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

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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 you had a transfer balance account before indexation occurs, your 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 your transfer balance account.

 

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

 

It is worth pointing out that indexation of the general transfer balance cap may also change other caps and limits that may apply, especially if you:

  • 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 you intend to claim a tax offset for that contribution.

 

Summary of changes that may affect clients

If… Then…
You starts your first retirement phase income stream on or after indexation. Your personal transfer balance cap will be $1.7 million.
You commenced a retirement phase income stream before indexation. Your personal transfer balance cap may increase by a small amount, unless at any time between 1 July 2017 and indexation, the balance in your transfer balance account was $1.6 million or more. See: Transfer balance cap changes
You were a child death benefit beneficiary before indexation. If you only receive a child death benefit income stream your child death benefit transfer balance cap increment will not change. If you also receive another retirement phase income stream your personal transfer balance cap may increase by a small amount. See: Changes affecting child death benefit income streams
You will be receiving income from a capped defined benefit income stream and: you 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 your income stream may change. The defined benefit income cap will increase to $106,250 for most people and you may need to review the amount of income from these income streams that you include in your income tax return. The maximum amount of the 10% pension tax offset you may be able to claim will increase. See: Changes affecting capped defined benefit income streams
You makes a non-concessional contribution to your super on or after 1 July 2017 and you have a total superannuation balance of $1.7 million or more on 30 June just before indexation. You will exceed your non-concessional contributions cap. See: Non-concessional contributions cap changes
You want to receive a government co-contribution after making a contribution to the fund on or after indexation and you have a total superannuation balance of less than $1.7 million on 30 June just before indexation. You will be able to do so if you 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
You want to claim the spouse tax offset for super contributions and your spouse has a total superannuation balance of less than $1.7 million on 30 June just before indexation. You will be able to do so if you 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
December 11th, 2019|Categories: Make Money|