The Labor government has handed down its first budget and from a superannuation point of view there was very little to get excited or concerned about. On the positive side, worries a total super balance limit would be introduced were allayed, the proposed three-year SMSF audit cycle was officially thrown out and there was no move to freeze further indexation of the transfer balance cap.
From a negative perspective, there was no announcement about any review and changes to the non-arm’s-length income and expenditure rules and no mention of any amnesty period to allow problems associated with legacy pensions, such as market-linked income streams, to be addressed, just to name a few things.
I have to say it was surprising Treasurer Jim Chalmers actually brought up the three-year audit cycle policy again, even if it was only to confirm its quashing. This measure was first introduced in the 2018/19 budget papers and was consistently criticised by just about all and sundry in the SMSF sector.
Although then assistant treasurer Stuart Robert appeared to indicate he was pushing on with the initiative, despite unanimous stakeholder pushback, the government did not legislate the measure. With the bullet seemingly dodged at that point, I was surprised this government felt the need to put such a definitive full stop on it as it pretty much hadn’t been discussed since.
When looking at the positives, the decision to allow the next application of indexation to the transfer balance cap is great as it will offer the opportunity for SMSF trustees to put more money into the pension phase of their fund.
And this second round of indexation will potentially be more significant than the first due to the higher levels of inflation we are experiencing. Without going into the intricacies of the indexation formula, the next application will likely see the general transfer balance cap rise by $200,000 and land at $1.9 million.
But in all reality this will only solidify how impractical and complicated the associated proportionate procedure to indexation is.
When the transfer balance cap was increased from $1.6 million to $1.7 million, every superannuant got to see how complex their record-keeping was about to become. As a reminder, the amount of indexation available to every individual was determined by how much of the $1.6 million they had used in the pension phase of their fund.
So if they had an income stream or streams to the value of $1.6 million, then they would not be eligible for any of the $100,000 in indexation. And so began the era where we all had to become accustomed to having a general transfer balance cap and a personal transfer balance cap.
However, this era is now going to another level. Consider this: individuals will now need to know how much of the original transfer balance cap they have used, how much of the original indexation amount they were entitled to and how much of that amount they actually used to then determine how much of the new $200,000 they will be able to use.
It makes my head spin just trying to explain that concept. As the title of this editorial says, it doesn’t get any easier.
We can hope though it might prompt a rethink as to how the indexation methodology can be revised and possibly simplified in the future.
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