May 2021 4 Minutes
Pension Transfer Balance Cap Increases From 1 July 2021 To $1.7m
The superannuation general transfer balance cap is set to increase from $1.6m to $1.7m on 1 July 2021 and follows the release by the ABS of the All Groups CPI index. The cap has remained the same since its introduction on 1 July 2017.
General transfer balance cap
The ATO website has confirmed that when the general transfer balance cap is indexed to $1.7m from 1 July 2021, there won't be a single cap that applies to all individuals. Rather, every individual will have their own personal transfer balance cap of between $1.6m and $1.7m, depending on their circumstances.
At the time an individual first commences a retirement phase superannuation income stream, the individual's "personal transfer balance cap" is set to the general transfer balance cap for that financial year. Therefore, individuals need to be aware that a decision to start their first ever retirement phase superannuation income stream before 1 July 2021 will activate a personal transfer balance cap and effectively set it at the general transfer balance cap of $1.6m at that time. If their first income stream is started on or after 1 July 2021 their lifetime personal transfer balance cap will be set at $1.7m.
Individuals can view all their transfer balance cap information via ATO online. Before 1 July 2021, ATO online will display a person's highest ever balance in their transfer balance account. It will also show if the person's personal transfer balance cap will be proportionally indexed.
Proportional indexation of transfer balance cap
If an individual had a transfer balance account before 1 July 2021, but has not used the full amount of their transfer balance cap, their personal cap will be proportionally increased based on the highest ever balance of their transfer balance account. It is calculated by identifying the highest ever balance in the individual's transfer balance account, using that to work out the unused cap percentage of their transfer balance account, and then multiplying the unused cap percentage by $100,000. If a person has already used 100% of their available cap space, their personal transfer balance cap will not be subject to further indexation.
Example - proportional indexation
Leanne started an $800,000 retirement phase income stream on 1 October 2017. On 13 May 2019, Leanne commuted $200,000 from her pension. Leanne's transfer balance account was debited by $200,000.
Although the balance of her transfer balance account when indexation occurs is $600,000, the highest ever balance of her transfer balance account is $800,000. Leanne's unused cap percentage is 50% of $1.6m.
Leanne's personal transfer balance cap will be indexed by 50% of $100,000. Leanne's personal transfer balance cap after indexation on 1 July 2021 is $1.65m.
Example - no proportional indexation
Simon started a pension valued at $1.6m on 1 July 2020 and has other assets in super. He commutes his pension in full on 30 June 2021 and gets a debit of $1.6m in his transfer balance account on that day. The balance of Simon's transfer balance account at the end of the day on 30 June 2021 will be nil.
Simon plans to start a new pension valued at $1.7m on 1 July 2021 to take advantage of the new indexation balance cap. As Simon isn't entitled to proportional indexation of his personal transfer balance cap, it will remain $1.6m. If Simon starts a new pension valued at $1.7m, the ATO says he will have an excess transfer balance that he will need to commute. He will also have to pay excess transfer balance tax.
Defined benefit income cap
The indexation of the general transfer balance cap also means that the "defined benefit income cap" will increase from $100,000pa to $106,250pa from 1 July 2021 (being the general transfer balance cap divided by 16). Certain amounts of capped defined benefit income stream payments above the "defined benefit income cap" for a financial year are included in the recipient's assessable income and subject to additional income tax.
The "total superannuation balance" threshold for making non-concessional contributions will also increase from $1.6m to $1.7m from 2021-22. This means that individuals with a total superannuation balance of $1.7m or more on 30 June 2021, will have a non-concessional cap of nil from 1 July 2021. The total superannuation balance limit also determines if an individual is entitled to use the non-concessional bring forward arrangements. When the general transfer balance cap is indexed on 1 July 2021, individuals with a total superannuation balance of $1.7m or more on 30 June 2021 won't be eligible for the bring forward arrangements from 1 July 2021.
The increase in the general transfer balance cap to $1.7m from 1 July 2021 will also increase the total superannuation balance limit for the purposes of claiming a co-contribution or spouse contribution tax offset.
If you have any questions about the above pension transfer balance cap increases , then please contact our office and speak to Iggy.
Article from Chartered Accountants Australia and New Zealand.
Essential Tax & Super Update - Quarterly Update | Period: 4 Dec 2020 to 25 Feb 2021