From 1 July 2021 the Transfer Balance Cap will be indexed to $1.7 million, which is great news for any individual who hasn’t started to receive a retirement phase income stream prior to that date. However, not all retirees should get excited. Change brings opportunity but with that comes a requirement to understand what that change means for everyone, and in this instance everyone is different. We also will see indexation of the contribution limits which will provide opportunities and in some instances they are also linked to the transfer balance cap.
The positives of the new transfer balance cap are clearly there for those still in accumulation with less than $1.7 million. Similarly, those in a transition to retirement income stream who are yet to trigger a condition of release to move them to retirement phase will also benefit. There are also tax incentives for those making spouse contributions to obtain tax rebates and individuals seeking government co-contributions as eligibility for these are measured against the general transfer balance cap. However, for those that have already used their full cap, there is little pension joy to be obtained and for those who have used part of their cap, understanding the indexation of your personal transfer balance cap can be complicated.
The not-so-good news
For those of you that have already started a pension with $1.6 million, either prior to or following 1 July 2017, then indexation is not available and $1.6 million will forever be your personal transfer balance cap. What you can think about is whether you are eligible to make more contributions due to your age and your total superannuation balance and then whether it is worthwhile putting those extra contributions into the fund. The problem with contributing once you have maxed out your cap is that the contributions will be retained in an accumulation interest and all earnings on the contributions form part of your taxable component. The greatest significance of this will be estate planning considerations as any death benefit paid to a non-tax dependent will be taxed at 15% plus Medicare on the taxable component. Overall, this may not be a significant tax impost but at least must be a consideration.
Some tricky parts
For those who previously started a pension for less than $1.6 million there is the allure of indexing your personal transfer balance cap based on the unused cap space. From 1 July 2021, an individual can have a personal transfer balance cap anywhere between $1.6 million and $1.7 million.
If an individual commences a retirement phase income stream for the first time after 1 July 2021, their personal cap will be $1.7 million.
Where the full cap has not been utilised, the transfer balance account is used to calculate the proportional increase and thus determining the new personal cap that applies.
The proportionally indexed transfer balance cap is calculated by:
- Determining the highest ever balance in the transfer balance account
- Using the highest ever balance to calculate the proportion of the cap used, as a percentage, rounded down to the nearest whole number, and then subtracting from 1 to determine the ‘unused cap percentage’
- Multiplying the unused cap percentage by the indexation increase of $100,000
- The dollar figure is than added to the original personal cap to represent the new cap.
Here’s an example
An individual commences their first retirement phase pension on 1st February 2020 for $1.1 million. This represents the highest ever balance of the transfer balance as no further transactions have occurred.
- The unused cap percentage is ($1.6 million – $1.1 million) / $1.6 million = 31% (rounded down)
- The personal cap will be indexed by 31% x $100,000 = $31,000
- Personal cap after indexation = $1.6 million + $31,000 = $1,631,000
NOTE: in the above example if there had been a commutation from the pension it would be ignored for the calculation and the highest ever balance would still be used to calculate the proportionate indexation.
In the end, every bit helps so if you can squeeze a few extra thousand dollars into a retirement phase and have the capacity to make a contribution to get you there then what’s to say there is no benefit.
GOOD NEWS: concessional caps go up from July 1!
The benefit for contributors from 1 July 2021 is that the concessional cap raises to $27,500 and the non-concessional cap to $110,000 along with it, which in turn increases the bring-forward amount to $330,000.
Anyone with a total superannuation balance of less than $1.7 million on 30 June 2021 will be able to make non-concessional contributions subject to satisfying the contribution rules. With an age increase (up to 67) and a balance increase (up to $1.7m) there will be those who will be able to make the most of this benefit from 1 July who otherwise would have missed out. Subject to the bring-forward rules eventually passing through Parliament this would be a boost for those aged 65 or 66 on 1 July 2021 as they will be able to fully maximise the bring forward provisions with a balance under $1.48 million.
So we can be satisfied that we have a new transfer balance cap, well some of us, and we can rejoice that it may provide us some scope for contribution, pension and estate planning strategies. It will also no doubt provide us with some lessons in understanding the rules. It’s a given that some will not understand how the indexation works which may result in them exceeding their cap. The challenge is to educate as many people as possible before 30 June to avoid unnecessary tax liabilities.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
