Super strategies will soon need to factor in new transfer balance caps

When the legislation to limit the amount that can be transferred into a pension account took effect on 1 January 2017, there was always written into those rules a requirement for the transfer balance cap (TBC) to eventually be indexed.

The legislation, the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016, 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).

The ATO has only recently made firm announcements that indexation of the TBC is a looming reality, but essentially depends on the December 2019 indexation rate. If the “All groups CPI weighted average of eight capital cities” reaches or surpasses 116.9 index points, then indexation of the TBC will occur at the next 1 July. (At 30 September 2019 the CPI was at 115.4 — see quarter ending rates for CPI here.) Therefore, the earliest this may occur is next July, however it may be delayed until 1 July 2021, depending on the December CPI.

Note that the ATO has already announced that its web content referring to the TBC has been updated to highlight how individuals will be affected by this future indexation.

The general TBC may not apply
The general TBC is currently $1.6 million, but after indexation there may not be a single cap that applies across the board. Every individual will have their own cap, which should be between $1.6 million and $1.7 million, depending on circumstances.

If a client had a transfer balance account before indexation occurs, their personal transfer balance cap will be:

  • $1.6 million if, any at time between 1 July 2017 and indexation occurring, the balance of that account was $1.6 million or more
  • between $1.6 and $1.7 million in all other cases, based on the highest ever balance of their transfer balance account.

If a client starts a retirement phase income stream for the first time after indexation occurs, they will have a personal transfer balance cap of $1.7 million.

It will be worth pointing out to clients that indexation of the general transfer balance cap may also change other caps and limits that may apply, especially if they:

  • make non-concessional contributions to super
  • make a non-concessional contribution to super and may be eligible for a co-contribution
  • make a concessional contribution to super on behalf of a spouse and they intend to claim a tax offset for that contribution.

Summary of changes that may affect clients

If… Then…
Your client starts their first retirement phase income stream on or after indexation. Their personal transfer balance cap will be $1.7 million.
Your client commenced a retirement phase income stream before indexation. Their personal transfer balance cap may increase by a small amount, unless at any time between 1 July 2017 and indexation, the balance in their transfer balance account was $1.6 million or more. See: Transfer balance cap changes
They were a child death benefit beneficiary before indexation. If they only receive a child death benefit income stream their child death benefit transfer balance cap increment will not change. If they also receive another retirement phase income stream their personal transfer balance cap may increase by a small amount. See: Changes affecting child death benefit income streams
They will be receiving income from a capped defined benefit income stream and: they are 60 years or over, or the income stream is a death benefit income stream and the member was over 60 at the time of death.   The amount of money the fund withholds from their income stream may change. The defined benefit income cap will increase to $106,250 for most people and your client may need to review the amount of income from these income streams that they include in their income tax return. The maximum amount of the 10% pension tax offset they may be able to claim will increase. See: Changes affecting capped defined benefit income streams
Your client makes a non-concessional contribution to their super on or after 1 July 2017 and they have a total superannuation balance of $1.7 million or more on 30 June just before indexation. They will exceed their non-concessional contributions cap. See: Non-concessional contributions cap changes
They want to receive a government co-contribution after making a contribution to the fund on or after indexation and they have a total superannuation balance of less than $1.7 million on 30 June just before indexation. They will be able to do so if they meet all the other requirements because the limit to receive a co-contribution will increase from $1.6 million to $1.7 million. See: Co-contribution changes
Your client wants to claim the spouse tax offset for super contributions and their spouse has a total superannuation balance of less than $1.7 million on 30 June just before indexation. They will be able to do so if they meet all the other requirements because the spouse total superannuation balance limit will increase from $1.6 to $1.7 million. See: Spouse tax offset changes


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