Many people in the SMSF world began the new year eagerly awaiting the December quarter Consumer Price Index (CPI) figure to determine whether another round of indexation would be applied to the transfer balance cap.
I won’t go into the machinations of how the measure works, but basically the CPI number was not high enough to trigger the action. It means the general transfer balance cap will for the time being remain at $1.9 million.
The fact the status quo has been maintained is actually both beneficial and detrimental to trustees at the same time due to the implementation methodology of the measure.
Had the third round of indexation been applied, the general transfer balance cap would have risen from $1.9 million to $2 million. This would have been most advantageous for SMSF members yet to commence a pension as the measure would have allowed them to maximise their transfer balance cap and establish an income stream worth $2 million should they have the money in the fund to do so. In simple arithmetic terms that represents a $100,000 pension bonus for them.
On the other hand, the proportionality rule contained in the indexation methodology means those who have a pension in place would have only received a marginal benefit. I know I’ve covered off how it all works before, but basically the dollar amount of indexation entitlement available to a member would be determined by the extent of the cap they had previously used.
For example, had they started a pension worth $1.9 million, or 100 per cent of the transfer balance cap, during the 2024 income year, then none of the additional $100,000 would be available to them. Similarly, had the pension been established with a balance of $1.71 million, meaning 90 per cent of their transfer balance cap had been used, then a further $10,000, or 10 per cent of the $100,000 indexation amount, would be available for them to boost their pension account. Hardly a huge windfall.
More importantly, all trustees can now avoid the additional administration burden a third round of indexation would bring. You see, when the transfer balance cap was first indexed from $1.6 million to $1.7 million on 1 July 2021, the concept of a general and personal transfer balance cap was introduced.
The former represents the maximum amount that can be used to start an initial income stream, with the latter indicating the amount of the transfer balance cap an individual has used to date, including any indexation money. On this basis, every round of indexation potentially makes SMSF administration more complex.
Now you might argue an additional record-keeping impost is not a reality because the ATO monitors and tracks everyone’s personal transfer balance cap. It is true. The regulator does do this. But many an SMSF expert has recommended trustees keep their own records just to be sure, which would translate into extra administrative duties.
Of course, it would be a whole lot easier for a member to know $2 million, $1.9 million now, would be available to them in pension phase – period.
Unfortunately it is a quirk, or really a flaw, of the system we will always need to revisit when the possibility of general transfer balance cap indexation is on the cards.''