Understanding the indexation of the Transfer Balance Cap
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia
For anyone who had a pension in place on 1 July 2017 when the super changes commenced, or started one after that time, the value of the pension is counted against their Transfer Balance Cap (TBC). Most people who are currently in receipt of a pension have a TBC of $1.6 million. However, a small number of individuals in receipt of defined benefit pensions, such as life expectancy or lifetime pensions, may have a higher TBC. This article is about those who have a TBC of $1.6 million.
A person’s TBC restricts the amount that can be transferred into a pension-phase fund, so that any income on investments supporting the pension remains tax exempt. Any change in the balance of the pension due to pension payments or fluctuation in the balance due to the value of the underlying investments do not impact on the amount counted for a person’s TBC. However, converting some or all of the pension to a lump sum (commutation) will reduce the amount counted against the person’s TBC.
The TBC should not be confused with a person’s Total Superannuation Balance (TSB), which is calculated on the total amount a person has in all superannuation funds as at 30 June in the previous financial year. The TSB determines whether non-concessional contributions can be accepted by the fund and whether a person qualifies for other types of contribution concessions, such as the co-contribution or bring forward concessional contributions. For example, an individual with a TSB greater than $1.6 million will be penalised if they make non-concessional contributions to the fund.
Since 1 July 2017 the TBC has been $1.6 million, but this amount is to be indexed from 1 July 2021 as permitted by the tax legislation. Indexation is based on changes in the Consumer Price Index, and any change in the cap takes place in increments of $100,000. Thus, the increase to $1.7 million.1
The main issue with the indexation of the TBC is that individuals who may have already used up the whole of the $1.6 million cap will not get access to the increased amount of $1.7 million. However, for those who have not used up all of their $1.6 million cap, these individuals will be entitled to a proportional increase in the indexed amount. Persons who have not commenced a pension from their super fund will have the opportunity of the increased TBC amount of $1.7 million. If that sounds confusing, then below are a few case studies to illustrate how indexation may be applied in different situations:
Case Study 1
Let’s assume someone was receiving an account-based pension from their super fund which had a balance of $1 million on 1 July 2017 when the new rules commenced. At that time, the member’s balance would have been counted as a credit against their TBC. On 1 July 2020, when they commenced another account-based pension with $600,000, this amount would have also been credited to their TBC. As the total amount counted against their TBC is $1.6 million, the member would have used up all of their cap and won’t be able to access to the $1.7 million indexed threshold.
Case Study 2
In this case study a person commenced a pension on 1 September 2019 with $1.2 million and has not commenced another pension since. With the increase in the TBC on 1 July 2021 to $1.7 million, the person will get a proportional increase in their TBC. As they have used up 75% of their TBC, then they will be entitled to 25% of the increase in the TBC due to indexation. This means that their TBC will increase by $25,000 (25% of $100,000) to $1,625,000 in view of the unused proportion of the TBC they have not used.
Case Study 3
This case study covers someone aged 60 years of age and plans to commence their first pension from their super fund on 31 December 2021. Since the individual has not used any of their TBC, they will be entitled to the whole of the indexed cap of $1.7 million.
Summary
As you can see from the above case studies, whether someone is entitled to a higher TBC due to indexation depends on the proportion of the cap that has been used previously. For those who are yet to commence a pension, these persons may be able to access to the full indexed cap amount. However, those who have had a pension in place since 1 July 2017, these members may only get access to a proportion of the indexed amount.
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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth - SuperConcepts-
Important notes
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