The super reforms from 1 July 2017 have introduced a range of new concepts for post-retirement, along with an obligation to report amounts being transferred into retirement phase so that it is assessed against each member’s $1.6 million transfer balance cap. The cap is designed to limit the amount of capital that can be transferred into retirement phase to support the payment of an income stream and be entitled to tax exemption of fund earnings from assets supporting the pension. Importantly, a person is not limited to one pension within the retirement phase, but they will be assessed on the combined amount of all income stream accounts against the cap.
A Transfer Balance Account (‘TBA’) will include a range of credits and debits that will ultimately impact an individual’s TBA as follows:
Credits to an individual’s transfer balance account
The following amounts will count as a credit that must be reported and applied to an individual’s Transfer Balance Account:
- The value of all superannuation interests that supported superannuation income streams being paid at 30 June 2017 and continued in the retirement phase thereafter;
- The commencement value of new retirement phase super income stream after 1 July 2017 – this incorporates both:
- Transition to Retirement Income Streams where a member satisfies a condition of release with a nil cashing restriction (e.g. retirement); and
- the payment of a death benefit income stream to a tax dependant beneficiary
- The value of reversionary superannuation income streams at the time the individual becomes entitled to them (although the timing of the credit for transfer balance cap purposes is deferred);
- Amounts for payments under certain limited recourse borrowing arrangements that have been entered into on or after 1 July 2017
- Notional earnings that accrue on excess transfer balance amounts.
Importantly, changes to the value of a superannuation interest that supports a superannuation income stream after the initial valuation that credits the individual’s transfer balance account are not taken into consideration (i.e. any increase or decrease in the member’s account balance subsequent to the commencement of the income stream).
Debits to an individual’s transfer balance account
The following amounts will count as a debit that must be reported and applied to an individual’s Transfer Balance Account:
- An individual that commutes (in part or in full) a superannuation income stream is entitled to a debit for the value of the lump sum from their transfer balance account;
- An individual receives a structured settlement payment that is received and then contributed towards their superannuation interest (e.g. personal injury payment);
- An event that results in an individual’s superannuation interest being reduced, such as through fraud, dishonesty or bankruptcy);
- A payment split through divorce or relationship breakdown;
- Where a member fails to comply with the pension rules for a particular income year and the income stream ceases (e.g. does not meet the minimum pension);
- Where the fund does not comply with a commutation authority issued by the Commissioner in respect to a pension to reduce the member’s transfer balance cap to $1.6m or under; and
- a notice being issued by the Commissioner in respect to non-commutable excess transfer balance amounts (i.e. defined benefit income streams);
Note: pension payments from a superannuation income stream will not count as a debit. Furthermore, with the repeal of Regulation 995.1.03 of the ITAR 1997, whilst a commutation will count a transfer balance debit, the new laws post 1 July 2017 disallow a partial commutation to apply towards a member’s minimum pension for an income year (refer to SISR 1.07D).
Subject to the market value of a member’s superannuation interest at the time a debit may occur, it could result in the individual’s transfer balance account to go into a negative balance. Importantly, this will allow for any subsequent credit back to the individual’s TB account to be appropriately measured against their transfer balance cap (e.g. where a member commutes the income stream and completes a rollover between super funds).
Understanding how these debits and credits will impact an individual’s transfer balance account over their lifetime have now become central to the post-retirement landscape from 1 July 2017.
For further details regarding the implications of the transfer balance cap, you can refer to Law Companion Ruling, PCR 2016/9.