The TBC was introduced with effect from July 1 2017 with the intention of making the tax concessions in superannuation more sustainable by limiting the extent to which large account balance holders can take advantage of the earnings tax exemption that applies to retirement phase pension interests. However, the introduction of the TBC has added significant complexity to what is already a complex system.

Now that the TBC has been law for some time, this paper looks at key aspects of the measure to help clarify how the rules operate for advisers and SMSF (self-managed super fund) trustees.

All section references are to the Income Tax Assessment Act 1997.

NB: This paper does not cover the topic of the total superannuation balance, which operates in a different manner to the TBC.

Balance cap versus transfer cap?

When the TBC measure was first introduced on July 1 2017, it was effectively imposed as a 'balance cap' on existing pensions in retirement phase. Accordingly, individuals with retirement phase pensions in place immediately prior to this date were subject to TBC testing in respect of their actual pension balances on 30 June 2017. Therefore, fund members with larger account balances were required to (partially or fully) commute one or more of their pensions prior to 1 July 2017 to ensure they stayed within the cap.

However, for present purposes, the TBC measure functions as a cap on transfers. Therefore, it is generally only when a pension is commenced (or when a transition-to-retirement income stream (TRIS) enters retirement phase) that the net market value of the pension interest is tested against a person's personal cap. This effectively means that changes to existing (retirement phase) pension balances over time (including overall growth or losses) are generally ignored for TBC purposes.

What is the cap that applies?

It is important to note that the general TBC is an indexed general threshold that is never directly applied to individual taxpayers. Thus, a person can only ever have an excess arise under the TBC rules in relation to their 'personal TBC'.  A superannuation fund member will commence having a personal TBC on the first day that they start to receive a retirement phase pension (eg. when they first commence an account-based pension). At that point in time (ie. the day they first start to be a retirement phase recipient), the person's personal TBC comes into existence based on the general TBC for the relevant financial year.

For example, if a fund member commences a retirement phase pension for the first time in, say, the 2022 financial year, and the general TBC at that time happens to be $1.7 million (ie. due to indexation), their personal TBC will be $1.7 million.