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.