SMSF Transfer Balance Cap indexation - is it all too hard?

This article discusses the indexation of the Transfer Balance Cap (the government mandated cap on the asset value of transfers into SMSF retirement phase accounts) (TBC).

The cap is currently $1.6m and from 1 July 2021 the cap will undergo indexation and increase to $1.7m.

The SMSF Association is calling on government to remove or simplify indexation of this figure.

Overview

The SMSF Association is the peak body representing the SMSF sector. Its aim is to build integrity and credibility for the sector by establishing better standards and controls which apply to SMSF advisors, and to improve the quality of education and information.

One of its key objectives is eradicating unnecessary complexity and instability for consumers in the system. And the Association strongly believe the TBC indexation needs to be removed, or the indexation method simplified.

This is largely because, if the method of indexation established by government continues to apply, most individuals with a retirement phase income stream will eventually have their own personalised TBC which differs to the general TBC applying across the board. The Association expects a fluctuating individualised TBC will make compliance with an already complex area of the law very difficult.

What is the Transfer Balance Cap?

Essentially, the TBC imposes a limit on the asset value of all superannuation accounts held in the pension phase (across all of a person's self-managed superannuation funds and other super funds). This limit is currently $1.6 million, is increasing to $1.7 million on 1 July 2021, and then will be indexed with the consequence that it will vary from SMSF to SMSF.

You can read about the TBC in the article we wrote when it was first introduced in 1 July 2017 (here). In that article we discuss how one may commute pension amounts back into the accumulation account, in order to avoid surpassing the TBC (and the legal consequences surrounding both commutation, and exceeding the TBC).

How complicated is the new method of indexation and what will it mean for SMSFs?

Once indexation of the TBC occurs across the board on 1 July 2021, there will be no single TBC which applies to all superannuation members.

Initially, a member's TBC will equal the TBC in the year they first have a retirement phase income stream counted against their transfer balance account. Currently, this is $1.6 million and rising to $1.7 million on 1 July 2021.

However, after 1 July 2021, the general TBC may differ for any one member due to proportional indexation - meaning their own personal TBC will apply (Personal Cap).

The application of proportional indexation will mean that the unused portion of the member's Personal Cap (based on the highest percentage usage of their TBC) will be indexed in line with the indexation of the general TBC.

A helpful example the SMSF Association cites to explain proportional indexation is as follows:

Leanne commenced a retirement phase income stream on 1 October 2017 with a value of $812,000. On 13 May 2019, Leanne commuted $200,000 from her pension and her transfer balance account was debited by $200,000. Although the balance of her transfer balance account when indexation occurs is $612,000, the highest ever balance of her transfer balance account is $812,000.

Leanne's unused cap percentage is 49.25% of $1.6 million. On 1 July 2021, Leanne's personal transfer balance cap will be indexed by 49.25% of $100,000. That is Leanne's personal Transfer Balance Cap after indexation on 1 July 2021 will be $1,649,250.

Should Leanne wish to commence another retirement phase income stream in the next income year, she must calculate her personal Transfer Balance Cap based on her specific proportional indexation percentage and ensure she doesn't end up with a balance in her transfer balance account which exceeds $1,649,250. Leanne must also be aware that her personal Transfer Balance Cap will be different to everyone else's. It is likely she will need advice to calculate it accurately.

What else does the SMSF Association have to say?

The SMSF Association fears that the complex nature of proportional indexation will give rise to mistakes being made, causing inadvertent breaches of the TBC. It also worries that it will cause problems that ATO online will be the only place individuals can access information regarding their Personal Cap. Further, late reporting and retrospective re-reporting post indexation will wreak even more havoc.

We are minded to agree with the Association's position on this issue. At the same time as the law, and sometimes the Tax Commissioner, takes a hard line on non-compliance with contributions limits or transfer balance caps, the same laws are making the compliance task more and more difficult. If a hard line is to be taken in relation to enforcement, then compliance should be made simpler.

We will watch this space carefully to see whether the government is persuaded by the SMSF Association's submission, and provide more updates in due course.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of superannuation topics here.

• ATO issues confirmation that LRBAs do not contravene super law
• Your SMSF Investment Strategy and COVID-19
• SMSFs and property development ? why is the ATO concerned?
• Leasing during lockdown - land tax and payroll tax relief during COVID-19
• ATO releases 'safe harbour' guidelines for certain superannuation borrowings
• Total superannuation balances now include outstanding LRBA balances
• SMSFs and related party borrowings - ATO clarifies scope of non-arm's length income rules

Order related document packages

• SMSF Minutes and Resolutions Package
• SMSF Pension Commutation
• SMSF Pension Pack
• Superannuation Trust (SMSF)
• Update to SMSF