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Retirement

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Volume 13 Issue 03 | 2021

CPD

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Worth a read because:

The onset of the 2021/22 financial year brings with it, for the first time, indexation of the transfer balance cap (TBC). Unlike indexation of the general contribution caps, indexation of the TBC will result in different outcomes among individuals and, as this paper explores, may well lead to unintentional breaches of the TBC rules.

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Indexation of transfer balance cap and contribution caps

Added complexity may lead to unintentional breaches of TBC rules

Garvin Jones, Neil Irving

T

he All groups CPI figure for the December 2020 quarter has triggered upward indexation of the general transfer balance cap (TBC) and any unused part of an individual’s TBC from 1 July 2021. This sounds like good news, but the bad news is that the indexation system to be used for any individual’s cap space is quite complex potentially leading to errors and unintentional breaches of the TBC rules.

Also, the movement in average weekly ordinary time earnings (AWOTE) has triggered an upward indexation of the general concessional contributions cap from 1 July 2021. This means the general non-concessional contributions cap, which is set at four times the contributions cap, will also increase.

Transfer balance cap

When the concept of the transfer balance cap (TBC) was introduced in July 2017 as the upper limit for pension balances in the retirement phase, the general transfer cap was set at $1.6 million.

In the year a person commences a retirement phase pension for the first time, their individual TBC is set as equal to the general TBC for that financial year. Until now, everyone has started with a TBC of $1.6 million. The general TBC and any unused part of an individual’s TBC, also termed cap space, are potentially subject to indexation for movements in the CPI, but until now the movement in the CPI has not been enough to trigger any increase. It has therefore been easy to calculate the amount of any cap space by subtracting the balance of an individual’s transfer balance account (TBA) from the general TBC of $1.6 million.

However, for the first time since July 2017, the general TBC [was slated to] rise by $100,000 to $1.7 million on 1 July 2021 due to increases in the CPI. For an individual commencing a retirement phase pension for the first time in the 2021/22 financial year, $1.7 million will become their individual TBC. This may be good news if the individual can delay starting their first retirement phase pension until after 30 June 2021.

Indexation also potentially applies to the cap space of an individual who already has a retirement phase pension in place on 1 July 2021, but has not fully used their individual TBC, but the details of how it is applied can lead to confusion.

When a person has not fully used their individual TBC, their TBC will be increased by a dollar amount calculated as:

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Increase in personal TBC = unused cap percentage x indexation increase where: unused cap percentage is the percentage of the individual’s TBC not used and rounded down to the nearest whole number. indexation increase is the dollar amount by which the general TBC is increased by indexation ($100,000 in the 2022 financial year).

It is important to note that the ‘not used’ part of an individual’s TBC is calculated using the highest balance in their TBA at any time before 1 July 2021, not just the TBA balance as at 30 June 2021.

For example, if Amir’s TBA briefly hit $1.5m in the past but is now $1m, his unused cap percentage would be based on $1.6m - $1.5m = $0.1m as a percentage of $1.6m (or 6%), not on $1.6m - $1m = $0.6m as a percentage of $1.6m (or 37%).

So, using Amir’s situation, on 1 July 2021 his TBC will be increased by 6% x $100,000 = $6,000 and become $1.6m + $6,000 = $1.606m.

As the unused cap percentage is rounded down to the nearest whole number, there are potentially 100 different unused cap percentages (1% to 100%) to be applied to an individual’s TBC.

Further, it is necessary to know an individual’s complete TBA history to determine their highest TBA at any time before 1 July 2021. The result is that the dollar amount by which each individual’s TBC will increase due to indexation must be calculated for each and every person. In effect we go from a situation where the TBC was $1.6m for everyone, to one where the TBC is potentially different for every person with any unused cap space on 30 June 2021.

As well as the complexity of the method used to calculate the increase resulting from indexation, there are the practical problems in determining the highest balance in a person’s TBA in the past has been. Unfortunately, the ATO’s records of TBAs are dependent on timely lodgement by superannuation funds of annual returns, transfer balance reports and the correction of errors.

It is possible that when the indexation provisions were drafted, there was limited appreciation of how difficult they would be to implement in practice. In its submission to the 2021 Federal Budget, the SMSF Association recommended simplification of the system by either doing away with indexation of cap space altogether or retaining

Garvin Jones, Nexia

Jones is a director of the superannuation division at Nexia Sydney. He has worked as an accountant for over 20 years and specialises in superannuation, family business and estate planning.

Neil Irving, Nexia

Irving is a manager in the business advisory team at Nexia Sydney. His experience includes working with a range of clients from individuals through to ASXlisted companies.

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The quote

With the increase in the general TBC to $1.7 million on 1 July, an individual’s ability to make non-concessional contributions might be restored in the 2021/22 year, provided their TSB is not greater than $1.7 million on 30 June 2021.

indexation of the cap space but reducing the potential number of percentage steps from 100 to five or some other appropriate number. Unfortunately, no simplification of the process was announced in the Budget.

The following three examples demonstrate the application of indexation to an individual's TBC.

