As we know, the General Transfer Balance Cap (GTBC) was introduced from 1 July 2017, originally set at $1.6 million, and is a cap on the how much can be transferred to a retirement phase pension for a member. It is also the threshold for determining eligibility for various contribution measures. The cap is indexed based on movement in the Consumer Price Index (CPI) in increments of $100,000 and having indexed to $1.7 million from 1 July 2021 it will now index a further $200,000 to $1.9 million from 1 July 2023.
Personal Transfer Balance Cap
Every individual in receipt of a retirement phase pension will have their own personal transfer balance cap (PTBC) which will initially align with the GTBC in the year they commence a retirement phase pension. How much an individual commences their initial and any subsequent pension will determine how their PTBC is indexed.
With an initial GTBC of $1.6 million, individuals who commenced a retirement phase pension prior to the first indexation date had an initial PTBC of $1.6 million. For those who didn’t utilise their entire cap, their personal cap was indexed on 1 July 2021. For those did use their entire cap their PTBC will forever remain $1.6m.
With the second tranche of indexation occurring from 1 July 2023 let’s look at how the PTBC will be indexed for those who still haven’t used their entire cap and those that commenced a pension for the first time after 1 July 2021.
How indexation affects the Personal Transfer Balance Cap?
The amount of indexation available to an individual is calculated proportionately based on their available cap space. As stated above, when the cap is met or exceeded, there is no entitlement to any indexation. Where the cap isn’t met, proportionate indexation is available, this is where the calculation becomes complex.
With a GTBC of $1.9 million, from 1 July 2023, an individual can have a PTBC anywhere between $1.6 million and $1.9 million.
To be clear, if a member commences a retirement phase income stream for the first time after 1 July 2023, their PTBC will be $1.9 million.
If a retirement phase income stream commenced before 1 July 2023 the PTBC will be:
- $1.6 million if at any time between 1 July 2017 and 30 June 2021, the highest balance of the individual’s Transfer Balance Account (TBA) was $1.6 million or more.
- $1.7 million if at any time between 1 July 2021 and 30 June 2023 the highest balance of the individual’s TBA was $1.7 million or more.
- Between $1.6 million and $1.9 million for all other cases, based on the highest balance in the TBA.
It’s important to note that under the first two scenarios above, there is no entitlement to indexation regardless of whether an individual subsequently reduced their TBA balance before indexation via a full or partial commutation.
The Transfer Balance Account effect
Where the full cap has not been utilised, the TBA is used to calculate the proportional increase and thus determining the new PTBC that applies to the individual’s affairs. The ATO’s online services for individuals, will show a member’s TBA balances and whether their PTBC is proportionately indexed. For 1 July 2023 indexation the updated ATO records will be reflected online from 11 July 2023.
How to calculate the proportionate increase in the PTBC at 1 July 2023?
The proportionally indexed transfer balance cap is calculated by the following process, outlined in section 294-40 of the Income Tax Assessment Act 1997:
- Step 1 – Determining the highest ever balance in the TBA
- Step 2 – Use the highest ever balance to calculate the proportion of the cap used, as a percentage, (rounded down to the nearest whole number) and then subtract from 100 to determine the ‘unused cap percentage’ of the TBA
- Step 3 – Multiply the unused cap percentage by the indexation increase of $200,000
- Step 4 – Add that dollar figure to the existing PTBC to represent the new PTBC.
An individual commences their first retirement phase pension on 1st March 2022 for $1.2 million. This represents the highest ever balance of the TBA as no further transactions have occurred.
- The unused cap percentage is calculated by first determining the % of cap used = $1,200,000/$1,700,000 = 70.5% (rounded down to 70%)
- 100% – 70% = 30% unused
- The PTBC will be indexed by 30% x $200,000 = $60,000
- PTBC after indexation = $1.7 million + $60,000 = $1,760,000
|Event||Debit||Credit||Balance||PTBC||Cap Space||Unused %|
|01/03/22 – ABP1||$1,200,000||$1,200,000||$1,700,000||$500,000||30%|
|01/07/23 – Indexation||$200,000 x 30% = $60,000||$1,760,000||$560,000||30%|
It is also important to note that in the above example if there had been a commutation from the pension it would have been ignored and the highest ever balance of the TBA would still be used to calculate the proportionate indexation increase to the PTBC.
Let’s look at another example with more events over a longer timeframe to further reiterate the importance of the ‘highest ever TBA balance’.
|Event||Debit||Credit||Balance||PTBC||Cap Space||Unused %|
|01/06/20 – ABP1||$800,000||$800,000||$1,600,000||$800,000||50%|
|01/07/21 – Indexation||$100,000 x 50% = $50,000||$1,650,000||$850,000|
|31/07/22 – Partial commutation||$100,000||$700,000||$1,650,000||$950,000|
|01/09/22 – ABP2||$500,000||$1,200,000||$1,650,000||$450,000||28%|
|01/07/2023 – Indexation||$200,000 x 28% = $56,000||$1,706,000||$506,000|
Reversionary pensions can create quite a unique situation for recipients.
Let’s use example 2 above to demonstrate. In the example, the original pensioner has two account based pensions, both reversionary. The pensioner died on 1 March 2023. At the date of death the value of ABP1 is $700,000 and ABP2 is $520,000. These amounts are reported as pensions for the reversionary spouse on 1 March 2023 but will not appear as a credit in their TBA until 1 Mary 2024. The reversionary spouse did not have an existing pension.
The spouses highest TBA value at 30 June 2023, immediately before indexation will be nil ($0) and they will be entitled to full indexation of $200,000 resulting in their PTBC being set at $1.9 million.
What else will indexation of the GTBC have an impact on?
The increase to the GTBC will also have a significant impact on the following as they are all tied to the value of the GTBC:
- Making non-concessional contributions
- Ability to use the bring forward provisions for non-concessional contributions
- Eligibility for the Government co-contribution
- Eligibility for the tax offset for spouse contributions
- The defined benefit income cap (indexed to $118,750 from 1 July 2023)
With the exception of those that fully use the general transfer balance when they first commence a retirement phase income stream, no two individuals will have will have the same personal transfer balance cap unless by coincidence.
The key to ensuring an individual’s PTBC is accurate will be to ensure accurate and timely reporting of pension commencements so the highest TBA balance can be determined and indexation applied appropriately. Any events that occur prior to 30 June 2023 that aren’t reported prior to that date will likely result in the ATO having to recalculate the PTBC.