Transfer balance cap - more than meets the eye

Over the last 16 years, I have enjoyed working with SMSF trustees, preparing SMSF financials, tax returns, audits, and providing limited advice through a limited Australian financial services licence. One constant in the superannuation industry is change, and the most recent change is the indexation of the transfer balance cap.

Transfer balance cap

The transfer balance cap (TBC) was introduced via the 2016-17 budget and the superannuation reform package. It sought to sustain the superannuation system and its integrity while providing flexibility due to changing work patterns.

The TBC is a lifetime cap that limits the total amount of superannuation money that an individual can transfer into an income stream for retirement purposes. The cap was set at $1.6m and would only change in line with CPI, indexed in $100,000 intervals.

In practical terms, individuals at 1 July 2017 that had pension balances in excess of $1.6m could only continue to hold $1.6m in pension phase in order to attract concessional taxation treatment in relation to that balance.

Anything in excess of $1.6m had to be rolled out of pension phase. Most people moved their balances into accumulation phase, while some withdrew the excess out of the superannuation system entirely.

Note that individuals that are in receipt of defined benefit pensions have a different system to align their fixed annual lifetime pension to the TBC which I won’t be discussing in this article, nor will I delve into the transfer balance account (for simplicity), other than to say it is a running balance of an individual’s TBC.

What’s changed and why?

From 1 July 2021, the TBC will be $1.7m. This occurred due to the All Groups CPI figure for the December 2020 quarter reaching 117.2, which triggered the $100,000 indexation from $1.6m to $1.7m.

What does this mean?

There will now be an extra layer of complexity and/or confusion within the superannuation system when it comes to the TBC.

At first glance, the average person could assume that everyone that commenced a pension with $1.6m at 1 July 2017 would have an additional $100,000 that could be transferred into pension phase. But that is not how the TBC works.

The TBC, once fully utilised by an individual at $1.6m, does not allow them to participate in any indexation. Furthermore, those that have partially used their $1.6m TBC prior to 1 July 2021 will have their TBC calculated proportionally based on the highest point (at any time between 1 July 2017 to 30 June 2021) of their transfer balance account.

Only those that commence a retirement income stream on or after 1 July 2021 for the first time will have access to the $1.7m TBC.

Where to get information on your TBC?

There are three ways to access information regarding your TBC.

Firstly, the tax agent for the individual can access this information via the ATO tax agent portal (the tax agent for the SMSF does not have access to this, nor does anyone in the financial planning industry).

Another way is via a MyGov account, where the individual has a secure account that links directly to government agencies such as the ATO, Centrelink, Medicare etc.

The third way is for an individual to call the ATO, and upon confirming their identity, receive verbally the TBC information and request a formal printout of TBC data.

In summary, there will be no single transfer balance cap which applies to all individuals from 1 July 2021.

Furthermore, indexation of the general transfer balance cap will have consequences on other caps and limits that will flow through to other parts of the tax and super systems. Stay tuned!