account that each company has. The
franking account is used to track income
tax paid by the company so that the
company can pass to its shareholders
the benefit of franking credits when
a distribution is made. The “franking
account” does not actually record
anything for accounting purposes, but
merely tracks an income tax attribute
(which is why it does not appear on any
financial statements).

Each individual receiving superannuation
income stream benefits will have a
transfer balance account, which in
general will be created when they start
an account-based pension with all or part
of their accumulated superannuation
balance. But an important additional
rule is that there is to be a cap placed
on the amount that can be held in these
accounts, which for 2017-18 is set at $1.6
million (it will be indexed for later years).
The start date for the new measure is July
1, 2017.

The ultimate purpose of introducing
the transfer balance account is to limit
the total amount of an individual’s
superannuation interests that receive an
earnings tax exemption. Those who are in
retirement phase will typically not pay tax
on pension income from their super fund.
While the transfer balance account
mostly tracks how much superannuation
savings an individual transferred into
the retirement phase, it does not limit
total transfers to the retirement phase.
The transfer balance cap is used for this
purpose.

However the cap applies towards net
transfers to the retirement phase and
is not affected by earnings, losses
or drawdowns that occur within the
retirement phase. Note also that
indexation of an individual’s transfer
balance cap is done on a proportional
basis – only the unused portion of the
transfer balance cap is indexed. 

In cases where there are excess funds
above the cap (for that year) held in the
account, the amount in excess will be
required to be removed. Failure to do so
will see the funds concerned deemed to
be not in retirement phase, and therefore
lose the earnings tax exemption. This will
also be deemed to take effect from the
start of the financial year in which the
excess occurred, and all later financial
years. 

Not only this, but notional earnings made
on this amount will be taxed — at a rate
of 15% for the first instance of a breach
of the cap, but at 30% for subsequent
breaches. Moreover, notional earnings are
to be taxable regardless of whether the
individual has rectified their breach and
removed the notional earnings amount
from the retirement phase.