By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
February 2021

From 1 July this year, the general transfer balance cap (TBC)—the limit on the amount that can be transferred into superannuation’s tax-free retirement phase—will be indexed to $1.7 million (up from $1.6 million).

The general TBC is indexed to the consumer price index (CPI) in increments of $100,000. The December 2020 CPI figure resulted in the first ever increase in the TBC since it was introduced on 1 July 2017.

What does it mean?

The TBC limits the amount you can use to start a retirement phase income stream, e.g. account-based pension, or receive by way of a death benefit pension, e.g. on the passing of your spouse. It doesn’t apply to transition-to-retirement pensions unless they move into retirement phase.

So, the increase in this cap means you may be able to get more into the tax-free environment from 1 July. But before you get excited, anticipating doing this, you need to understand how it works.

It all depends on what you have done up to 30 June and it will be easy to get it wrong. Professional financial planning advice may be necessary.

From 1 July when the general TBC is $1.7 million, there will no longer be a single cap applying to everyone. Instead, you will have your own personal TBC of between $1.6 and $1.7 million.

Your TBC will be $1.7 million if you have not transferred any super into retirement phase, nor received a death benefit income stream before 1 July. Thus, you will benefit from the full $100,000 increase in the cap only where you start a retirement phase income stream, or receive a death benefit pension, for the very first time after 30 June.

When you commence a retirement phase income stream for the first time, the Australian Taxation Office (ATO) establishes a transfer balance account (TBA) to track progress against your TBC. It works on a system of debits and credits. Start an income stream, or receive a death benefit pension, and your TBA is credited with the value of the pension—for defined benefit income streams, a formula applies. Stop all or part of your pension and your TBA is debited with the amount withdrawn. Pension payments are ignored.

Your TBC will continue unchanged at $1.6 million where you have a TBA before 1 July and the balance of this account at any time between 1 July 2017 and 30 June 2021 was $1.6 million or more.

This is the case even if the balance is less than $1.6 million when indexation occurs. As you have used your entire cap, you cannot add more to the retirement phase even though the general TBC is increasing.

It is important to reiterate that this is about your TBA which records transfers into and out of retirement phase. It is not about your pension balance which reflects the effect of investment performance and pension payments.

Your TBC will be between $1.6 and $1.7 million where you have a TBA before 1 July and the balance has never reached $1.6 million. As you have not fully utilised your cap, your TBC will be proportionally indexed based on the highest ever balance of your TBA—and this where it gets complicated.

With proportional indexation, your TBC’s unused portion (based on the highest percentage usage of your cap) will be indexed in line with indexation of the general TBC. Not understanding and calculating your balance accurately may lead to excess transfers into retirement phase—and a tax bill.

Take Paula who had an account-based pension on 1 July 2017 valued at $760,000.

On 1 June 2018, Paula’s husband died. She was the beneficiary of his account-based pension under a binding death benefit nomination.

On 1 October 2018, she received her late husband’s super as a death benefit pension valued at $600,000.

On 1 March 2021, hearing the TBC is increasing and needing to take advantage of this—she intends making a $300,000 downsizer contribution (DC) in 2021-22 and wants it all going into a tax-free pension—Paula commuted her original pension valued at $720,000 back to accumulation phase.

On 1 July 2021, the balance of her TBA is $640,000 ($760,000 + $600,000 – $720,000). Paula thought her cap would be indexed by $60,000.

However, her TBA’s highest ever balance is $1.36 million.

Accordingly, Paula’s unused cap percentage is 15 per cent of $1.6 million, so her TBC is indexed by 15 per cent of $100,000. Paula’s TBC after indexation is $1.615 million—not $1.66 million as she hoped, nor is it $1.7 million.

Paula didn’t achieve anything by commuting her pension back to accumulation phase—100 per cent of the DC cannot go into a pension and it cost her 15 per cent fund earnings tax into the bargain.

The ATO will calculate your new TBC and it will be found in your myGov account linked to the ATO.

What else has changed?

Indexation of the TBC has a flow-on effect to certain superannuation measures tied to the cap.

For one, the total superannuation balance (TSB) limit is equal to the general TBC. Consequently, the TSB test for a number of measures will increase to $1.7 million from 1 July.

Your TSB determines your eligibility to make non-concessional contributions and your entitlement to use the bring-forward rule. So, if your TSB on 30 June 2021 is less than $1.7 million—up from $1.6 million—you can make after-tax contributions from 1 July.

Eligibility for a government co-contribution and entitlement to the spouse contributions tax offset are—amongst other criteria—both dependent upon a TSB test which is $1.7 million from 1 July.

On 1 July, the defined benefit income cap—currently $100,000—increases to $106,250. So, if you are receiving a defined benefit income stream from a taxed scheme, 50 per cent of pension payments above this increased amount will be included in your assessable income and taxed at your marginal rate. And if it’s from an untaxed scheme, e.g. Commonwealth Superannuation

Scheme, the maximum tax offset you may be eligible to claim from age 60 increases from $10,000 to $10,625.

What about the contribution caps?

Indexation of the TBC has not changed the contribution caps.

The concessional contributions (CCs) cap—currently $25,000—is indexed in line with Average Weekly Ordinary Times Earnings (AWOTE) in increments of $2,500. This has not yet happened.

The non-concessional contributions cap—currently $100,000—is four times the CCs cap, so it will increase to $110,000 only when the CCs cap is indexed.

So, only the TBC has been indexed at this stage and we await the release of AWOTE for the November 2020 half on 25 February to know whether the contribution caps will also increase from 1 July.

Unfortunately, superannuation is going to get more complex from 1 July.