There’s been plenty to consider since the introduction of the super reforms post 1 July 2017 – CGT relief, the introduction of the transfer balance cap and total super balance (TSB) to name a few…From a transfer balance cap (TBC) perspective, things have been relatively straight forward with an individual’s personal TBC (‘personal cap’) aligned to the $1.6m general transfer cap (‘general cap’). This however may be about to change with the potential indexation of the general cap from 1 July 2020. This will occur where the CPI figure for December 2019 is 116.9 or higher – this figure will be published by the ABS on 29 January 2020.
Where the general cap indexes from $1.6m to $1.7m, this will have an impact on making non-concessional contributions into super, including where an individual may be eligible for a co-contribution, or where the contribution may otherwise qualify a spouse to claim a tax offset (up to 18% on the first $3,000). This increase in the TSB threshold will also include changes for any bring forward NCC amounts. e.g. ineligibility to make NCCs will increase to $1.7m.
We will also in the not to distant future (maybe 2021-22) need to simultaneously track any increase of the NCC cap via indexation of the concessional contribution cap from $25,000 to $27,500. Where this occurs, the NCC laws link to 4 times the CC cap, or $110,000. Indexation of the CC cap is linked to AWOTE.
Personal transfer balance cap
In determining what level of indexation will apply to an individual’s personal cap, consideration needs to be given to:
- whether the individual had a transfer balance account before indexation occur;
- if the individual had a transfer balance account prior to indexation occurring and, at any time between 1 July 2017 and indexation, the balance of their transfer balance account (TBA) was $1.6 million or more; or
- if the individual had a TBA prior to indexation occurring and the highest ever balance of your transfer balance account between 1 July 2017 and indexation was less than $1.6 million.
Starting a transfer balance after indexation
Individuals who commence their first retirement phase income stream on or after indexation will have a personal transfer balance cap of $1.7 million.
A transfer balance account exists before indexation
Fully utilised transfer balance cap space
Where an individual had a TBA before indexation occurs, if at anytime the their personal cap has reached $1.6 million or more, no indexation will apply. That is, there is no unused cap space available for that individual, which means that their personal cap will remain at $1.6 million. This will be the case even where the individual may have reduced their cap to less than $1.6m at the time of indexation.
To understand how this applies, let’s look at the following example:
Maryanne started a pension in her SMSF valued at $1.6 million on 1 December 2017. On 1 July 2018, she commuted $400,000 and the value of her transfer balance account just before indexation is $1.2 million. Maryanne is not entitled to indexation and her personal transfer balance cap remains at $1.6 million. She will continue to have cap space available to start a new retirement phase income stream to the value of $400,000.
Available transfer balance cap space
Where an individual has never used the full amount of their transfer balance cap, their personal transfer balance cap will be proportionally indexed based on their highest ever cap balance.
The proportional indexation of the personal cap is calculated by:
- identifying the highest ever balance in your transfer balance account;
- using that to calculate the unused cap percentage of your transfer balance account; and
- multiplying your unused cap percentage by $100,000.
The following example explains how this will apply:
Leanne commenced a retirement phase income stream on 1 October 2017 with a value of $800,000. On 13 May 2019, Leanne commuted $200,000 from her pension and her transfer balance account was debited by $200,000. Although the balance of her transfer balance account when indexation occurs is $600,000, the highest ever balance of her transfer balance account is $800,000.
Leanne’s unused cap percentage is 50% of $1.6 million. Leanne’s personal transfer balance cap will be indexed by 50% of $100,000. Leanne’s personal transfer balance cap after indexation is $1.65 million.
Let the fun begin…
The ‘simplicity’ of a personal cap that matched the general cap has meant that tracking transfer balance account positions has been relatively straight forward. Without question the indexation of the cap is going to catch people out where there is an assumption of the general indexation of $100,000 applying or miscalculating the level of indexation due to the need to determine the smallest available cap space (prior to indexation) to work out what level of indexation applies… with the ATO already starting to highlight concerns over re-reporting of events within SMSFs, you could potentially see a few problems arising in the future in this area.
Indexation won’t apply to segregation for ECPI purposes
It is important to note that the indexation of the general TBC does not impact the disregarded small fund asset (DSFA) rules within s.295-387(2)(c)(i) of the ITAA 1997. This is because the legislation on this topic was instigated ‘on the run’ leading the subsection referencing $1,600,000, rather than the general transfer balance cap.
The ATO has published additional information on their website to further understand the implications of how indexation will apply – https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Indexation-of-Transfer-balance-cap/