Indexation of the transfer balance cap
So the $1.6m general transfer balance cap will become $1.7m from 1 July 2021.
It’s one of the many strange things that’s happened during this pandemic. The cap increase depended on prices (as measured by the Consumer Price Index, CPI) going up by just 0.6% between December 2019 and December 2020 - something that appeared almost inevitable back in January 2020. But when prices actually fell in the June 2020 quarter, it was suddenly in doubt. Apparently those falls were temporary and now we know for sure – indexation of the transfer balance cap will occur on 1 July 2021.
I should say at the outset that I think this is a good thing. Important thresholds for retirement tax concessions should definitely increase over time to reflect the fact that the cost of living (which is what these tax concessions are designed to help people self fund) goes up.
But I must confess I have some strong views on the way in which this particular threshold works that are not entirely complimentary.
Firstly, who invented the overly complicated system that sees us each have an individual transfer balance cap (TBC) depending on how much of the cap we’ve ever used in the past? That means there are 100 possible individual transfer balance caps in 2021/22 and 200 once we get our next round of indexation in a few years’ time.
Not only are there too many possibilities, the method is too complicated.
To work out an individual client’s TBC, we have to look through their entire transfer balance account history. We find the day when they had used “the most ever” of their cap and work out their indexation based on the proportion of their cap they had left at that moment. It doesn’t matter if they (say) used all their cap for a few days but then subsequently settled well within the $1.6m, we have to use the “worst ever” figure. Among many other things, this does highlight the importance of thinking carefully before setting up a large pension and then commuting a significant proportion some time later. We have walked through several of these in the latest updates to our Heffron Super Companion to show how the indexation result can be profoundly different depending on the order of events.
Of course the ATO will track these figures – thank goodness. And firms like ours already have calculators ready (spoiler alert – ours will be in our Super Toolkit very shortly). But honestly, what was wrong with simply indexing $1.6m to $1.7m for everyone and leaving it at that?
I expect the mischief the lawmakers were concerned about was that a superannuant with a balance well over $1.6m would have been able to convert an extra $100,000 to a retirement phase pension every time indexation occurred. Sure. And would that really have been so bad? We would be giving away exempt current pension income on an extra $100,000 each time indexation occurs. I question whether that’s enough to make life this complex.
We have form here – in the old Reasonable Benefit Limits system (universally decried as being way too complicated), we let everyone benefit from indexation of the RBLs but we indexed benefits taken in the past. That was overly complicated too. It was really designed to achieve the same outcome – philosophically both methods ensure that people who took maximum advantage of a particular threshold at the time they started their pensions etc don’t get any more benefit when the threshold is indexed in the future.
You’d think we’d have learned and kept life simple this time.
And that’s not my only beef with complexity around the TBC threshold.
A few other points will trip people up unnecessarily.
Firstly, the $1.6m threshold used to work out whether an SMSF can claim a tax exemption on its investment income using the “segregated method” stays the same. It’s not linked to the general transfer balance cap even though we picked the same number. Why?
Secondly, the rules for bringing forward non-concessional contributions are a combination of contribution caps and the general transfer balance cap. For example, currently anyone with a total superannuation balance of $1.6m or more at 30 June 2020 has a non-concessional cap of $nil in 2020/21. From 1 July 2021 the relevant number will be $1.7m.
But currently, anyone wanting to use the three year bring forward rule and contribute $300,000 in non-concessional contributions in 2020/21 had to have less than $1.4m in super at 30 June 2020. The maths behind the calculation of that threshold is:
General transfer balance cap ($1.6m) less
2 x the annual non-concessional contributions cap ($100,000)
(There is another threshold in the middle that allows people with between $1.4m and $1.5m to do a cut down version of the bring forward rules and those with between $1.5m and $1.6m to have a non-concessional contributions cap of $100,000 but no bring forward.)
In 2021/22, the $1.4m threshold could be $1.5m:
General transfer balance cap ($1.7m) less 2 x $100,000 = $1.5m
But equally if the non-concessional contributions cap also increases from 1 July 2021, the calculation would be:
$1.7m less 2 x $110,000 = $1.48m
And we won’t know until the end of February. Why? If we know that the general TBC is to be indexed why don’t we know whether or not the contribution caps are changing too? Because they are linked to a different index – AWOTE rather than CPI. Were we trying to make this complicated?
Life could be so much simpler.
Why don’t we do a bit of slashing and burning of red tape here:
- Everyone gets the $1.7m general transfer balance cap – no personal indexation complexity
- Anyone whose total super balance is less than the general transfer balance cap at 30 June can use the full three year being forward rules for the following financial year (assuming they meet the other normal age based rules for making contributions and bringing forward)
- Anyone whose total super balance is higher continues to have a non-concessional contributions cap of $nil.
I think that would take a lot of the complexity out without suddenly creating an enormous loophole for wealthy people to exploit to the detriment of the wider community. It would be great to see some Treasury modelling on this.
We are working on an easy to use calculator within the Super Toolkit to help you determine a client's indexed TBC.