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Superannuation is a complex issue, but a basic understanding of the main rules and regulations can help avoid costly mistakes. Unfortunately, the rules keep changing and multiplying.
In 2017 two new technical terms (and the regulations that apply to them) were introduced to super.
From 1 July 2017 the Australian Taxation Office (ATO) began to use:
- The total superannuation balance (TSB) to determine a fund member’s eligibility for certain types of contributions
- The transfer balance cap (TBC) to determine eligibility for tax exemptions for income earned on fund investments that support pensions.
“The major stumbling block is that both the TSB and TBC caps are $1.7 million. People think the amounts counted towards the caps are the same, which is not the case,” SuperConcepts executive manager, SMSF Technical and Private Wealth, Graeme Colley says.
Total superannuation balance (TSB)
Let’s start with total superannuation balance. This is a fairly easy concept to understand. It’s the total amount of money you have in your super at any one time.
If you are in accumulation phase and have just one super account, then your TSB will be the number that appears on your statement. If you have more than one super account, it will be the total of all the accounts, which you can find in your myGov account once it is linked to the ATO.
The ATO says your TSB equals the sum of the following:
- The accumulation phase value of your super interests that are not in the retirement phase
- The retirement phase value of your super interests
- The amount of each rollover super benefit not already reflected in the accumulation phase value or the retirement phase value (that is, rollovers in transit between super funds on 30 June)
- In certain circumstances, the outstanding balance belonging to a limited recourse borrowing arrangement (LRBA) in an SMSF (or other regulated super fund with less than five members) you entered into from 1 July 2018, if either:
- The LRBA is with an associate of the fund
- You have satisfied a condition of release with a nil cashing restriction.
Your TSB matters when you are considering making certain types of contributions to your super in addition to the superannuation guarantee contributions made by your employer.
Your TSB balance and concessional contributions
If your TSB was below $500,000 as at 30 June for any year after 2019 you may be able to increase your concessional contributions cap and carry forward concessional contributions if you have unused portions from previous financial years.
To increase your cap, the ATO says “You must both:
- Make concessional contributions in the year over the general concessional contributions cap ($25,000 from 2017–18 to 2020–21; $27,500 from 2021–22)
- Have unused concessional contributions cap amounts for one or more of the previous five years (but not before 2018–19).”
The annual concessional contribution limit increased from $25,000 to $27,500 on 1 July 2021 and includes SG contributions made by your employer.
Using a simple example, say you earn $100,000 a year and your employer makes employer (before-tax) contributions of $9,500 a year for the financial years ending 30 June 2019, 30 June 2020 and 30 June 2021.
Your TSB on 1 July 2021 was $400,000 and you haven’t made any other contributions to super. Therefore, you have capacity to make catch-up (carry-forward) concessional contributions of $46,500, that is, ($25,000 – $9,500) x 3. You also have the annual $27,500 concessional contributions cap available to use in 2021–22 (or $17,500 after deducting your employer’s SG contribution of $10,000). Using the carry-forward rule, you could make a personal concessional contribution of up to $64,000 ($46,500 + $17,500) in the 2022 financial year.
If your TSB had been more than $500,000 you would not have been eligible to make the catch-up (carry-forward) contributions.
Your TSB balance and non-concessional contributions
Your total super balance will also impact whether you can make non-concessional contributions to super.
If your TSB is equal to or greater than the general cap – which increased from $1.6 million to $1.7 million on 1 July 2021 – at the end of the financial year you can’t make any further non-concessional contributions. If you do make contributions and your TSB exceeds the limit, the tax on those contributions will be at the highest marginal tax rate.
Your TSB must also be lower than the transfer balance cap to be eligible for the co-contribution and spouse tax offset.
The transfer balance cap (TBC)
The transfer balance cap is a little more complex, but the good news is you don’t need to worry about it too much if you’re still in accumulation phase. It only comes into play as you approach or enter retirement.
The TBC is the limit on the amount you can transfer from accumulation phase to support a retirement income stream. It increased from $1.6 million to $1.7 million on 1 July 2021.
It’s important because the income earned on capital supporting a pension is concessionally taxed in the fund at 0%. A cap was introduced to limit the amount of tax-free funds available to retirees in retirement phase.
A transfer balance account will be established for you once you start a retirement income stream. It’s a record of all the events that count towards your TBC.
What is, and isn’t, included in my transfer balance cap?
If you start a transition-to-retirement income stream (TRIS) before you retire, it will not be included in your transfer balance account. This also applies to any amount you have in an accumulation account.
The ATO says that a TRIS starts to count towards your TBC on the day it becomes a retirement phase income stream based on its value on that day.
However, all your retirement income stream amounts at any point in time and your accumulation amounts are included in your TSB.
The amount supporting a retirement income stream is counted against your TBC at the time you commence the pension. Any pension payments or income added to your account do not change the amount counted against your TBC. You can have more than one pension, but the total amount of pensions counted against your TBC balance are not to exceed your TBC otherwise a tax penalty will apply until you transfer the excess amount back into an accumulation account or remove it from super entirely.
Although the same limit applies to both your transfer balance amount and your total super balance in some instances, they are not the same thing. It’s important to remember how they are calculated to avoid extra tax.