The ATO’s deputy commissioner, superannuation and employer obligations, James O’Halloran, recently spoke at the Association of Superannuation Funds of Australia’s (ASFA) 2019 National Policy Roadshow.
O’Halloran offered many revealing insights into ATO activity and planning regarding its superannuation policy and frameworks (see the full text of his speech here), but among these items he referenced the indexation of the transfer balance cap (TBC), which has been one of those “at some stage” inevitabilities since the legislation was introduced.
From the insights revealed by the deputy commissioner, it seems this development is close enough now to mean that SMSF members/trustees should start to think about the possible consequences for their own retirement saving plans.
As a reminder, O’Halloran mentioned that the requirement for indexation is contained in the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 with a date of effect of 1 January 2017. The legislation provides that the general TBC is to be indexed in increments of $100,000 if the indexation rate reaches a prescribed figure (and this is calculated using a formula set out in the legislation).
“Therefore, a matter to be aware of is that indexation could occur on 1 July 2020 or 1 July 2021,” he said. “However, it is important to note that this will depend on the December 2019 indexation rate and if it reaches 116.9 index points.” (At 30 June 2019 the CPI was at 114.8 — see quarter ending rates for CPI here.)
“While it may be more likely that indexation will occur on 1 July 2021, you should start considering what this may mean for funds and members,” he said. “Once indexation of the general transfer balance occurs, there will be no single personal TBC which applies to all your members with a retirement phase income stream, as potentially each member will have their own personal TBC.”
O’Halloran said that the ATO will publish information to advise super fund trustees and the industry in general if indexation will apply on which of the possible 1 July dates (2020 or 2021) as soon as possible after an indexation figure is released.
The ATO approach to indexation
Importantly, O’Halloran filled in some details about how indexation would affect super funds and fund members in the future.
“An individual who starts their first retirement phase income stream on or after indexation will have a TBC of $1.7 million,” he said. “An individual who already had a TBC account, and had equalled or exceeded the $1.6 million TBC at any stage, won’t be entitled to indexation and their personal TBC will remain at $1.6 million.
“For everyone else, we’ll identify the highest ever balance in their transfer balance account and use this to calculate the proportional increase in their TBC and apply the new personal TBC to their affairs going forward.”
He said that these individuals should find they will have a personal TBC somewhere between $1.6 million and $1.7 million.
“You and your members can already see what we consider their highest ever transfer balance was and if we consider that they will be entitled to indexation,” he said. “This information is based on information reported to and processed by us. Late reporting or retrospective re-reporting by funds, even after indexation has occurred, will mean we’ll reconsider whether the individual was entitled to proportional indexation and apply this new information to their affairs.”
He reiterated that the ATO is committed to keep fund members and trustees informed as vital information comes to hand regarding of indexation of the TBC.