The consumer price index (CPI) figure for the December quarter 2022 was released on 25 January and is very significant for superannuants. That’s because the possibility indexation may be applied to the general transfer balance cap (TBC) hinges on this very data point.
And this isn’t any ordinary round of indexation that might be applied. While I won’t go into the minute details of how the indexation formula works, the inflation rate of 7.8 per cent, the highest in over three decades, has paved the way for two stages of CPI-driven indexation to be imparted on the superannuation system on 1 July 2023.
What this translates to is having the general TBC jump from its current level of $1.7 million to $1.9 million. The movement is very unusual considering indexation increases to the general TBC were designed to be in $100,000 increments, which is what occurred when the initial inflation-neutralising exercise was undertaken on 1 July 2021.
But of course the Turnbull government wouldn’t have foreseen we would be experiencing record levels of inflation throughout 2022 when formulating the rules associated with the operation of the TBC when it was introduced.
Whenever indexation provisions are implemented they are usually seen as a positive development as it means the purchasing power of the dollar is being maintained, and this is of course true in this instance. However, the way in which the indexation has been slated to apply to individuals with an existing pension interest within their superannuation fund suggests, in this instance, the administrative complexity could actually outweigh the notion of purchasing power parity.
Observant readers may well have already noticed the use of the term general TBC throughout this editorial. That’s because since 1 July 2021 every superannuant has had to observe the general TBC and their own personal TBC.
How did this come about? Well it’s basically because indexation is to be applied proportionately to an individual’s unique situation. Explaining how the system works is relatively easy in the context of the TBC jump that occurred in 2021.
As mentioned earlier, the general TBC jumped from $1.6 million to $1.7 million in the 2022 income year, but this did not mean superannuants already in pension phase could enjoy the full $100,000 increase. The amount of indexation they could take advantage of depended on the value of their pension at the time of the increase.
For example, if a person had a pension worth $800,000 in place before 1 July 2021, it would mean they had used up 50 per cent of their original TBC of $1.6 million. As such, the rules dictated when the general TBC rose by $100,000 they were entitled to include an additional $50,000 to their personal TBC. In this instance it would result in the person’s own TBC totalling $1.65 million.
Similarly, if a person had an existing pension at 1 July 2021 valued at $1.6 million, they would receive no benefit from the indexation exercise as they would have already used 100 per cent of their allowable TBC.
Confusing? Well it’s certainly not a process you could describe as simple.
Fast forward to 1 July 2023 when the second proportionate TBC increase has to be taken into account and you can see it’s going to get really complicated in a hurry. I will try to unpack it for you.
Let’s assume in the situation I used above the super member with the $800,000 pension did not increase or decrease the said income stream. This means they would still be adjudged to have used only 50 per cent of their personal TBC. Extending the methodology to the potential $200,000 general TBC increase coming in on 1 July 2023, they would be able to increase their personal TBC by a further $100,000, being 50 per cent of the full increase.
This would result in their personal TBC settling at $1.75 million from the 2024 financial year and beyond.
In this instance I’ve kept the numbers and calculations involved very simple, but we all know real life is not as neat. What if the person had increased the value of that original pension? This increase would have to have been taken into account, a new calculation determining the proportion of their personal TBC that had been used would have to be performed and this new determined percentage would then have to be applied to the $200,000 to arrive at their new personal TBC.
As you can see, superannuation administration and pension strategies are about to become infinitely more complicated and no doubt there will be a significant number of genuine errors surfacing as a result.
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