Since 1 July 2017 all persons entering retirement have been subject to a transfer balance cap which restricts the amount of savings in superannuation that can be transferred into the retirement phase (e.g. as an account-based pension) and receive preferential tax treatment with income earned tax free. The value of this transfer balance cap was set at $1.6 million.
We are now in the fourth financial year of this regime and most practitioners are now comfortable with the transfer balance cap and its reporting requirements. Unfortunately managing the transfer balance cap of retirees is about to get a whole lot more challenging.
The transfer balance cap is legislated to increase in $100,000 increments based on when the consumer price index has increased such that it would tip the current $1.6m cap over the $100,000 threshold to $1.7m. When this occurs the general transfer balance cap applying to all new retirees will increase to $1.7m, and all retirees who have partially utilised their cap will be entitled to a proportional increase. On the face of it this seems fair, however what this means is that for every retiree who has commenced a retirement phase income stream, but not utilised their full cap, when indexation of the cap occurs all of these retirees will have a different personal transfer balance cap, and it will be different to the general transfer balance cap.
Importantly, the All Groups CPI for December 2020 quarter was released today (27 January 2021) and was 117.2. Based on current legislation and rules, this means the general transfer balance cap will increase to $1.7m on 1 July 2021 and from this date there will be no single transfer balance cap which applies to all individuals.
We will have to start asking what a person's 'personal transfer balance cap' is, as it may not equate to the 'general transfer balance cap'.
- A personal who first commences a retirement phase income stream on or after 1 July 2021 will have a transfer balance cap of $1.7m.
- A person who had a transfer balance account balance of at least $1.6m at any time prior to 1 July 2021, will not be entitled to any of the TBC increase - their 'personal transfer balance cap' will remain at $1.6m.
- For everyone else, they will be entitled to a proportionate entitlement to the $100,000 increase and will have a 'personal transfer balance cap' of between $1.6m and $1.7m.
Example – no entitlement to indexation:
Fran started an account-based pension (ABP) in her SMSF on 1 December 2017 with $1.6m. On 1 July 2018, she partially commuted her ABP for an amount of$400,000.
The balance of her transfer balance account just before indexation on 1 July 2021 is $1.2m, being the credit of $1.6m from commencement of her ABP on 1 December 2017, less the debit of $400,000 from the partial commutation on 1 July 2018. Whilst Fran’s transfer balance account is less than $1.6m just prior to indexation of the transfer balance cap, as her highest transfer balance account balance, prior to indexation, was $1.6m, she is not entitled to any indexation and her personal transfer balance cap remains $1.6m.
However, Fran will have cap space available to start a new retirement phase income stream to the value of $400,000.
Example – proportional entitlement
Terry first commenced a retirement phase income stream, an ABP, on 1 September 2020 with an amount of $1.4m. There are no other events in Terry’s transfer balance account prior to 1 July 2021.
Terry's highest TBA balance prior to indexation of the general transfer balance cap was $1.4m and as a percentage represents 87.5%. For indexation purposes this is rounded down to the nearest whole number, that is, rounded down to 87%1.
Terry’s unused cap percentage is therefore 13%2 and consequently he is entitled to 13% of the $100,000 increase to the general transfer balance cap.
Terry’s personal TBC will be indexed by 13% of $100,000, that is, $13,000.
Terry’s personal TBC after indexation of the general TBC on 1 July 2021 will be $1,613,000, leaving him a cap space of $213,000.
The indexation of the general transfer balance cap will no doubt present complexities for SMSF members and their advisers. Careful consideration, including an accurate history of an individual’s transfer balance account history will be required to minimise the risk of exceeding an individual’s personal transfer balance cap.
We will support you over the coming months in order to understand and implement these changes with your retired and retiring clients in preparation for 1 July 2021.
For more information on the interpretation from the ATO please click here. https://www.ato.gov.au/Super/Sup/Transfer-balance-cap-indexation/