I bet when the legislators wrote the rules governing the indexation of the transfer balance cap, it never occurred to anyone that one day we could see it jump by $200,000.
But it has come to pass.
I guess that’s what happens when you have an important threshold linked to inflation and we experience the levels of inflation that we’re having at the moment. The release of the December CPI figure today locks in a general transfer balance cap of $1.9m from 1 July 2023 – unless the legislation is specifically changed to stop that from happening. (And I expect we should always consider that qualification given that we have a Federal Budget in May.)
This of course has a number of important consequences for clients right now.
Personal transfer balance caps
While the general cap will increase to $1.9m, not everyone will get this same increase.
Those who have already used up their transfer balance cap in full at some point don’t get any value at all out of the indexation. Even switching off pension(s) entirely before 30 June 2023 (so that they have none in place at 1 July 2023 when the general transfer balance cap increases) won’t change anything. The indexation rules are smart – they look back over a person’s history and find the moment when they had used up the most (in percentage terms) of their transfer balance cap. If that was (say) 75% back in 2021, only 25% of the $200,000 indexation ($50,000) will be available from 1 July 2023. That’s true even if the client has subsequently taken pension commutations and has far more of their cap available “now”.
There will also be plenty of clients, who haven’t previously started a retirement phase pension, who will wonder whether they should wait until 1 July 2023. It means they will get the full value of the indexation and potentially be able to put up to $1.9m into a retirement phase pension in the future. Be careful though. There are plenty of cases where it’s still worthwhile locking in a pension “sooner rather than later” to start benefiting from the tax exemption on investment income (ECPI). We’ve done some interesting modelling on this front which we’ll share in a future newsletter.
While lots of people have transfer balance caps that are nice neat numbers ($1.6m, $1.7m or $1.9m) there will now actually be 301 possible transfer balance caps ($1,600,000, $1,601,000, $1,602,000 and so on) depending on exactly when an individual’s pensions started and how large they were at the time. Spare a thought for the ATO, advisers and accountants who need to watch these numbers.
But don’t forget that contributions are different.
When it comes to non-concessional contributions, everyone benefits from this increase in the general transfer balance cap.
Remember that the non-concessional contribution cap in 2022/23 is $nil for everyone with a total superannuation balance at 30 June 2022 of $1.7m or more. For 2023/24 the relevant threshold will be $1.9m at 30 June 2023. And this applies to everyone, even those whose personal transfer balance cap was locked in at $1.6m or $1.7m and has been used in full.
A big question for many of us is the other contribution thresholds for people wanting to use the bring forward rules next year.
In 2022/23, for example, someone considering making three years’ worth of non-concessional contributions at once (3 x $110,000, ie $330,000) must have had a total superannuation balance at 30 June 2022 of less than $1.48m.
This threshold will definitely change for 2023/24 but at this stage we can’t say for sure what it will be. It depends on whether or not the contribution caps themselves also change (ie, the $27,500 for concessional contributions and $110,000 for non-concessional contributions). The threshold for being eligible to make three years’ worth of non-concessional contributions is worked out as:
General transfer balance cap less 2 x the normal annual non-concessional contributions cap
While the general transfer balance cap increases in line with inflation, contribution caps increase in line with Average Weekly Ordinary Time Earnings. The relevant figures won’t be released until next month. So the magic threshold for someone wanting to use the three year bring forward rules could be a total superannuation balance at 30 June 2023 of either:
$1,900,000 - $220,000 = $1,680,000 (if the contribution caps don’t increase)
$1,900,000 - $240,000 = $1,660,000 (if they do)
This will definitely impact those wanting to maximise contributions in the next few years.
Let’s consider someone with a total superannuation balance of $1.47m at 30 June 2022 (just below the threshold for making three years’ worth of non-concessional contributions). If they contribute $330,000 “now”, they will clearly be unable to make further non-concessional contributions until 2025/26.
A better strategy may be to contribute only $110,000 now as long as they can be reasonably confident their balance will remain below $1.66m at 30 June 2023 and they will be eligible to make super contributions next financial year. This leaves open the option to contribute a further $330,000 (or even $360,000 if the contribution caps increase) in 2023/24.
Certainly there is always a lot to think about when thresholds increase. For more on the Transfer Balance Cap, there is a wealth of information in the Heffron Super Companion.