Example 1: Brian began a retirement phase pension before 1 July 2021 and at that time used his entire TBC of $1.6m. There have been no other transactions in his TBA since then.

As his cap space on 1 July 2021 is zero, the indexation of the general TBC is no benefit to him.

Example 2: Shusmi began a retirement phase pension before 1 July 2021, using $1m of her TBC. There have been no other transactions in her TBA since then.

On 1 July 2021, her cap space will be $1.6m - $1m = $0.6m. Her unused cap percentage will then be $0.6 / $1.6 = 37.5% or 37% rounded down to the nearest whole number.

The increase in Shusmi’s personal TBC on 1 July 2021 will be $100,000 x 37% = $37,000 so Shusmi’s personal TBC will then be $1.6m + $37,000 = $1.637m.

Shusmi has used $1m in establishing her retirement phase pension, so with the indexation increase on 1 July 2021 the unused balance of her TBC will become $1.637m - $1m = $0.637m.

Example 3: Tod commenced a retirement phase pension in 2018 using $1m of his TBC. He also began a second retirement phase pension in 2019 using a further $0.4m of his TBC but commuted the second pension back to accumulation later in that year. An increase in the second pension account balance meant that the commutation gave rise to a $0.5m debit to his TBA.

Although the balance of Tod’s TBA on 1 July 2021 will be $1m + $0.4m - $0.5m = $0.9m, his cap space for indexation purposes is calculated using the highest balance in the TBA at any time before 1 July 2021. This would be calculated as $1m + $0.4 = $1.4m.

Tod’s cap space on 1 July 2021 will therefore be $1.6 - $1.4 = $0.2m and not $1.6m - $0.9m = $0.7m. As a result, Tod’s unused cap percentage will be $0.2m / $1.6m = 12% rather than $0.7m / $1.6m = 43% (both rounded down to the nearest whole number).

The increase in Tod’s personal TBC on 1 July 2021 will be $100,000 x 12% = $12,000, and his personal TBC will become $1.6m + $12,000 = $1.612m.

With indexation the unused balance of Tod’s TBC on 1 July 2021 will become $1.612m - $1m - $0.4m + $0.5m = $0.712m.

It is also worth noting an interesting consequence of the increase in the general TBC to $1.7m on 1 July 2021 that relates to members who have been unable to make non-concessional contributions in the 2020/21 year because of the size of their total super balance (TSB). A person is considered to have a non-concessional contributions cap of zero if their TSB at the preceding 30 June is greater than the general TBC for the year in which the contributions would have been made.

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With the increase in the general TBC to $1.7m on 1 July, an individual’s ability to make non-concessional contributions might be restored in the 2021/22 year, provided their TSB is not greater than $1.7m on 30 June 2021.

Contributions caps

The general concessional contribution cap of $25,000 and the general non-concessional contributions cap, which is set at four times the concessional contribution cap, will also increase on 1 July 2021 to $27,500 and $110,000 respectively, due to increases in the AWOTE index.

Broadly, this means that the maximum non-concessional contribution a member who triggers the bring forward rule on or after 1 July 2021 can make will be $330,000. Table 1 summarises the relationship between the new thresholds for the TSB, the non-concessional contributions cap and the bring-forward periods for 2021/22.

Table 1. Relationship between TSB and bring-forward thresholds for 2021/22

Total super balance Non-concessional Bring-forward period on 30 June 2021 contributions cap for the first year

Less than $1.48m

$330,000 $1.48m to less than $1.59m $220,000

3 years 2 years $1.59m to less than $1.7m $110,000 No bring-forward period. Non-concessional contributions cap applies.

$1.7m or more Source Nexia Australia Nil Non-concessional contributions cap is zero

The maximum amount of the brought forward cap is set by reference to the general non-concessional cap applicable in the year the bring forward is triggered. It is important to note that this means that if a bring forward is triggered on or before 30 June 2021, the increased non-concessional caps which would otherwise apply in 2022 and 2023 do not apply. fs

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CPD Questions

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1. Jung started a pension with $1.2m in 2020. From 1 July 2021, what percentage of the indexation amount will

Jung have access to?

a) 0% b) 100% c) 25% d) 75%

2. Sam commenced a pension in 2020 with $1.1m and a second pension shortly after with $300,000. He then commuted $100,000 to buy a sports car. What is Sam’s transfer balance account (TBA) value at 30 June 2021?

a) $1,300,000 b) $1,400,000 c) $1,100,000 d) $1,700,000

3. Li’s highest TBA balance at 30 June 2019 is $1.5m. What balance is used to calculate her cap space for indexation purposes from 1 July 2021?

a) $200,000 b) $1,500,000 c) $1,700,000 d) $100,000

4. Jacqui commenced a pension with $1.6m during 2018.

What amount of indexation will Jacqui have access to from 1 July 2021?

a) $100,000 b) $1,700,000 c) $0 d) $10,000

5. The new non-concessional ‘bring forward’ maximum of $330,000 will be available to all members with a total super balance less than $1.7m.

a) True b) False

6. Indexation of the general concessional contributions caps is linked to AWOTE, and indexation of the TBC is linked to CPI.

a) True b) False

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