The concept of a “transfer balance cap” (TBC) came into existence on 1 July 2017 which is a lifetime limit on the total amount of superannuation that can be transferred into the retirement “pension” phase. All income on this pension phase is tax free. The value of this TBC is currently set at $1.6 million.
Before 1 July 2021, all individuals have a personal TBC of $1.6 million.
From 1 July 2021:
- An individual who first commences a retirement phase income stream on or after 1 July 2021 will have a personal TBC of $1.7 million
- An individual who had a TBC of at least $1.6 million before 1 July 2021 will not be entitled to any further TBC increases
- Individuals not caught by the above two scenarios will have a proportionate entitlement to the $100,000 increase and will have a personal TBC between $1.6 million and $1.7 million
As changes to the TBC arise due to indexation, different individuals will have a different TBC depending on their circumstances.
Let us consider the examples below:
Example 1: Pension Established After 1 July 2021
Jenny has a balance of $1.7 million in superannuation on 30 June 2021. Jenny is retiring and starting her first pension account on 1 July 2021. As she is beginning her first pension account on or after 1 July 2021, Jenny is entitled to $1.7 million as her transfer balance cap.
Example 2: Maximum $1.6 Million Cap Already Utilised
Jill started a pension valued at $1.6 million on 1 July 2019. On 30 June 2020, she ceases her existing pension and starts a new pension valued at $1.7 million on 1 July 2021 to maximise the new index TBC.
As 100% of the cap was utilised on 1 July 2019, Jill is not able to access any additional increases to the cap value from 1 July 2021.
As Jill starts a new pension valued at $1.7 million, she will have an excess transfer balance of $100,000 which will need to be reversed and excess transfer balance tax will be incurred.
Example 3: Existing Pension Account Under $1.6 Million
John started a pension with a value of $1.2 million on 1 July 2018. There have been no other contributions or transactions that affect his transfer balance prior to 30 June 2021. As a result, John’s transfer balance is $1.2 million.
On 1 July 2021, John’s unused cap percentage is 25% of $1.6 million. With the cap increased by $100,000 to $1.7 million, John’s personal transfer balance cap will be indexed by 25% of $100,000, that is $25,000.
Therefore, John’s personal transfer balance cap after indexation on 1 July 2021 is $1.625 million.
The indexation of the general TBC will undoubtedly result in increased complexities for superannuation fund members to ensure that an individual’s personal transfer cap is not exceeded. An excess transfer balance will result in payment of excess transfer balance tax and require rectification of the excess balance.
Our accounting and financial advisers will be working together to ensure our affected clients are ready for this change.
If you have any questions regarding the TBC indexation and how it applies to you, please do not hesitate to contact your Altitude Adviser. We are here to help.