A couple of weeks ago the ATO signalled that the superannuation landscape is about to get a whole lot messier and infinitely more complicated. It did so with its confirmation that indexation will be applied to the transfer balance cap (TBC) on 1 July 2021.
The introduction of the TBC and other superannuation thresholds such as the total super balance (TSB) on 1 July 2017 already made running an SMSF considerably more difficult. It straight away meant trustees had to determine if their pension accounts were in excess of $1.6 million and, if so, devise a strategy to get it or them below this new limit.
In addition, it forced trustees to rethink their overall retirement savings strategy, seeing they could no longer make non-concessional contributions if their TSB was already $1.6 million or more.
Further, trustees also need to know if their TSB is $500,000 or more because if it is they are ineligible to carry forward the unused component of their concessional contributions cap for five years.
It’s easy to get confused with these rules and these are just three of the existing TBC and TSB parameters in play.
Come 1 July 2021 though and the TBC takes on a whole new dimension as a result of indexation. You may be wondering what I’m talking about because on the surface it all looks pretty straightforward. Basically the TBC is increasing from $1.6 million to $1.7 million.
A lot of trustees might very well be thinking: ‘”that’s great, the government has given me the opportunity to include another $100,000 in my SMSF pension account.” However, that’s not the case because the indexation process is being implemented in quite possibly the most convoluted way possible – on a proportionate basis.
Straightaway it means there will be two TBCs trustees will have to monitor after June – the general TBC set at $1.7 million after indexation and their personal TBC based on the percentage of the cap they had previously used.
So how will indexation work? Basically if the trustee has already reached their maximum TBC of $1.6 million before 1 July, they will receive no benefit from indexation because 100 per cent of the allowable cap has already been exhausted.
In this scenario the trustee will have a personal TBC of $1.6 million, while the general TBC is $1.7 million post 1 July.
Similarly, if a trustee’s TBC sits at $1.44 million before 1 July 2021, which indicates they’ve used 90 per cent of their TBC, they will effectively be able to add another $10,000 to their TBC once indexation has been introduced, that is, 10 per cent of the $100,000 total indexation amount.
Here the trustee’s personal TBC will be $1.61 million and the general TBC will be $1.7 million after 1 July.
Pretty straightforward isn’t it, with the need to track a personal TBC against the general TBC, as well as all the other related thresholds from the start of the 2022 financial year.
Out of all of this there are probably a couple of predictable outcomes. Firstly, there will be greater administrative confusion among SMSF trustees and as a result more errors will end up being made. I think we all have a legitimate right to ask whether superannuation really needs to be this complicated.''